Definite Guide To Refund Scams

Profit decreases and can’t explain why? Do your clients return perfectly working products for no reason?

Refund policies give buyers the confidence to buy with no obligation to keep an item they don’t want. But others can use this privilege for profits.

You want to offer a generous return plan to attract shoppers. But you neither want to make it so strict that it affects sales. What’s the problem?

refund scam

What Are Refund Scams?

What Are Refund Scams

If you’re losing sales, but product quality isn’t the problem, refund fraud may be ruining your business. Sellers expect some buyers to dislike a small percentage of their products.

Anything higher than this anticipated and calculated percentage could mean your store has a blindspot that scammers are using to make profits. Once they find the trick, they use different identities to do it over again until it no longer works.

Refund scammers make money by returning different goods from the ones they bought. Some even manage to get a refund without returning the item. Others make use of the product as long as they need it and the return policy allows, then they pack the product back up for a return.

Refund scams are commonly known for:

  • “Renting” items instead of buying them
  • Faking receipts to refund fraudulent orders
  • Replace the item with a broken replica and keep the real item
  • Arbitrage with store locations
  • Sell stolen goods and re-print receipts

In large retail stores, dishonest employees can involve as much as buyers. Instead of selling out the inventory, you’re paying someone to take away your items.

Real VS Fake Refund

How do you tell legit returns from fraudulent? Refund scams happen all the time because of how easy it is to cover. Any store of any size is at risk of refund scams.

As a popular one, scammers buy online and return to the real store. After you show the product and receipt, employees will usually refund you in no time. The product, however, may be a counterfeit, a damaged item, or a similar-looking item that’s cheaper than the original one.

As retailers add security measures, fake buyers learn how to get around them and keep profiting. That’s why you can never get caught off-guard. Preventive measures will save you a fortune.

How To Detect Refund Fraud

How To Detect Refund Fraud

Scammers look for the easiest way to do things, which means they often use the same tricks. They may try different locations and brands, but the patterns look the same.

#1 Review Your Refund Rates

What are the most returned products, and why? Prices and categories may give you clues.

If your product costs around $20, refunds are normal. People make small orders all the time without really thinking about it. It happens with electronics and merchandise.

High-price products should have lower sales and accordingly refund rates as well. People will not buy an expensive item by accident. As a rule of thumb, constant returns of +$50 items is a red flag, unless there is a known limitation of the particular product that gets returned.

#2 Convenient Return Times

Most refund scams happen once the buyer returns products to the physical store. 

Scammers have slightly better chances if they show up in the right place at the right time.

  • If they enter the store a few minutes before it closes (or a crowded shop), the employee will issue the return in a hurry without thinking too much.
  • If a single employee is working when the shop opens, he can process returns from goods stolen with a partner.

To hide the scam, these buyers never return items in the same shop with the same payment method.

#3 Concerned About Shipping

A buyer orders online and never stops asking about the delivery status. Ironically, he buys large quantities without caring about shipping costs. Why? They may be using money from a stolen credit card. Fast shipping lowers the chance of getting caught.

These are the same clients making overly specific questions about payment methods and return policies.

#4 Inventory Shrinks But No Money Coming In

You know they’re stealing from you when numbers don’t make sense. If sold 300 items this month and only earned the equivalent of 240, those 60 items can’t just disappear. 

Inventory stands for the most reliable means to detect refund scams, although it’s too late to stop it by the time you find out.

It may help to look at the clients making these returns. Do they all appear in the same town? Do several duplicate orders point to the same address? Is the customer account using fifty different credit cards?

If you find evidence in those geographics, you may try to stop selling products to those areas.

#5 Inconsistent Return Rates

As an established brand, your clients can’t just raise the refund rate by 50% overnight. If you just find this problem but haven’t had refund problems in months, you might be the target of a scammer group.

Con men go wherever they find opportunity. If your expensive products are easy to counterfeit, some buyers may ask for fake returns.

These rates aren’t easy to explain due to other factors:

  • International shipping may affect product quality
  • Holiday-season and trendy products
  • Your item has too many sizes and colors to choose from

Types Of Refund Scams

Types Of Refund Scams

#1 Wardrobing

You find the perfect product for an event but costs too much to buy it. Luckily, some businesses will rent you similar goods for a fraction of its price.

Instead of renting, shoppers buy this expensive product, use it, then return it in the same condition. If they bought online, sellers lose money on unneeded shipping.

#2 Switching Items

As long as the item looks the same, you can return and get your money back. But that’s not the case of electronics “bricking.” The scammer buys an expensive device, extracts valuable pieces (batteries, chips, materials), and returns an item that looks the same.

He makes the device unusable although it will look new. They blame the seller for selling defective products.

When buying branded clothing and collectibles, they can switch with counterfeits. Later, they return complaining that the “product is not authentic.”

#3 Price Switching

Two commodities may look similar but have big price differences. Electronics, for example. The con man buys the item and replaces it with another version in the box. 

Once the client complains about damages, sellers can’t do much to verify it. That’s why many have started to record their packages. Thus, whenever they get a defective-product refund, they ask you to return the same product they recorded.

Unfortunately, scammers find ways to get around and switch items without even opening the box:

  1. You buy two commodities from the same brand. They cost $100 and $300 but look the same.
  2. You pay for your orders and complete the one costing $100.
  3. You now have two products. You ask to return the $300 item.
  4. Instead, you return the $100 box you didn’t open. Sellers will receive a product that looks the same and has the same branded box. Because you have both boxes, you can see the label IDs and switch them too.
  5. You got a $300 product for $100. Resell it, and you’d just made $200!

