Uncovering refund and return fraud: help to protect your business

With evolving consumer behaviors, a simple refund and returns process has become a basic requirement and a strategic advantage for many firms. Yet, these processes may unwittingly become a breeding ground for a growing problem—refund and return fraud.


9 minute read

As competition for customer loyalty and satisfaction has increased and online shopping has rocketed, businesses have adapted to create more flexible and customer-friendly product return and refund policies. This has led to a new wave of fraud as criminals exploit unexpecting employees. In the U.S. alone, the National Retail Federation reports the cost of retail refund fraud at $22.8 billion in 2022.1


Simply put, refund fraud is a malicious act in which the refund process is manipulated to claim reimbursement for a product that was never bought or is not returned. This fraud can occur directly through a company’s own process, or the refund request can be initiated through a card issuer, which is known as chargeback fraud. Closely related, and oſten overlapping, is the concept of return fraud, where the returns process is manipulated for financial gain.


Given that refund and return fraud take many forms, understanding the tactics of fraudsters is the first step for companies looking to address the problem.

Types of refund and return fraud

  1. The impersonation game

    Refund fraud oſten begins with a phone call or email. The fraudster contacts a business, impersonating a customer, another employee from headquarters or a bank representative. Their aim is to gain access to the card machine and have someone process a refund on their behalf to a card that was never used to make a purchase.


  3. Distraction tactics

    A group of fraudsters may also attempt to access a card terminal by distracting the salesperson. While one customer attempts to buy something, others will distract the salesperson, giving the fraudster enough time alone with the card machine to issue a fraudulent refund.


  5. The internal player

    This internal type of refund fraud involves an employee manipulating the refund process from within the company. They may issue fraudulent refunds to their personal accounts or help external fraudsters access refunds in exchange for a share of the money.


  7. The prodigal product

    A common tactic used by fraudsters is taking advantage of the product delivery process. The fraudster will falsely report to the company or the card merchant that the product did not arrive and request a refund while keeping the product.


  9. Wardrobing

    When it comes to return fraud, “wardrobing” is a growing problem for retailers. In this form of return fraud, a customer will buy a high-value item, like a television or dress, for a specific event. The customer will keep the tags and packaging and return the item a few days or weeks later in second-hand condition, resulting in a loss for the company.


  11. The swap

    In another form of return fraud, fraudsters use a simple trick where they purchase a product and then return a similar but older or broken item in the new product’s packaging. The business, not noticing the switch, unwittingly refunds the purchase, and the fraudster gets a new product for free.


  13. Whose receipt is this?

    As the key transaction record, receipt manipulation is central to return fraud tactics. Fraudsters may forge receipts, pick up discarded receipts or use previous receipts to enable their fraud. They will then enter a store and pick up one of the items on the receipt before heading straight to the counter to request a refund for the item that has not been sold.

While the tactics for refund and return fraud are growing, just a few simple steps can help any company reduce and prevent this crime.

Simple steps to prevent refund fraud

  1. Reconcile refunds to sales

    Each refund or return request should be matched to a specific sale to ensure its legitimacy. To do this, companies must maintain accurate transaction records and enable employees to process refunds with the correct information. To facilitate this, a daily reconciliation of all transactions should take place.


  3. Train staff well and continuously

    Ensure procedures are in place so that all staff know the steps to take before processing a refund or return. Regular staff training to recognize new forms of refund or return fraud is also critical. Equip your staff with the knowledge and tools to detect and prevent fraud, and encourage employees to report suspicious activity promptly.


  5. Ingrain identity verification in the business

    Effective refund processes begin with robust verification of the requestor. A bank or card merchant will never call to ask you to process a “test” refund. For any internal employee requests, ensure there is a documented approval process that requires more than a single phone call or email. For customer requests, always cross-reference information with sales data, including mailing addresses, email addresses and phone numbers. Consider demanding additional verification, such as photo ID, for high-value returns.


  7. Guard access to your card machine

    Limit access to your card machines carefully, whether at the point of sale or over the phone. Point-of-sale machines should be password-protected, with passwords updated regularly. Replaced machines should have their terminal IDs deactivated. Report any stolen terminals to your bank and secure any backup or unused terminals.


  9. Embrace technology

    Daily reporting of any unmatched refunds is a start. New fraud detection tools and technology can also aid in the identification of suspect refund patterns and behaviors. Larger merchants may consider investing in machine learning and artificial intelligence systems to filter through transaction data for anomalies that indicate fraudulent activity.


    A proactive and well-informed approach to managing refund fraud is critical. Your business's reputation and financial health depend on it. The challenge for all companies will be striking the right balance between streamlined, simple refund and return processes and the tools and tactics necessary to prevent fraud. Bank of America can help. If you experience refund fraud or notice suspicious activity, speak to your Bank of America representative as soon as possible to understand how we can support you.