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Finance glossary

What are refund scams?

Bristol James
6 Min

When a customer falsely claims that a company owes them a refund — whether it’s for a product that they didn’t actually purchase or a fake claim of faulty goods – in an attempt to gain financially from the refund, that customer is perpetrating a refund scam.

Also referred to as refund fraud, refund scams are running rampant, making it hard for businesses to maintain profit margins and continue operations.

According to the 2023 Consumer Returns in Retail Report, returns cost businesses a total of $743 billion annually. Of the total returns that year, 13.7% were fraudulent returns, resulting in a loss of $101 billion. Although these data points are specific to the retail industry, there are plenty of refund scams that exist in other industries, too.

Types of Refund Fraud

Scammers are getting more and more savvy with each refund scam; they’re usually much more complex than keeping the tags on an expensive dress and returning it after the event. The rise in online shopping has also brought forth a new set of refund scams that can involve the identity theft of another customer. Some of the main types of refund fraud are:

Return fraud

If a person untruthfully returns an item claiming it is damaged or hasn’t been used, they are committing refund abuse. Because retailers are committed to customer satisfaction, scammers can easily take advantage of that commitment and end up costing stores thousands and thousands of dollars.

Chargeback fraud

When a customer calls their bank to dispute a charge or claim that they didn’t make that specific purchase when they actually did, they are committing chargeback fraud. Refund policies make it hard to prevent chargeback fraud, but often, the banking institution tries to vet the dispute before reclaiming the funds from the retailer.

Tax refund fraud

A different form of refund fraud, tax return fraud takes place when an individual or a business files a fake tax return in hopes of getting a tax refund that isn’t theirs. This can also involve identity theft if the personal information of someone else was used to file the return.

Insurance refund fraud

If a business owner damages their business in hopes of filing an insurance claim and getting a hefty payout, insurance refund fraud is in action. Insurance refund fraud makes insurance policies more expensive for everyone, showcasing the ripple impacts that refund abuse can have on innocent bystanders.

Wardrobing

The old “return the dress after the gala” trick may not be the only type of refund abuse happening, but it’s still prominent in the retail space. Retailers are not rental agents, though wardrobing positions them as such. Wardrobing doesn’t just happen with clothes; electronics and accessories are commonly “returned” after use.

Receipt fraud

With technological capabilities today, creating a fake receipt or purchase order is easier than ever. Customers can exploit that ease and share an altered or entirely fake receipt with a business, then attempt to get a refund based on the corrupted document. Shoppers can also exploit stores with multiple locations by pretending they bought something at one location and using a doctored “receipt” to return it at another location.

Price switching

If a customer removes the barcode from a cheaper item and places it on a product they want to buy, they are price switching, which is a refund scam. The scammer can then attempt to return the item at the “higher price,” getting a bigger refund than what they paid in the first place.

Employee Fraud

No one wants to believe it, but employees are often central to refund scams. Sometimes an employee will help their friends or family members execute return fraud, making it harder to catch and prevent in the future.

How to prevent refund fraud

The best way to minimize financial losses associated with refund abuse is to prevent refund scams entirely. Whether a retailer is facing a surge of niche online scams or trying to combat ongoing refund abuse, these prevention tactics can help.

Revise Refund Policies

Whatever your current refund policy is internally, chances are, it needs to be updated. Sneaky scammers look for outdated policies that are easier to exploit; by closing the loopholes that let bad actors get away with refund scams, retailers can prevent them in the long run. Be sure your refund policies are clear, concise, and easy to find. Set return windows or timelines for high-price items.

Stores that have struggled with wardrobing scams started placing ink tags on visible areas of clothes, making it harder for the customers exploiting refund scams to return an already-used item. Little adjustments like this can go a long way in preventing refund abuse.

Educate store employees on refund fraud

Employees are always, always the first line of defense when it comes to refund scams. They have to be able to identify fraudulent returns quickly, and in order to identify them, they have to know how they happen. Quarterly team trainings on current refund scams or newly developed schemes can help empower teams to take action if something seems off.

Employees should also be trained to look up purchased items in the system, verify the form of payment used to make the purchase, and deescalate heated situations where a scammer is demanding a fraudulent refund.

Implement tighter regulations for high-ticket items

The more expensive an item is, the more likely someone is going to try and return the item to get money back for it. For high-risk goods, retailers should have even more strict return policies such as requiring a reason code to be listed in the system. Employees need to closely monitor the returns for high-risk items in order to identify patterns and adjust as needed.

Track customer behavior

Is there a customer who seems to come in regularly with suspicious returns? If so, keep a log of the returns they are making to figure out whether or not they’re committing refund fraud. If refund fraud is suspected, limit that customer’s return capabilities, or offer store credit instead of cash.

Utilize the power of technology

There are lots of software solutions that can help prevent refund fraud. These solutions can monitor all return data, track worrisome trends, and alert store leaders of potential online scams happening in the background. To safeguard payments for your customers and your store, consider using a tool like Eftsure. Eftsure is a secure payment platform that conducts invoice matching and payee verification, protecting businesses from fraudulent payments and downstream scams.

Summary

  • Refund fraud occurs when customers falsely claim refunds for goods or services, exploiting businesses for financial gain in the process. The impact of refund scams grows annually, with 2023 seeing $101 billion lost because of these schemes.
  • Refund scams can take many shapes, including return fraud, chargeback fraud, tax refund fraud, insurance refund fraud, wardrobing, receipt fraud, price switching, and employee fraud.
  • Preventing refund fraud requires proactive measures such as revising refund policies, educating store employees on fraudulent schemes, implementing tighter regulations for high-ticket items, tracking customer behavior for suspicious patterns, and utilizing software solutions to do a lot of the heavy lifting in prevention.
  • Refund scams are constantly evolving as store policies change, technology advances, and scammers get savvier. Staying ahead of these types of scams is part of selling goods and services; they aren’t going away anytime soon, so retail leaders should focus on continuous fraud prevention efforts.

 

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