Returns fraud cost UK retailers £11.3 billion in 2023, with 38% of shoppers admitting to return policy abuse. The rapid growth in online shopping has intensified the issue, raising operational costs and overwhelming return logistics. High-value industries like jewellery and tech are particularly affected, highlighting the urgent need for preventative measures.

The growing threat of returns fraud - in the UK today, over 80% of consumers shop online and the forecast is that this figure will keep rising. Such rapid growth is good news for e-commerce.

What isn’t good news, however, is the corresponding increase in returns fraud. Data from the previous twelve months shows that around 38% of UK shoppers admit to engaging in return policy abuse or fraudulent behaviour. This, as well as protracted criminal activity, is causing operational costs to rise to unsustainable levels and the pressure now placed on return logistics is fast becoming unworkable.

According to a study carried out by Loop, returns fraud cost UK retailers £11.3 billion in 2023 and in the first half of 2024, according to the National Fraud Intelligence Bureau, returns fraud has already cost those same retailers £5.4 million with high-value industries such as those shipping jewellery, mobile phones, laptops and tech being targeted in particular.

It's not all bad news: The solutions are out there

E-commerce operations directors have an unenviable challenge. They must ensure their customer base is satisfied by implementing seamless returns policies. Yet, they must convince these same customers that stricter, less-flexible policies are for the best in the long-term. Above all, it is imperative that they adopt a robust and comprehensive approach to returns fraud whilst at the same time, ensuring packaging- and returned product integrity.

Against the backdrop of a highly competitive market, this task is a complex and tricky balancing act, but the solutions are out there.

Already levels of cross-department collaboration for enhanced returns management are on the rise with cooperation between operations and fraud detections teams at an all time high. Working closely together to share insights on customer behaviour and returns trends means that fraud can be investigated more quickly and tailored solutions easier to come by. Fraud specialists can identify common and current fraud tactics, enabling operations teams to implement tighter procedures based on these insights. The result is targeted, worthwhile prevention and deduction.

Within their own companies, operations directors should lean on their customer services teams. Highly experienced and knowledgeable where their customer base is concerned, these employees can play a key role in identifying suspicious returns behaviour because they know customer habits and behaviour so well. Empowered customer service representatives can take some of the strain off operations teams by spotting anomalies and suspicious spending patterns and flagging potential fraud cases.

So what exactly is returns fraud? In this article, we explore the definition, identify the main types and the industries affected and run through the packaging and operational strategies necessary to combat it successfully.

Understanding Returns Fraud

Returns fraud is the exploitation by the customer of a retailer’s returns policy for personal and undeserved financial gain. This gain is usually obtained in the form of a refund or replacement product and depending on the e-commerce sector affected, returns fraud can take various forms.

Wardrobing

How many people have bought a piece of clothing they can’t afford and worn it with the labels intact – maybe for one evening or event – only to send it back, enjoying the company’s free return policy and the knowledge they’ll receive a full refund? According to a survey by VoucherCodes.co.uk, 27% of consumers in 2023 did just that (a 50% increase in those undertaking the same practice ten years ago).

Many see wardrobing as a harmless way of looking great without any of the expense. Others are simply after a bulk haul for their social media posts.

If you’re guilty of wardrobing however, you’re also guilty of fraud. It costs the UK fashion industry an estimated £1.5 billion annually and it’s no laughing matter for the environment either with one in four returned items ending up in landfill.

The Empty Box Scam

There are two types of Empty Box Scam. The first is when a customer claims not to have received their package when, in actual fact, they have. Then, there’s the scam where consumers return either an empty box or one containing a counterfeit product. These days, it’s common for e-commerce retailers to find return packages stuffed with anything from newspaper to a non-original, less expensive product.

According to a survey carried out in 2022 by fraud management company riskified, almost 40% of retailers see the Empty Box Scam as the most challenging type of fraud to address. This is down to a few factors.

Firstly, there are those out there who make a living defrauding e-commerce businesses. Forums exist on the dark web where cybercriminals gather to congratulate each other as well as collaborate. They deliberately exploit loopholes in lenient (and therefore riskier) returns policies put in place to appeal to customers by market leaders such as Amazon.

One example of this would be where refunds are given as soon as a consumer instigates an online return whether or not they have returned the product. What's additionally troublesome is that historically, many of these relaxed policies have been adopted by others in order to achieve a competitive edge and so this type of fraud has proliferated.

However, The Empty Box Scam isn’t always about fraudulent retailer versus consumer. It can affect the genuine customer negatively as well - i.e. when the box is tampered with during transit. This leads to distrust, dissatisfaction and disappointment, plus loss of income and property at both ends of the supply chain. 

Cargo Theft

Logistics has evolved at a staggering rate. Unfortunately, this has enabled individuals and organised groups to exploit a system that might not always be as robust as it could be.

