Returns Fraud: Essential Research on Retail's Fastest-Growing Loss

Returns fraud has displaced payment fraud as a primary concern for many retailers.

As businesses have tightened controls around transactions, bad actors have shifted their attention to the claims and returns process, exploiting gaps in data, policy, and team training.

In this conversation, Professor Michael Townsley and Dr Andrew Childs share findings from their returns fraud research for ECR Retail Loss, drawing on a consumer survey of nearly 6,000 people across the US, Canada, the UK, and Australia.

 

Summary: the returns fraud challenge

Returns fraud has displaced payment fraud as a primary concern for many retailers.

As businesses have tightened controls around transactions, bad actors have shifted their attention to the claims and returns process, exploiting gaps in data, policy, and team training.

In this conversation, Professor Michael Townsley and Dr Andrew Childs share findings from their returns fraud research for ECR Retail Loss, drawing on a consumer survey of nearly 6,000 people across the US, Canada, the UK, and Australia.

The discussion covers the most prevalent forms of abuse, from wardrobing to Did Not Arrive claims, and reveals just how little friction most offenders encounter.

Dr Childs explains how online fraud communities maintain live spreadsheets tracking which methods work against which retailers, creating an almost infinite number of variations.

The researchers outline three priorities for retailers:

1. Joining up fragmented data across ordering, fulfilment and claims
2. Aligning KPIs so that loss metrics sit alongside customer service targets
3. Investing in team member training to counter social engineering

They also explore the difference between fraud and abuse, arguing that many customers who engage in problematic return behaviours do not consider themselves criminals, and that education might be more effective punishment as a detterent. With rapid delivery formats creating even more vulnerabilities, the research offers a practical framework for retailers ready to take action.

Introduction: the returns fraud challenge

COLIN:

Hello and welcome to the ECR Retail Loss Sell More and Lose Less podcast series. My name is Colin Peacock. I’ve worked in the retail and FMCG business for more than 40 years, working on the dark side of retail, on retail loss at every point in the supply chain.

In this podcast, we’re really listening to what some of the key learnings have been over the last 18 to 24 months. Where should retailers be thinking about acting to disrupt some of this bad behaviour or perhaps nudge people towards good behaviour? They’ve worked with retailers, they’ve worked with and listened to consumers, and certainly had many focus group discussions with our working group on e-commerce loss. So I’ll hand over to Michael and to Andrew and look forward to what they’ve got to say.

Three things retailers can do right now

MICHAEL:

Thanks, Colin. I’m really happy to be here. To cut right to the chase, we think there are three things that retailers can do right now to really take a bite out of returns fraud.

The first is getting all their data lined up, having a holistic view from ordering, fulfilment, and claims. There seems to be lots of disparate, fragmented data in a lot of retailers.

The second is looking at their team members. Team members are in some ways their best line of defence. They are the most subjected to the bad actors who are using a lot of social engineering tactics. So that’s really focusing on training, but also recognising that there is some team member collusion with either bad actors or associates, and that those people can really do you a lot of harm. We found it really difficult to study that last problem, the team member collusion.

From payment fraud to returns fraud

If I take a step back, that’s what we think retailers should do. But how did we get to that point? We noticed, and retailers have said this in some of our meetings, that payment fraud was a really big problem. But it seems a lot of people have taken some really positive action against that. They’ve noticed a displacement by bad actors into the claims process, abusing policies, manipulating team members to get a financial advantage.

Talking to retailers, we found lots and lots of subtly different types of return fraud. There are the big ones like wardrobing, which everyone has probably heard of. It’s the most prevalent. It’s mentioned in the academic literature more than any other type of return fraud. Then there’s Did Not Arrive, where you simply claim that your package that was delivered never actually arrived. And there are all the way to very complicated things like manipulating the return package.

Online fraud communities and infinite variations

We started cataloguing what must be dozens of different types of return fraud, with these minute distinctions between them, and thought we were being really clever. I was looking at all the academic literature, talking to retailers, and Andrew was in charge of looking at some fraud communities on social media sites and messaging sites. I might let Andrew tell you about the time he gave me the bad news that threatened to crater the whole research project.

ANDREW:

Thanks, Mike. One of the key things we were really keen on understanding with this rise of refund fraud is what’s going on in digital environments. We’d heard anecdotally from retailers that there are people sitting on TikTok sharing knowledge, or guides and refunding tutorials being distributed in dark web communities and markets.

