Fraudulent Returns: How Much Are They Costing Your Business?

Fraudulent Returns in the U.S. is larger than the economy of all but 40 of the 193 countries that comprise the United Nations.

A map of world economies by size of GDP (nominal) in USD, World Bank, 2014. License: CC0 1.0 Universal (CC0 1.0)

Product returns is a serious concern for merchandisers of all sizes and product categories. National Retail Foundation [NRF] estimated that total returns for 2015 to reach $260.5 billion. This figure exceeds the GDP of all but 40 of the 193 United Nations member countries. While retailers seek to minimize returns in-general, of great concern are fraudulent returns that account for upwards of $10.8 billion to $17.6 billion annually.

Last month, NRF estimated that fraudulent returns would cost retailers $2.2 billion during the 2015 Christmas season; a 14% increase over 2014 same-period figures. Retailers in NRF’s December 2015 survey indicated that 3.5% of holiday returns are fraudulent. Lowering the total means addressing the problem of fraud that is particularly troublesome during the holiday season.

A Best Buy Experience

Recently, I was in a Best Buy store when a couple arrived to return a large screen high definition TV unit. The customer service representative removed the TV from the box, finding the screen severely shattered. The customers claimed, “The TV screen was damaged during shipment and we discovered this after pulling it from the box.”

The attending representative, along with another employee, carried the unit to the adjacent Geek Squad area where I was standing. They were soon joined by other employees. And a conversation ensued that suggested the group of store manager and clerks doubted the customers’ claim that Best Buy had damaged the unit during transit.

Fraudulent returns - the case of a large screen TV at Best BuyI too doubted the customers’ claim. The box was in perfect condition; not a single tear, indentation, or other sign of sustained trauma from shipping. The screen appeared suffered a blunt force strike from another object. A strike that inside packaged would have absorbed. The frame itself was in-tact and, like the box and inside packaging, showed no signs of shipping damage. And upon further inspection, managers noted that the screen displayed a distinct point of impact from which several fractures extended. The kind of damage that would be caused by an accidentally launched video game controller.

This, then, was Best Buy’s dilemma. Reject the claim, which would be tantamount to calling the customers, liars. Taking this course of action would have been problematic as the store had no way of substantiating its counterclaim. Such a response is a customer service nightmare as irate shoppers are not particularly reliable for future purchases. And in the era of salacious news, no store manager can predict the fallout from an otherwise routine encounter.  Would this turn into a feature story or investigative report for a local or national media outlet, more than willing to expose a major corporation?  Conversely, for a store manager to agree with the notion that Best Buy damaged the TV had its own consequences. If the giant retailer develops a reputation for having liberal practices does this set up Best Buy for an epidemic of fraudulent returns?

The handling of fraudulent returns places undue pressure on retailers in an increasingly competitive market where profits derive, in-part, from navigating the operational gauntlet of limiting out-of-stocks, the costly processes associated with damaged merchandise, and leftover inventories. All concerns that ultimately factor into shareholder value.

And for all its benefits, eCommerce does not stem the tide of fraudulent returns, but rather complicates the problem. According to Bob Moraca, NRF Vice-President of Loss Prevention,“Return fraud remains a critical issue for retailers with the impact spanning far and wide, in-store and online.” This suggests that retailers that concentrate on eCommerce might rethink any notion that going online shields their operation from fraudulent returns. Carly Llewellyn, marketing director for Optoro, noted, “The number is going up as e-commerce sales rise and retailers are forced to offer more liberal return policies. Returns and excess inventory cost retailers $500B in the U.S., and over $1 trillion worldwide. For many big retailers, they have billions of dollars of returned inventory a year.”

Hidden Cost of Fraudulent Returns

Ultimately, the problem of fraudulent returns rests with whether or not individual consumers appreciate the downstream economics of a fraudulent claim.  Albeit hidden from a given transaction, the cumulative effect of fraudulent returns increases supply chain costs. And shareholders expect those costs to be mitigated in order to meet profit expectations. Consequently, fraudulent returns are impact product pricing and ultimately has checkout line implications.

