Navigating returns fraud challenges in the fashion and retail industry

Returns fraud has emerged as a significant concern within the fashion and retail industry, posing financial challenges and operational complexities for businesses. This form of fraud involves deceptive practices where consumers exploit return policies for personal gain, often by purchasing items with the intention of returning them after temporary use.

The fashion sector, with its high rate of returns due to sizing issues and changing preferences, becomes particularly susceptible to these schemes. As customers seek flexibility in return processes, retailers must navigate a delicate balance between meeting consumer expectations and implementing effective measures to curb fraudulent activities, ensuring the sustainability of their operations and profitability. FashionUnited spoke Alexandra Romantseva, a returns expert at ReBound, on how this is impacting the industry.

What are the common patterns or trends in returns fraud that retailers should be aware of?

When discussing returns fraud, it’s important to clarify what we actually mean, and to be aware of the different types of fraud that might occur. The main types are:

Wardrobing: Wearing an item of clothing, often to a party or an event, and then returning it for a refund.

Unethical renting: Buying something, using it for a purpose, and then returning it, such as using a big TV to watch an important game.

Knockoffs: Purchasing something expensive and sending back a replica. This is particularly popular with handbags.

Falsely faulty: Wrongly claiming an item is broken after the return window has expired and sending it back for a refund.

Incorrect item: Sending back a random item, such as a brick instead of shoes, hoping a refund is processed without the item being checked.

While a few of these are clearly malicious in nature, widespread misconceptions of what constitutes returns fraud is fueling a major issue in fashion. Despite 84 percent of consumers claiming that they do not and would not intentionally commit fraud, nearly one third (31 percent) believe that activities like using an item and then returning it as if unused isn’t fraudulent.

This gap in understanding enables behaviours like ‘wardrobing’. Such fraud is surprisingly common, with many shoppers buying clothes with this express intention. But these seemingly harmless actions hurt retailers.

The rise of fraudulent behaviours, like wardrobing, may stem from a shortage of widespread, affordable rental options. While 33 percent of consumers cited a lack of appropriate rentals, a further 17 percent cited the cost of rentals as a barrier.

How can retailers effectively distinguish between legitimate returns and fraudulent ones?

The most effective way to differentiate legitimate returns from fraud is to use data. By implementing an end-to-end returns management system, retailers gain valuable insight and visibility across the entire returns journey. This allows them to closely monitor consumer behaviour, reasons for returns, and the condition that items are returned in, and then drive effective anti-fraud strategies. Analysing historical returns data will enable retailers to more easily identify red flags and monitor for suspicious patterns.

Adopting a ‘smart returns’ system, by working with services like ReBound, ensures that refunds are based on verified information, as the contents of each returned package are authenticated before a refund is triggered. This approach prevents potential erroneous refunds being issued, such as when an incorrect item has been returned, which discourages and prevents fraud and ensures a more secure and accurate refund process.

Alongside this data-driven return process, retailers should incorporate item processing into their returns strategies. Each returned parcel must be carefully inspected at the warehouse to ensure the correct item is inside and in an acceptable condition for a refund. Swift processing allows legitimate customers to receive refunds quickly, boosting customer experience, while reducing the risk of fraudulent returns being successful, saving retailers from unnecessary costs.

What technologies or strategies can be implemented to prevent returns fraud in the first place?

Addressing the challenge of consumers needing short-term items without outright purchases can help reduce the number of those who are ‘wardrobing’. Introducing rental items across diverse product categories, coupled with targeted marketing to encourage adoption, could drastically reduce the number of people committing this type of returns fraud.

Unfortunately, it is less easy to prevent consumers from sending incorrect items and knockoffs, which is why it is so important to have the right measures at the processing stage, to prevent such returns from being refunded.

Within fashion, are there specific product categories more susceptible to returns fraud, and if so, why?

Returns rates vary quite drastically on different categories within fashion. For instance, roughly between 10 and 20 percent of loungewear items are returned. This rises to around 40 percent for everyday items like t-shirts and jeans. But for occasionwear, such as party dresses or suits, the return rate can be as high as 80 percent.

In simple terms, this is primarily down to cost and fit. If you’re spending 1,000 pounds on a new suit and it isn’t quite right, you will likely send it back. However, with a 20 pounds pair of tracksuit bottoms, they are both more likely to fit, and, if not, more likely to be kept anyway.

The concept of wardrobing is most common with occasionwear. Events like weddings, Christmas parties, stag dos, proms and awards ceremonies are all the types of one-off occasions that increase the likelihood of wardrobing.

How can a retailer strike a balance between offering a customer-friendly return policy and preventing returns fraud

To balance a customer-friendly return policy and prevent fraud, retailers need to be able to differentiate between returners who simply buy and engage more with the brand or shop versus those exploiting the system. Data shows that around 20 percent of shoppers generate 80 percent of refunds, but not all frequent returners negatively impact brands; this 20 percent cohort will also likely include their most loyal customers.

Retailers should adopt nuanced approaches, and avoid simplistic bans on serial returners. Instead, offering special services to subscription-based customers and providing a limited number of free returns per year can effectively mitigate the impact of frequent returns, while considering the individual customer's lifetime value. This approach demonstrates a better understanding of shoppers' return behaviour.

Is the increase in returns fraud a sign of difficult economic times for consumers?

ReBound data from last year found that while online retail purchases fell by 11.5 percent, returns were 26 precent higher. This surge in returns appears to be indicative of consumers facing mounting financial strains, with some needing to reclaim money. Individuals in challenging situations may even resort to misusing returns policies out of desperation. The cost of living crisis has further contributed to a rise in ‘first-party fraud’, with Cifas reporting an increase from one in 12 to one in eight people admitting to such offences over the past two years.

For retailers, it is important to recognise these motivations while still implementing measures to prevent returns fraud.