When we were wanting to explore how many methods there are and how exactly some of these methods are developed, we ran into this problem where actors are actually sitting in these communities constantly developing new iterations on new iterations of methods. One particular method might have twelve different variations. Then someone would face a problem in executing that method, and another community member would suggest another way around it. So it essentially creates an infinite number of variations.

That was compounded by the fact that in some of these communities there are cybercrime actors sitting there with live spreadsheets that they update depending on which method is working for which retailer. That was this problem we ran into with trying to catalogue a perfect clean number of methods.

Exploiting fragmented data

COLIN:

It goes back to what you said at the beginning, Michael, about often these MOs on the dark web relied on retailers not having joined-up data. They’d phone up customer service or phone up the store or visit the store and all the data was not joined up. So they were able to find these holes, promotion periods, and various other things that could create the opportunity. Is that what you were looking at?

MICHAEL:

Absolutely. What Andrew made me realise is that even if we do catalogue and get to whatever the number of return frauds that exist, retailers are going to change something, create better experiences for customers, provide a new type of service, and that is going to create more vulnerabilities.

Unfortunately, the returns channel doesn’t seem to have had the sort of investment and attention that maybe some other aspects of operations have. It seems to be a fragmented system that’s been underinvested in, and it’s just creating more vulnerabilities for bad actors to exploit.

Consumer attitudes to returns fraud

COLIN:

We did some work with consumers as well. I think one thing that really jumped out was the propensity of consumers, or certainly the sample you looked at, to claim for deliveries that did happen but they claimed didn’t. I was quite shocked by some of those stats.

MICHAEL:

Before we get into that, one thing to mention is that we spend a lot of this project talking about return fraud, but it’s interesting that customers sometimes don’t think that what they’re doing is necessarily fraudulent. They’re aware they’re doing something a bit naughty, but their understanding is: well, if retailers are going to give me a refund on just my word, they’re obviously happy with it. So in their minds, they don’t see that they’re doing anything necessarily wrong.

There’s a real tension there with customer expectations and retailers’ expectations. For instance, the problem of wardrobing. There are many customers that don’t have a problem with it. They don’t think they’re doing anything wrong. They’re just renting something. Whereas for retailers, of course, they have to deal with all the restocking, the verification, the costs of receiving back the merchandise. It’s actually quite a costly endeavour.

Survey findings: scale and prevalence

Getting to customers, we did a fairly decent survey of nearly 6,000 people across the US, Canada, the UK, and Australia. These are people that have done online shopping or in-store shopping recently. We asked about their experiences of the returns process and their understanding of what we call problematic return behaviours.

We outlined a number of scenarios like wardrobing, switch item return, bricking, Did Not Arrive, and described them in very objective, clinical terms. We didn’t call it fraud. We focused more on the behaviour, their awareness of it, whether they had heard of it, whether they had ever engaged in it, and how often.

Then we asked a lot of questions around their most recent experience doing it. How did they target the store? How did they select the retailer? Did they have any friction at all? Were they scrutinised? What did they do with the merchandise if they were allowed to keep it? How did they learn about it?

It turns out, Colin, this might be quite alarming for retailers. They largely learn through word of mouth or stumble upon it themselves. A vast majority experienced absolutely no friction at all in the returns process. They received no pushback. And they often target retailers because of either past experience or because it’s well known that there’s a liberal returns policy.

In terms of prevalence, wardrobing was the most prevalent of the return behaviours from our sample. About 12% of people said that in the last 12 months they had engaged in wardrobing-type behaviour. It really drops off quite considerably, but there is a strong relationship between the difficulty of each of the return behaviours and the prevalence. In other words, the easier it is to do, the more of it there is. You see this in all sorts of different types of crime.

Did Not Arrive and delivery fraud

COLIN:

I was really struck by the Did Not Arrive number. Was that like 6%?

MICHAEL:

Yeah. And that’s a very easy thing to do. You just don’t answer the door. Then when they go away, you say it says it’s arrived but it hasn’t. It’s quite straightforward. I think, talking to some of the retailers, they’ve really been able to combat that. Did Not Arrive is probably diminishing. Our stats are a snapshot. I think if we redid this, Did Not Arrive might be a lot lower.

COLIN:

It’s a tension because if you want to be really certain, as a retailer you probably have to invest more in photos and geolocation and maybe even not leave the package on the doorstep. Our friend Ben Stickle does a whole lot of work around package theft, porch piracy.