Fraudulent returns also influence a host of operational decisions. It is plausible, for instance, that a company with serious fraudulent return problems must factor related costs into staffing levels and compensation. One could also argue that aggregate productivity suffers, to some extent, as a result of fraudulent returns. A manufacturer that experiences excessive illegitimate returns is withheld capital to invest in new plant, equipment, technology, training, and other inputs that drive productivity.

Consequently, a seemingly innocuous fraudulent return is far from harmless, but runs its course through myriad micro- and macro-economic concerns, both domestic and international.

1. Free Renting Fraud (Wardrobing)

This involves buying items for temporary with full intention to return. Often this occurs when consumers are preparing for special occasions. An expensive dressed purchased for a wedding or ball. A big-screen TVs bought for a Super Bowl party. Or expensive fixtures purchased and placed in an office for an upcoming meeting with important potential clients.

2. Tender Liquidation Fraud

Under this form of fraud, consumers use one form of tender (e.g., a stolen credit card) to make purchases. Then items are returned in-exchange for merchandise credit.

3. Stolen Merchandise (Shoplifting) Fraud

One of the oldest forms of fraudulent returns involves shoplifting items with an expectation to return them later. A difficult-to-detect method involves the shoplifter buying an item and immediately taking it home or to his/her vehicle. The individual returns to the store with a concealed receipt and picks up an item identical to the previously purchased one. The shoplifter presents the receipt and the item to customer service. What looks like a legitimate return essentially paid the shoplifter for stealing merchandise. This is particularly difficult to detect in large stores during peak traffic periods where managers, salespersons, and checkout clerks are busy replenishing shelf displays and assisting consumers.

4. Devalued Merchandise Fraud

This type of fraud can take on many forms, including the suspected situation that occurred in the Best Buy incident. In a general sense, the scheme involves returning an item that are old or damaged and receiving a newer item. This enables the defrauder to shift the cost of unwarranted damage and/or obtaining the latest item.

5. Receipt Fraud

Also known as shoplisting, this involves a person obtaining a found, falsified or stolen receipt. Then locating the item in a store and presenting it to the customer service for return in-exchange for cash.

6. Resell Fraud

Reselling is one of the more interesting fraud schemes that shifts the cost of operations from individuals to legitimate businesses. Here, a persons makes a bulk purchase, sells as many units as possible, then returns unsold items to the store. Retailers are vulnerable to this in a number of scenarios. Hot items that are on-sale for a brief period can find fraudsters purchasing in bulk, with the intention to sale at a price below ordinary prices that appear after the sale is over. Popular close-out items run a similar risk as people are sometimes willing to buy at a small premium, knowing that inventories are depleted in legitimate stores. Also, twofers (2-for-1 specials) create this opportunity where individuals (or fraud networks) purchase in-bulk in order to sell-off extra units for below-market prices.

7. Employee/Collusion Fraud

Various forms of collusion involve employees and their accomplices. One form involves employees stealing valid receipts from the POS system or customer service, then using the receipts to return items - either themselves or through the use of another person. Another classic form occurs when employees steal products that is later returned by another person. A third version of collusion involves employees assisting thieves in returning stolen merchandise. In some scenarios, employees actually steal the items that another individual returns. this problem was of particular concern to mass merchandisers of hardware products, small appliances, and electronics. is being used for free inventory.

8. Arbitrage Fraud

Like some of the other schemes, arbitrage fraud comes in many forms. One involves buying an item at a lower price from one store and returning to another, profiting from the difference. another form involves purchasing similar items (i.e., items that at first glance look the same) that are priced differently. The fraudster later returns the cheaper item, using the receipt from the higher-priced version. Note that arbitrage fraud is particularly problematic for store that have liberal return policies. The expansion of eCommerce has resulted in a rise in arbitrage fraud where eReceipts from online purchases are used to return items to brick-and-mortar stores. Surprisingly, stores that pride themselves as exclusive are susceptible as they are sensitive to any action that might be considered offensive to high-end consumers.

