The Rising Tide of Returns

Amy S. makes most of the purchases for her family, both big and small. And when it comes to larger-ticket items, she not only shops around for the best price, but also looks closely at merchants’ return policies. “Making sure I can easily return a purchase is something I think about when deciding where to buy,” she said. Amy isn't alone. A recent consumer survey revealed that 55 percent of shoppers say a merchant’s return policy has a significant influence on where they shop.

Given the attention paid to return policies by shoppers like Amy, it’s no surprise that the scale of returns is staggering. According to the National Retail Federation (NRF), over $369 billion in merchandise was returned to retailers in 2018. This translates to roughly 10 percent of total retail sales. This volume of return transactions, coupled with the importance consumers place on returns and the increasing complexity of omnichannel shopping, is placing pressure on merchants’ customer service and reverse logistics processes.

Along with all the complexities of standard returns comes another challenge for merchants: battling return fraud. The NRF tallied the total cost of fraudulent returns to merchants at $24 billion in 2018, an amount that stresses the profitability of merchants and their suppliers. Given the scale of this issue, many merchants have taken steps to address fraud through one of two approaches: tracking people or tracking products.

Tracking people refers to the process some retailers use to capture a customer’s personal information at the point of return, typically by requiring the customer to present a driver’s license or other state-issued personal identification. Personal information is typically sent to a third party in order to make a real-time accept/reject recommendation based on the customer’s return history. There are a couple of challenges with this approach: first, retail fraud rings often recruit multiple people who operate within or across several merchant locations, reducing the value of profiling individual customers. According to the NRF, 49 percent of merchants reported that returns were made by organized crime rings in 2018.

Another challenge is the limitations new privacy laws place on using a customer’s information. A prime example is the California Consumer Privacy Act of 2018, which is modeled on European privacy laws requiring greater transparency with regards to the collection of personal information by corporations, as well as giving consumers greater control of the usage of their personal data. Said California Assembly member Ed Chau, the bill’s co-author, in a 2018 press release following the signing of the bill, which will go into effect on Jan. 1, 2020, “Consumers should have a right to choose how their personal information is collected and used by businesses. It is your data, your privacy, your choice.” This new law (and its recent amendments) gives consumers the right to refuse to have their information provided to third parties; a right that, if exercised, would reduce the value of the "tracking people" model for return fraud prevention.

Tracking products is the second model merchants use to minimize fraud. In this system, merchants track individual items from production to sale and through the returns supply chain. This is accomplished by serializing individual items at the point of manufacture, and was originally developed by a major gaming brand to reduce out-of-policy returns for gaming consoles. This process also relies on data captured at the point of return; however, instead of scanning personal identification, the sales associate scans the product itself. The product’s serial number is routed to a third party, and business rules are applied to determine whether the product is eligible for return.

This model has proven valuable to merchants, enabling them to deflect up to 43 percent of ineligible returns across multiple categories, including computers, mobile phones, car batteries, baby monitors, game consoles, televisions, and more. In addition to reducing invalid returns — defined as products that were not purchased at the merchant where the return is attempted or attempts to return products that are out of policy — merchants have also used this platform in unique ways to drive additional value for their customers and original equipment manufacturer (OEM) partners.

One of the more common ways merchants use product-specific tracking data is in optimizing their reverse logistics process. This is the process by which returns are received into the merchant’s store or online processing facility, sorted, and dispositioned based on business rules. As many OEMs have policies regarding the aging of returns — with the value associated with a return diminishing based on the time from sale — the ability to assess aging at the item level enables merchants to maximize their recovery of funds from OEMs. In addition, OEMs benefit through visibility into products that will be entering their returns processing system.

OEMs also stand to gain from the integration of point-of-sale sales data into their warranty process. Having this information available when a customer reaches out for support enables OEMs to determine exactly when and where a product was sold and which model the customer has. This information can then be used to streamline post-sales support.

As customer expectations for a simple, speedy return experience continue to evolve, it will be imperative for merchants (and their OEM and service provider partners) to continue to invest in effective and low-cost returns capabilities. Simultaneously reducing the cost of returns, simplifying the customer experience, and mitigating opportunities for fraud isn’t easy, but it is critical.

Of consumers who had a negative return experience, 69 percent said the experience significantly influences their future shopping decisions. Amy would agree. “I have three things that I'm waiting to return right now, including shoes I bought for my son that he doesn’t like,” she said. After a frustrated pause, she added “I think it should be pretty easy to return these.” Merchants should hope so, too.

Karl Denzer is senior vice president of emerging technologies at InComm, an innovative payment technology and solutions company, where he leads product innovation across a portfolio of businesses and geographies.

Kristin Secreto is vice president, general manager of InComm Product Control, a product lifecycle tracking solution that enables retailers and manufacturers to make smart and timely decisions about product logistics, sales and returns.