Refund fraud:
Tactics and how
to prevent them

Refund fraud, also known as return fraud, involves intentionally abusing a retailer’s return policy with the intent to defraud. 

Good retail data security involves ensuring that retailers have a solid understanding of the new vulnerabilities they face and have strategies for addressing them so they are better positioned to serve and protect their customers.

Return fraud can be carried out in a myriad of ways. Here are some common methods that bad actors may use in an attempt to fraudulently return merchandise.

Some tactics primarily target in-person brick-and-mortar settings.

Using a discarded or stolen valid receipt, fraudsters pick the item listed off the shelf in the store and proceed to the cash register to "return" the product.

While most retailers require customers to sign a return form, asking for ID as proof of identity may deter some bad actors. Offering store credit over cash refunds can also be helpful.

Or, instead of using a discarded receipt, the fraudster makes a purchase, leaves the store and immediately returns with the receipt and finds another of the same item off the shelf to "return," claiming that they changed their mind.

Ensuring product codes match on the receipt and applying code-laced liquids only visible to UV light are two prevention strategies.

Fake receipts are readily available online and can save fraudsters the time and effort required to complete the fraudulent activities above.

Training your employees to be on the lookout for fake receipts is a strong prevention strategy. Compiling a list of serial returners is also critical to help thwart this type of attack.

This classic retail cheat involves purchasing an item for temporary use with the intention of returning it for a full refund—for example, buying a designer suit to wear only once.

Placing tags in highly visible places on items of clothing can help prevent people from trying this tactic, as the customer cannot remove them.

Another type of retail fraud, known as “sweethearting,” is a common form of employee theft. It takes place at the cash register and occurs when the employee gives away merchandise to a friend, family member, or other acquaintenace. It can take a number of forms, such as not ringing up an item, ringing up a cheaper item, changing the price of an item through a price override, and giving refunds for items that were never purchased.

Prevention tips include installing video surveillance cameras and checking customer receipts when they exit the store.

While some of the above tactics, like wardrobing, can also translate to the e-commerce setting, online shopping comes with its own unique refund vulnerabilities.

This common refund fraud occurs when the e-commerce retailer must refund a disputed purchase. The fraudster can be either a criminal or a customer. In the case of the former, the online purchase is initiated by a criminal using a stolen account or credit card to buy an item online. The cardholder notices the unfamiliar charge and understandably requests a refund. In the customer scenario, the legitimate account or cardholder disputes a purchase with their issuing bank instead of the retailer, thus initiating a chargeback.

The financial threat for retailers is significant. Mitigating the risk is difficult, but refund tracking and limiting reasons for allowable refunds can reduce the impact.

Today, those who wish to commit refund fraud but don't want to go through the trouble of initiating the refund with customer service can have someone do the dirty work for them. Cyber criminals post refund services on online forums or social media, listing companies they can guarantee refunds for. Once the retailer initiates the refund, the cardholder pays the fraudster a fee for the service.

While steps for fighting this type of fraud are limited, they can be approached in a similar manner as chargeback fraud by tracking refunds and limiting reasons for allowable refunds.

Some fraudsters will scour liquidated or heavily discounted goods from a secondary market source, then initiate a return for full retail value with the e-commerce retailer.

Practices like monitoring inventory and return levels can help reduce the risk of secondary market fraud.

When the return process is optimized, the risk of fraud is more likely to diminish. Moreover, creating a positive return experience can enhance a customer’s impression of a retailer.

For e-commerce, revisiting (and perhaps hardening) return policies is necessary. In some cases, retailers may want to adjust when refunds are issued. As long as the customer experience isn't drastically affected, avoiding issuing refunds too early may help catch fraudulent claims in action.

Other practical streamlining strategies for e-commerce include identifying repeat offenders and putting an escalation process in place for refund request calls to be routed to a trained fraud team member.