Instead of selling, you could also return it to another store location with a duplicate receipt. 

#4 Cross-Retail Refund Fraud

Some stores like Walmart have regional management. It means the policies, rules, and prices are different in each state.

The same applies when selling online and buying on retail stores. Scammers buy low and return on a location where products price higher.

However, cross-retail is different from retail arbitrage which is legit. In arbitrage, you buy low and sell high on other platforms. Refund scammers return the product for more than they paid.

#5 Virtual Product Resell + Refund

Like wardrobing, people can buy virtual products, have a change of heart a few weeks later, and return them. Also, some people choose to profit from the program before they return it.

Let’s say you buy a $997 course. You go through the content, don’t like it, and you still qualify for first-month refunds.

Where’s the catch? Digital products are replicable. Many can use the same product at the same time.

Sellers prefer each client to buy its own product. Although there’s nothing wrong with sharing, you can’t sell someone else’s program without permission.

A motivated scammer could look at the course, create another website replica, and sell it for cheaper. But let’s stick to a refund fraud example.

  1. You bought your $997 program but want to get rid of it.
  2. You sell it to someone for, say, $397. You let him log in under your identity and change your account to his name.
  3. Right after you make the sale, you contact support to refund the course. They disable your account.
  4. You have $397 + $997. The buyer is $397 down the red with no course.

#6 Fraudulent Receipts

In the past, you could steal goods and return them to stores at full price. If it looks like new, you may even return broken items.

Now, you’ll need a purchase receipt to verify you bought the goods. But what we thought would add more security has only added more problems:

  • You can steal a receipt and find it on the garbage, collect/steal the item, and return.
  • You can return fake replicas if you print the same receipt they gave you.
  • You can forge the receipt. You can come back with the product complaining they “charged you twice” for the same item. 

If you know how to counterfeit receipts, you can keep selling stolen goods as easy as it was in the past.

#7 Employee Scams

An employee can steal items from the store when his coworkers aren’t in the building yet. A scammer’s partner, a shopper, may buy expensive items on purpose, then come back with a fraudulent refund and split the gains.

Dishonest workers lead to worse problems other than refunds; supermarket card skimmers, for example.

#8 Fake Refund Policies

A merchant selling on Amazon or Ebay may make refund guarantees that the platform doesn’t support. “Sign up on this website and receive X bonus,” or “leave a five-star review for a two-year guarantee.”

Long after the buyer has got the item, he may want to return it and would find out the fake claim. The guarantee they bought doesn’t exist. 

You’d be still lucky if you bought it from a major platform. If you did from the online store directly, the refund policy may not even exist.

6 Ways To Prevent Refund Scams

Ways To Prevent Refund Scams

Refund scammers make business harder. Instead of your clients buying the products, scammers empty your inventory for free.

Remember, opportunity causes the fraud triangle. You can save thousands of dollars by preventing these scenarios from happening. You might not protect yourself completely, but scammers will give up because they want easy targets.

#1 Refund Policies In Plain View

Whatever your policies are, publish them in public so everybody can see it as they enter the store. Most customers will likely ignore it, but if a scammer visits your store, these signs will discourage them from trying.

Although effective, these signs won’t stop those thieves who will try anyway. 

#2 Watch Your Numbers

Fraudulent refunds don’t always reflect on your revenue numbers. After being in business for months, you have an average return rate. As soon as your rate goes up, you should investigate.

Are you selling in different locations? Do you sell the same item on many platforms? Do others have permission to resell?

#3 Problematic Categories

A scammer can use countless excuses to qualify for a refund. Refund rates change by product details and categories. A 10% return rate in kitchen wares may be excessive, while 10% in apparel is considered normal. 

Spot those differences; does your item:

  • Have complex parts or breakable materials?
  • Large sizes/ special packaging?
  • Count as electronics, apparel, jewelry, health, supplements, or beauty?

Products with these features explain higher return rates. Otherwise, it could be return fraud.

#4 Identification

Scammers can fake receipts to get a refund, but receipts don’t cause the problem. We can make them harder to fake or add more steps to validate the refund.

The Retailer Exchange program will track what the product buys and returns. It prevents scammers from switching with replicas or posing as a previous buyer.

#5 Refund Alternatives

Some shoppers only have minimum verification details, which are not enough to prevent scams. If a suspicious buyer brings a receipt to return an item, you’ll have to give them that “refund.” What else can you do?

Partial refunds could work. If the buyer only receives a receipt but fails to identify, you can return 40% of the amount for example. That would protect sellers from giving away pricey products.

As the most secure option, claim refunds as store tokens/vouchers. A refunded $100 product won’t give you $100 in cash but will let you buy anything of that value in that store. Refund or not, the money stays in the company.

#6 Refund Methods

Prevent the BORIS, (Buy Online, Return In-Store). Refund online purchases online, return physical purchases in-store.

As you revise your refund rates, you’ll find methods that make it more common. If in-store refunds cause too much trouble, limit to a single online method.

Limiting refund options may repel new customers. However, if your products are the best, people won’t return them in the first place.

Note: Before you refund, check our guide on payment fraud as well.

The Bottom Line

The Bottom Line

You can only do so much about refund fraud. Loyal customers won’t care about refunds because they love your products. And scammers will keep finding ways to get over security. The difference is, some stores register two cases a month, and others twenty.

It’s unrealistic to expect to never lose money on refund scams. In fact, you might let scammers win sometimes to get rid of them; people can do more damage than not paying for your item.

Your refund policy should be strict enough to avoid scammers but flexible to keep buyers coming.

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