The Hidden Cost of Returns Fraud: What Retailers Aren't Seeing

Returns fraud is costing retailers more than they realise. It’s not just about the item – it’s about the refund. 

In 2024, global losses from returns fraud reached a staggering €103 billion. But the real damage often comes from refunds issued for items that can’t be resold. These include worn clothing, counterfeit swaps, and empty boxes – products that go straight to recycling or landfill, never making it back to shelves. 

This blog explores the hidden mechanics of returns fraud and what retailers can do to protect their margins without compromising customer experience. 

1. The Growing Threat: When Refunds Outpace Reality

Retailers often assume that a returned item equals recoverable value. But in reality, many refunded items are: 

• Damaged or worn beyond resale.

• Counterfeit or swapped.

• Empty parcels with no product inside.

• Incomplete.

These types of fraud are increasingly common. And because refunds are often issued before the condition of an item is verified, retailers are losing money on products that have no resale value.

2. The Operational Impact

Returns fraud now accounts for 15% of all returns, representing billions in lost revenue annually. And it’s not just about the money, it’s about the strain on operations. 

• Serial returners drive up to 25% of return volume.

• Customer service teams spend hours resolving disputes without evidence.

• Logistics teams handle unsellable items that clog up the system.

Without a way to verify an item’s condition, retailers are stuck in a cycle of inefficiency and loss. 

 3. Why It’s Hard to Detect

Most fraud detection tools rely on behavioural data alone. They flag suspicious patterns based on past customer behaviour, but they don’t verify what’s actually in the box. These systems act as alarms, not solutions. 

Some retailers try to prevent fraud by asking customers to submit photos before initiating a return. But this approach can frustrate genuine customers and is still easy to trick. Others use predictive fraud scoring, which can unfairly flag legitimate buyers and damage trust. 

The real challenge is balancing fraud prevention with customer experience. Retailers want to protect their margins, but not at the cost of alienating loyal customers. And the stakes are high: studies show that customers with a positive return experience are three times more likely to make repeat purchases. So, while fraud prevention is essential, it must be implemented in a way that maintains trust and ease for honest buyers. 

That’s where warehouse activities, like processing, come in. By inspecting an item in a warehouse facility, retailers can verify claims without burdening the customer. This operational layer is especially critical for large retailers managing high return volumes across multiple hubs. 

4. What Retailers Can Do

To break the cycle, retailers need to shift from reactive to proactive fraud management. Here’s how: 

• Invest in Quality Processing

Build a returns flow that includes item registration, item condition assessment (grading), and photo capture. This creates a defensible record for customer service teams and fraud analysts, enabling faster and fairer decisions and protecting the revenue. 

• Use Data to Identify Patterns 

Track repeat offenders, recurring damage claims, and refund anomalies. Combine operational data with behavioural insights for a full fraud picture. 

• Collaborate Across Departments 

Fraud isn’t just a customer service issue. It touches logistics, finance, and customer experience. Build cross-functional workflows to respond faster and smarter. 

 5. Closing Thought 

Returns fraud is more than just a financial hit, it’s a breach of trust. When retailers refund without verification, they risk rewarding bad actors and may alienate genuine customers. 

The solution isn’t more suspicion, it’s more clarity. 

By investing in returns intelligence, retailers can protect their margins, streamline operations, and build a fairer experience for everyone.