Return fraud is the act of defrauding a retail store via the return process. There are various ways in which this crime is committed. For example, the offender may return stolen merchandise to secure cash, or steal receipts and/or receipt tape to enable a falsified return. Return abuse is a form of “friendly fraud” where someone purchases products without intending to keep them. Perhaps the most well-known form of this abuse is “wardrobing” or “free renting” – in which the person makes a purchase, uses the product(s), and then returns the merchandise.
The retail industry experiences a significant fraud and abuse problem, losing money in the range of $9.6 to $14.8 billion per year, according to studies conducted by the National Retail Federation (NRF) and the Loss Prevention Research Council.
The problem has historically caused retailers to raise prices for shoppers in order to offset and recover the losses incurred from fraudulent returns. Alternatively, many stores have created stricter return policies such as “no receipt, no return” or imposed return time restrictions such as a 30-day limit on all returns that impact all shoppers.
A certain percentage of returned merchandise must be marked down or discarded in order to sell the product. After being returned, out-of-season clothing may have to be placed on the sale rack, for example. Or retailers may be forced to discard returned lingerie for health reasons. The retail company also incurs restocking time from returns, which could be time an associate spends driving new sales revenue by assisting customers.
Types of return fraud
Some examples of the return fraud and abuse problems include:
- Wardrobing or renting: Purchasing merchandise for short-term use with the intent to return the item, such as a dress for a special occasion, a video camera for graduations and weddings or a big-screen television for the Super Bowl.
- Returning stolen merchandise: Shoplifting with the objective to return the item(s) for full price, plus any sales tax.
- Receipt fraud: Utilizing reused, stolen or falsified receipts to return merchandise for profit. Alternatively, returning goods purchased on sale or from a different store at a lower price with the intention of profiting from the difference.
- e-Receipt fraud: Utilizing e-receipts issued when purchasing goods online, but returning them in store, to return merchandise for profit. A variation of the receipt fraud using the e-receipts.
- Employee fraud: Assistance from employees to return stolen goods for full retail price.
- Price switching: Placing lower priced labels on merchandise with the intention of returning the item(s) at the higher price point.
- Price arbitrage: Purchasing differently priced, but similar-looking merchandise and returning the cheaper item as the expensive one.
- Switch fraud: Purchasing a working item, and returning a damaged or defective identical item that was already owned.
- Cross-retailer return: Returning or exchanging an item purchased at another retailer (usually at a lower price) for cash, store credit or a similar, higher-priced item at another retailer.
Return policies have historically served as the primary way for retailers to combat return fraud and abuse; the challenge is keeping policies from being overly restrictive and/or inconsistently interpreted, both of which may discourage loyal customers and affect purchases. Separately, automated solutions have also been developed to help combat return fraud and abuse, including unbiased software programs that detect such behavior and help retailers determine whether a return is valid. These software programs allow retailers to maintain reasonable price points for consumers, maintain lenient return policies for their good customers, and offer better and more consistent customer service. Reducing fraudulent and abusive returns helps a retailer’s financial situation by lowering costs, preserving net sales, reducing shrink, while still delivering better service to their shoppers.
- National Retail Federation, Press Release, 2012
- National Retail Federation, Press Release, 2008
- Loss Prevention Research Council
- Stores Magazine article, “Tying returns to IDs helps Finish Line reduce shrink”:
- CNN Money article, “Price tag for holiday fraud: $3.7 billion”
- Good Morning America article/segment, “Buy, Wear, Return, Repeat”
- TIME article, "Word of the Day: Returnaholic"
- Speights and Hilinski (2005), Texas A&M, Mays Business School, Center for Retailing Studies Retailing Issues Letter, Volume 17, "Return Fraud and Abuse: How to Protect Profits"
- National Retail Federation
- Case Studies on Return Fraud
- Loss Prevention Research Council
- Dr. Mark Rosenbaum
- Dr. Mark Rosenbaum and Dr. Ronald Kuntze Looking good at the retailer's expense: investigating unethical retail disposition behavior among compulsive buyers
- Dr. Mark Rosenbaum and Dr. Ronald Kuntze The relationship between anomie and unethical retail disposition
- Return Preparer Fraud John Koskinen, Commissioner of Internal Revenue