Cargo Theft (otherwise known as Freight or Network Theft) is when a package or parcel is deliberately tampered with or stolen in transit (i.e., on its journey to the customer). And it's not just the retailer and the customer who suffer but the entire supply chain, from 3PLs, warehouse operators and fulfilment centres to carriers and insurance companies.

Cargo Theft itself can be divided into many sub-categories (stay tuned for our article on all of them). All involve the brazen stealing of products - sometimes opportunist, sometimes using sophisticated methods and systems - loss of income as well as reputational damage.

Friendly Fraud

Friendly fraud – otherwise known as chargeback fraud – is a further thorn in e-commerce’s side. It occurs when a customer disputes a legitimate purchase with their issuing bank or credit card company and, in doing so, causes loss and potential consequences for the retailer. 

So why is it referred to as ‘friendly’? Well, because relatively often, it’s unintentional. Customers might use the chargeback facility because they’re confused and unable to recognise the charge on their credit or debit card. Perhaps they’re dissatisfied with the item they’ve received or maybe they feel the retailer’s service wasn’t up to scratch. Then, of course, there are those who use the chargeback option for nefarious motives. 

Whatever the circumstances, even though retailers have the right to dispute a chargeback and may eventually recover their revenue, the process is complicated and lengthy. For small businesses with limited cashflow, this can prove disastrous.

Other Types of Returns Fraud

Receipt Fraud occurs where consumers use stolen or counterfeit receipts to return expensive items and claim refunds. Traditionally, this type of fraud was a problem faced by bricks and mortar shops. Now, it’s proving a significant threat to on-line retailers as well, particularly as software gets more sophisticated and invoices and receipts easier to counterfeit.

Switching Fraud involves returning a counterfeit product to the retailer in the hope of being refunded even though the product isn’t the original. Similar to ‘bricking’ where customers claim that they have received a damaged or non-operational item, the ‘customer’ attempts to obtain a refund, a replacement or both. (See also The Empty Box Scam.)

Whichever type of returns fraud a company falls victim of the impact is disruptive and expensive. It results in loss of income, reputational damage and feelings of corporate and personal vulnerability. It makes the returns process far trickier than it needs to be for genuine, honest consumers, undermines collaborative initiatives and means the price of products is hiked up to cover resulting costs.

High-Theft Industries Vulnerable to Returns Fraud

Though everyone involved in e-commerce needs to keep their wits about them, there are certain industries that are particularly vulnerable to returns fraud.

Jewellery: Small, high-end items such as engagement rings or luxury watches are easy to conceal and switch with counterfeit or damaged goods. Here, the profit margins are excellent and fraudsters have the added bonus of luxury brands being in demand and easy to sell on. An added complication is that jewellery is often purchased as a gift and turns out to be unwanted (see friendly fraud).

Electronics: The popularity and resale value of electronics including mobile phones and laptops makes them prime targets for fraud. Customers may attempt to return counterfeit devices or devices with internal damage keeping their original purchases, selling them on and pocketing both the refund and the sales profits. With a bit of effort, high-end cameras, gaming consoles or tablets can be swapped for refurbished or malfunctioning units. In terms of reputation, product and packaging integrity, this costs retailers heavily.

Designer Clothing and Accessories: See our paragraph on wardrobing.

The Impact of Returns Fraud on Packaging Integrity

Packaging is pivotal in e-commerce. It safeguards goods during transportation, establishes brand recognition and identity and is a means of communication with the customer building relationship and loyalty.

Packaging integrity is the capability of a package to act as a barrier, protecting the product it contains from threat, physical, chemical or microbial. 

Packaging and its integrity are vital components of e-commerce's success. Compromised and damaged packaging as the result of deliberate tampering and fraud leads to operations teams having to work extremely hard in order to verify the integrity of returns and then replace or refurbish inner and outer packaging components.

These return-to-stock inefficiencies translate into increased costs, extra time, extra labour and / or the subsequent necessity for extra protective measures such as tamper-evident seals or reinforced boxes. It’s also an environmental nightmare.

Operational Strategies to Combat Returns Fraud and Maintain Packaging Integrity

So what can be done to eradicate returns fraud? What operational strategies should be adopted? And which is the right one for your business? 

Solution: Implement Tamper-Evident Packaging

Tamper-evident packaging uses seals or specialised materials that make any interference with the product immediately visible. This helps reduce fraud by ensuring that once a package is opened, it cannot be delivered or returned without there being clear evidence that tampering has taken place.

One option at the disposal of high-end jewellery companies is packaging with holographic seals. Extremely hard to replicate or remove without damage, holographic seals can be made to incorporate logos or serial numbers and are a visible sign of authenticity.

