Returns Fraud: Smarter Strategies to Reduce E-Commerce Losses

Instead of traditional reactive policies and trying to figure out how to reduce product returns​, learn smarter strategies that reduce costs, prevent abuse, improve customer experience, and enhance sustainability efforts.

Return fraud is no longer an anomaly; it’s a persistent challenge baked into the e-commerce experience. As online shopping grows, so does the volume of returns, and with it, the costly problem of return fraud and unsellable inventory. For e-commerce operations and logistics leaders, loss prevention teams, sustainability experts, and finance strategists, the question isn’t just, "What is return fraud?" but "How can we reduce product returns and manage them smarter, not harder?"

The Return Fraud Reality

Return fraud happens when customers exploit return policies for personal gain, such as returning used or stolen items, wardrobing (i.e., using a product and returning it), or sending back counterfeit goods. According to a 2023 study by the National Retail Federation, return fraud accounts for approximately $25 billion annually in losses for U.S. retailers alone. This staggering figure highlights the magnitude of the problem and why traditional reactive policies are insufficient.

Retailers seeking how to reduce e-commerce returns often focus on tightening return windows or requiring receipts, however, these measures alone do not solve the underlying challenges. In fact, they can alienate honest customers and damage brand loyalty.

Why Fighting Every Return is a Losing Battle

E-commerce returns are rising everywhere: the U.S. return rate hovers around 20 percent to 30 percent of online purchases, compared to just 8 percent to 10 percent for brick-and-mortar. This surge brings operational headaches:

• Labor and Storage Costs: Handling returns involves inspecting, processing, and restocking or disposing of products, which can be up to 30 percent of sales costs.
• Unsellable Inventory: Items returned, opened, damaged, or suspicious are often unsellable, leading to waste or markdowns.
• Fraud and Abuse: Loss prevention teams face repeated offenders exploiting loopholes, with limited tools to proactively stop abuse.

In this context, obsessing over how to reduce customer returns entirely is unrealistic and can hurt customer experience. Instead, companies need smarter post-return strategies.

Smarter Strategies to Manage Return Fraud and Unsellable Items

‍1. Embrace return management platforms that prioritize value recovery.

Rather than letting unsellable items pile up in warehouses or, worse, landfills, some e-commerce leaders are leveraging return management platforms that optimize every post-purchase outcome. For example, LiquiDonate enables retailers to automate the donation of excess, open-box, and fraud-flagged items to vetted nonprofits, removing the burden of manual coordination while turning excess into impact. By recovering value through donation and resale channels, brands can improve margins and streamline operations.

This model also supports customer retention: 95 percent of customers who are satisfied with a return experience say they’ll shop again with that retailer.

‍2. Shift from reactive to preventative fraud detection.

Traditional loss prevention is reactive, focused on enforcing return policies after abuse occurs. But with the average retailer losing $145 million per $1 billion in sales to return fraud, the stakes are too high to play defense alone.

Retailers are now adopting fraud prevention tools that leverage behavioral analytics and machine learning to flag high-risk transactions in real time. For example, companies like Appriss Retail offer intelligent return authorization systems that stop fraudulent returns before they’re completed — without penalizing legitimate customers.

‍3. Rethink unsellable inventory for sustainability and profit.

Returned products that can’t go back on the shelf don’t need to go to waste. In fact, many brands are aligning their ESG goals with new pathways for excess inventory. The EPA reports that 11.3 million tons of textile waste (a major category in e-commerce returns) ended up in U.S. landfills in 2018.

Through strategic partnerships with platforms like LiquiDonate, retailers can redirect unsellable goods to nonprofit partners, receive documentation for tax deductions, and reduce disposal costs. This supports ESG teams looking to improve circularity, minimize waste, and meet impact reporting benchmarks without disrupting core logistics operations.

‍4. Educate customers and create clearer return policies.

Clear, transparent return policies reduce friction and fraud. When customers understand product sizing, materials and expectations, they’re less likely to return. And when return policies are consistent, fraudsters have fewer loopholes to exploit.

A study found that 63 percent of customers read a return policy before making a purchase, and nearly half said unclear policies would deter them from buying. Detailed product descriptions, size guides, and visual try-ons can reduce fit-related returns and limit abuse like wardrobing.

‍Measuring the Financial Impact of Return Fraud

From a finance perspective, returns significantly erode margins. Return fraud accounts for nearly 7 percent of total retail returns, leading to billions in lost revenue annually. The hidden costs include labor to process returns, inventory write-offs, and lost sales opportunities.

However, redirecting unsellable returns through charitable donations or resale can offset losses via:

• tax benefits from charitable contributions;
• avoided disposal costs by rerouting products; and
• improved brand reputation driving customer loyalty.

Investing in smarter return management solutions directly improves profitability. Retailers looking to implement these solutions can explore platforms that integrate donation and resale channels into their workflows to maximize return value while reducing waste.

Return Fraud is Here to Stay — But So Are Smart Solutions

E-commerce brands cannot stop returns fraud by fighting every return or obsessively trying to eliminate returns. Instead, they must adopt smarter strategies that reduce costs, prevent abuse, improve customer experience, and enhance sustainability efforts.

By leveraging innovative technology, integrating preventative fraud detection, and creating sustainable post-return pathways, e-commerce leaders can turn the challenge of return fraud into a strategic advantage.

Disney Petit is a social impact entrepreneur and CEO of LiquiDonate, a software that integrates with any WMS or RMS to match unsellable returns and overstock inventory with nonprofits and schools.