How E-commerce Businesses Can Mitigate Return Fraud and Refund Fraud

Sep 3, 2023
Chai NadigFounder, CTO

The e-commerce industry continues to thrive, but it also faces challenges, including increasingly common return fraud and refund fraud. Each is, unfortunately, something online retailers can’t completely avoid—but businesses can mitigate and even make the best of these rampant issues.


What is Return Fraud?

Return fraud occurs when dishonest customers exploit a retailer's return policy for personal gain. According to the National Retail Federation, return fraud costs retailers billions of dollars annually; of the $212 billion worth of online returns, $22.8 billion—a whopping 10.7%—is deemed fraudulent.

Three common types of return fraud are prevalent in e-commerce:

1. Wardrobing: Making up 50% of return fraud, this type of fraud involves buying items with the intention of using them temporarily, such as wearing clothing for an event and then returning it for a refund. It's a deceptive practice that puts e-commerce businesses at a significant financial disadvantage.

2. Bracketing: In bracketing, fraudsters purchase multiple items with the intent to keep the most expensive one and return the rest. This tactic enables them to exploit the return policy and receive a full refund without intending to keep all the items.

3. Return of used or damaged products: Some unscrupulous customers return items that they’ve used, damaged, or altered, making it difficult for retailers to resell the products at their original value, even if they’re technically usable.

What's Refund Fraud?

Refund fraud is a closely related issue, but with a subtle difference. While return fraud involves manipulating the e-commerce returns process, refund fraud exploits the refund process directly. This typically happens when a customer requests a refund for an item they didn’t purchase, often by providing fake or stolen purchase info. Sometimes, crafty fraudsters will create or source fake receipts to fool online retailers.

No matter their approach, it can be difficult for e-commerce companies to detect and eliminate all return fraud, especially for businesses processing a ton of orders. Still, there’s some hope.

3 Ways to Mitigate Return Fraud and Refund Fraud


1. Lay out Clear Return and Refund Policies

The first step in combating return fraud and refund fraud is to have transparent and easily accessible return and refund policies. Ensure that policies are clear and concise, outlining eligibility criteria, timeframes, and procedures for returns and refunds. Educating customers about these policies—and placing them front and center on receipts or confirmation emails— can discourage fraudulent refund and return attempts.

2. Consider Store Credit Instead of Cash Returns

Offering store credit instead of cash refunds can be an effective way to curb return fraud. While some customers genuinely need to return items, others may attempt to abuse the system for personal gain. By providing store credit, businesses have the opportunity to inspect suspicious claims and ensure that returns are legitimate.

3. Use LiquiDonate to Save Money by Donating Returns

The easiest way to mitigate return and refund fraud is by using LiquiDonate. Through LiquiDonate’s online platform, online retailers can have customers donate would-be returns rather than risk accepting them and paying warehouse restocking fees. And LiquiDonate makes the process simple and efficient; retailers can choose to issue refunds only after an item is donated to a nonprofit, saving them money on handling, storage, transit, and landfill fees associated with traditional returns destined for the landfill after weeks in the warehouse.

Moreover, donating through LiquiDonate helps businesses achieve their Environmental, Social, and Governance (ESG) goals, making a positive impact on the environment and local communities. It's a win-win-win for brands, customers, and the nonprofits they support.

Mitigate Return and Refund Fraud With LiquiDonate

Return fraud and refund fraud pose stiff challenges to e-commerce businesses, impacting their bottom lines and potentially their reputations. But by utilizing LiquiDonate, businesses can better navigate these fraudulent activities, save money, and help nonprofits support their local communities and causes.

The best part? It’s super simple. Book a demo today to see how easy it is to save money through donations versus paying to send unsellable returns to the landfill.


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