RFID (Radio Frequency Identification) tags are also a solution. The tags use radio frequency technology, transmitting data to a reader, which then transmits the information to an RFID computer programme. Used successfully in bricks and mortar retail spaces, e-commerce also benefits by being able to track the movement of its goods automatically, bolstering security against theft.

There are several other types of tamper-evident devices that don't rely on seals or tags, but the packaging itself. A well-designed, 'simple' box is sometimes all it takes to reduce levels of theft and tampering dramatically.

Take FlyPak, for example. The Packaging Club's own patented box, with its integrated side tamper evident design for extra security, has helped one of the UK's largest 3PL companies shipping high-value consumer electronics report a 78% reduction in delivery theft since its implementation (white paper to follow). And not only has theft been reduced, but a further knock-on effect is that this 3PL has now seen a 90% increase in insurance approvals as regards their loss recovery. Simple, cost-efficient, yet highly effective.

Solution: Leveraging Data and AI for Fraud Detection

Many companies have started to use data analytics to detect patterns which indicate potential fraud. 

Requiring little effort to set up, AI is a tool of empowerment for e-commerce able to detect unusual spending patterns, frequent returns by specific customers or returns of high-value items made shortly after purchase (often suspicious). All these examples are instances which should trigger investigation or, at the very least, additional verification and AI does this automatically.

Such a strategy would be especially useful for electronic retailers like Apple or Samsung where users who return mobile phones or laptops multiple times could be flagged for review before any returns are ever processed.

Solution: Reinforcing Returns Policies

Returns policies for high-value items must be stricter even if there’s a risk initially of alienating individual customers. Customers must accept that refunds will be offered, but only after extensive inspection of any returned product and that return policies, though generous, cannot be exploited. Requiring original receipts, product authentication and serial number tracking are all measures which make fraud difficult.

Luxury brands such as Rolex or Gucci could insist on in-person returns. Return an authentic product with its original packaging intact personally and only then will a full refund be issued. Maybe surprisingly, this approach could work well across the board. Happy Returns reported in one of their studies, that 67% of consumers preferred in-person returns to returning on-line, especially if it meant they could avoid fees.

Solution: Utilising Secure Labelling and Serialisation

Serialisation is a straightforward way of stopping fraud in its tracks. Like chassis numbers on cars, a unique serial number will ensure that the returned item matches the one originally sold helping to verify product authenticity.

Did you know that mobile phone retailers like Vodafone or O2 already use unique IMEI (International Mobile Equipment Identity) numbers to track each device? And only the phone with the matching IMEI number is eligible for return? 

Meanwhile, in the fashion industry,  Checkpoint Systems has introduced its R-Turn Tag. Designed to eradicate wardrobing without inconveniencing legitimate customers, the tag remains in a visible place on the item until the consumer removes it at home, whereupon they are unable to return the garment. 

Solution: Third-Party Authentication Services

Working with third-party authentication services can ease the process of verifying the authenticity of returned items before refunds are processed. Happy Returns, Certilogo (fashion) and Entrupy (tech) are three companies specialising in returns software and reverse logistics developed to verify authenticity, eradicate fraud and most importantly, assist genuine customers.

Integrating third-party authentication to validate a returned product’s legitimacy, preventing counterfeit returns, for example, could benefit an e-commerce platform selling second-hand or refurbished luxury watches.

Conclusion: Balancing Customer Satisfaction with Fraud Prevention

Following years of being persuaded to make online purchases with the promise of easy returns, consumers now have embedded expectations when it comes to returns policies. However, the time has come where these expectations clash with e-commerce’s need to maintain profitability as well as answer the call to be environmentally friendly. E-commerce is being forced to tackle the growing issue of returns fraud, the number of cases of which has exploded though a combination of lax policies, the anonymity of the internet, the pressures of recession and an ‘easy’ way for people to gain financial advantage.

Operations Directors must come up with strategies offering seamless, customer-friendly returns processes whilst ensuring fraud is minimised. If they don’t, there is the very real risk that their returns policies – the very things implemented to increase their profits - will run them out of business.

But as we've detailed, the solutions are out there! Using advanced packaging technologies, including tamper-proof packaging, data analytics and stricter policies, businesses can protect profits while still fostering customer loyalty. So, consider investing in packaging upgrades and fraud detection software. Think about introduce more rigid returns policies that will ensure your company can meet its environmental as well as consumer obligations. And whatever you do, make sure you empower your customer services team.

Finally, before you spend a single penny on any of these measures, undertake a packaging and dispatch operations audit. Let data and evidence-based analysis drive your decisions.

You'll be amazed at what this process can do to elevate your packaging, streamline your operations, protect your goods, save you money and beat fraud.

Taking every measure you can to safeguard your e-commerce operations against returns fraud means you will safeguard your company's future. Plus, there are few feelings better than outsmarting a fraudster.

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This document provides Operations Directors with a structured approach to understanding, addressing, and preventing returns fraud.

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Ecommerce

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