MICHAEL:

Again, we weren’t able to focus on it a great deal, but we had evidence, and Andrew found evidence, that some of these bad actors collude with some of the courier services. For organised retail crime groups, that is a boon to have someone in a courier business.

COLIN:

Spoiler alert: something we’re hopefully doing next year or in future years is around grocery online delivery. Missing items in grocery deliveries seem to be another thing. Some bad actors, or people finding an easy touch, to say that Jack Daniels wasn’t in my order from Deliveroo or Just Eat or Uber Eats.

MICHAEL:

Absolutely. With that rapid delivery format, it seems to me that it’s even better for committing return fraud because retailers are breaking their neck to get items to people really quickly, and customers are able to exploit that rapidness. Further, if you’ve got a third party involved like a delivery platform, their returns policy might be even more liberal than a retailer’s. It seems an even harder problem than just straight return fraud.

Practical recommendations for retailers

COLIN:

In the spirit of not going on too long, tell me, in terms of what retailers should be doing. You’ve done crime scripts, which I think is really helpful. As you said, you can’t get to a list of 2,000 different ways of doing it. Crime scripts is something you’re recommending, joining up data. What are some of the really big things? If you’re a retailer listening to this, go away and do this.

MICHAEL:

We outline in the report, which you should see on January 20th at all good ECR Loss websites. We recommend three things. You really need to get your house in order.

First, joined-up data, as I mentioned before. Second, having KPIs that are aligned. Having good customer service KPIs is great, but you also need to build in loss metrics, so that success is when loss is going in the right direction and customer service is going in the right direction. And the third thing is team training. Your team members are one of your best assets in this problem space. They’re subjected to a whole host of social engineering, and they really need to be supported with scripts to deal with the bad actors.

Then the other piece is the potential for team members to be involved in collusion. Once you’ve got those three things in place, there are some tactics you can think about.

For fraud, it’s really about trying to identify these problematic customers, these repeat behaviours, and trying to identify them through data and exiting them from your customer group.

For abuse, this is really a potential for education. These are ordinarily good customers, or people that have the potential to be good customers. It’s about expressing some of the norms about what is appropriate return behaviour.

One of the things about the people committing a lot of wardrobing is that they’re really interested in the environment more broadly. I think a lot of customers aren’t aware of the environmental impact of these problematic return behaviours. Those are the sorts of things. Less so the damage it does to the retailer. It seems that some of these people don’t really care if it’s impacting the retailer, but they probably care about impacting the environment.

Return fees and personal contact as deterrents

COLIN:

Andrew, do you want to say anything else before we close?

ANDREW:

Just on the data we found about how customers felt about getting charged a return fee, and how much that would change their likelihood of engaging in return fraud. I thought that was a really interesting implication for retailers to consider. Probably an unpopular option for most customers, I imagine.

COLIN:

To your point, the number one deterrent was just being contacted by the retailer to say: we’ve noticed you’re returning an awful lot, or you’re always claiming the goods aren’t being delivered, is there something we can do? That seemed to be a huge deterrent. Taking the organisation and making it a person. Someone calling up and making contact.

Guys, this was terrific work and I think groundbreaking. As an industry, it’s very hard to get a feel for how big this problem is, but I think you’ve really put some markers out there in terms of how big the problem can be, based on the consumer research and all the work you’ve done on the dark web. We really appreciate that. We’re looking forward to this body of work being received really well. We’re also looking forward to seeing how retailers can act and come back and tell us how they worked on crime scripts or joined up their data. So we have some success stories and can prove the impact of all your good work. We really appreciate that. We’re looking forward to the next projects and our continued partnership going forward.

MICHAEL:

Thank you, Colin. We’re super excited to get this out in the hands of the retailers too.

Outro

COLIN:

Thank you very much. Cheerio.

Well, that’s all we have time for this week. Thank you for joining us and thanks to all the ECR Retail Loss community for the sharing of their knowledge, their research, and latest learnings that ensure that we become truly a global platform for learning.

My name is Colin Peacock. This is the Sell More and Lose Less podcast. If you liked it, please subscribe so you automatically get all future episodes. And if you think your colleagues and friends might also like it, please ask them to follow ECR Retail Loss on LinkedIn and tune in to our next podcasts. If you didn’t like it, then let us know and we’ll try and fix it. Either way, see you next time. Thank you again.