9. Downpayment (Discounted Price) Fraud

In this scenario, consumers begin with tender liquidation or purchasing items with stolen credit cards, then returning the items for in-store credits. Then, they come back to the store with additional cash to purchase items in what effectively requires less actual cash outlay. The initial purchase/returns serves as an illegal downpayment that enables the consumer to purchase items at a discounted price.

Smart Moves

Citing the growing problem of fraudulent returns is not to suggest that markets are void of interventions. Quite the opposite. Some of the solutions are taking place today, with other possibilities on the horizon. For example:


In addition to false claims that was potentially at the center of the aforementioned Best Buy scenario, returns without receipt are another source of concern. Retailers estimate that in these situations, roughly 10% are fraudulent returns. For instance, this occurs when a colluding store clerk steals an item that is subsequently returned by someone else. This problem has 85% of stores requiring customers to present an ID at the point of returns; a level that represents a 71% increase over the previous year.


Retailers in certain categories (e.g., consumer electronics, appliances, hardware) might undergo sweeping periodic reviews of their product lines in order to designate certain goods for “in-store inspection” (ISI). Namely, items are jointly inspected by store clerks and customers prior to moving the checkout line. While this certainly has operational cost implications, this could mitigate the costly problems associated with fraudulent returns. Having built a loss prevention analytical computer system for one of the largest manufacturers in the world, there is clear evidence that metrics work in this arena. Periodic analysis affords retailers to develop ISI strategies for either: targeted product categories; specific brands; fragile items; high dollar-ring items; etc. And the involvement of intermediaries such as contracted buyer agents and/or shipping companies (e.g., UPS) could extend ISI to online merchandising. Another process innovation is emerging through returns tracking where retail intermediaries collect and mine data, authorize returns, and assist in identifying the 1 percent of consumers that engage in fraudulent returns activity.  


Bob Moraca cautions, “While technology has played a significant role in deterring many in-person fraudulent transactions that would have otherwise gone unseen, there is little that can be done to prevent a determined criminal who will find a loophole one way or another. When it comes to retail fraud, retailers can build taller walls, but criminals continue to find taller ladders.” However, “smart product” partnerships between manufacturers and retailers can in partnership might hold the key to further deterrence.

To illustrate, let’s look at the Best Buy situation. Electronics manufacturers might consider building firmware that provide various metrics such as usage hours. Retailers equipped with special devices that are capable of extracting these metrics could determine whether or not an item was indeed used for a period of time prior to return. If so, store managers could refute claims that place the burden on customers to explain, for instance, how a television used for several hours if delivered with a shattered screen. As it turns out, older model Digital Light Processing [DLP] TVs came with this technology so as to measure the hours that plasma bulbs were in-use. With the migration from plasma bulbs to Light-Emitting Diode [LED] technology, usage meter capability was no longer necessary. Re-introducing this capability, while not for product reason per se, could have an impact on stemming the tide leftover inventories and other costs associated with fraudulent returns.


Ultimately, the problem of fraudulent returns rests with whether or not individual consumers appreciate the downstream economics. Given the aforementioned rising cost, we can conclude that the practice of fraudulent return is now cultural in-nature. of a fraudulent claim. As such, solutions must be found in households and individual consumers. Further, consumer groups must continue the work of educating people about the harmful aggregate effects of showing up at the local customer service desk with a claim that one knows is illegitimate.

In the Final Analysis …

Fraudulent returns is a problem that effects every economic unit along a path that runs from manufacturer to household. Consumers must ask themselves about the hidden cost they absorb as a result of myriad illegitimate product return schemes. Retailers, whose thin margins suffer from fraudulent returns, cannot simply rely on third parties (e.g., manufacturers) to shoulder the burden. Neither should manufacturers expect parties downstream in the supply chain to suffer losses without inevitably hurting the makers of electronics, hardware items, clothing, and other goods. Fraudulent returns is a collective problem that ultimately impacts everyone. As such, this problem requires collective solutions on the part of manufacturers, distributors, retailers, industry/trade associations (e.g., chambers of commerce), academia and research institutions, government, consumers groups, and most certainly, consumers. ♦♦♦


If your organization is experiencing high incidents of merchandise returns, contact BayLou to assist in designing, implementing, and managing solutions.