Why Return Fraud Has Become Retail’s Next Margin Crisis

Retailers have spent years strengthening fraud defenses at checkout, but today, wrongdoing committed after customers hit the buy button is far more costly for merchants. Return fraud and abuse have become the newest form of “digital shrink,” which shows up through customer refunds, false claims, policy abuse, and inventory that can’t be resold. And as the e-commerce industry continues to boom, reaching $326.7 billion in Q1 2026 and representing 16.8 percent of all retail sales, so does post-purchase risk for merchants.

Refund and policy abuse is now the type of risk most often cited by merchants, with 41 percent naming it as a challenge, according to the MRC 2026 Global eCommerce and Fraud Report. With 61 percent of merchants reporting increases over the past year, and 20 percent reporting spikes of 25 percent or more, retailers must move beyond traditional fraud prevention and leverage post-purchase data to protect their margins while still maintaining a fast, low-friction experience for their legitimate customers.

Return Fraud Has Become Operational Risk

Today, return fraud and abuse have moved beyond isolated bad actors exploiting a merchant’s generous policies. It has become a snowball effect of margin erosion for retailers.

Common forms of return fraud and abuse include making false claims that goods were never received, returning used or incorrect items, and wardrobing. While many retailers still view this “shrink” only as lost inventory, the cost extends far beyond refund payouts. In fact, “digital shrink” shows up as lost product, lost refund value, shipping costs, customer service and manual review costs, reverse logistics costs, and inventory that can’t be resold.

The core issue is that most post-purchase systems were designed to prioritize trust and convenience, leaving merchants vulnerable when bad actors learn to exploit return policies at scale.

The Blind Spot After Checkout

Most online retailers are mistakenly still treating fraud prevention as a checkout issue. Of course, the customer’s journey doesn’t end once their order is approved. The transaction may be legitimate at the time of purchase, but the tables can turn later through abusive return behaviors.

Staying keen on identifying risk signals is critical; merchants need visibility into the full customer relationship. This includes order histories, refund patterns, payment and device data, and product categories.

Having a full view into the entire transaction and refund process highlights the value of centralized post-purchase intelligence. With this holistic outlook, retailers can more easily identify repeat abuse patterns, high-risk return types, and even location-based patterns.

Protecting Margins Without Creating Friction for Loyal Customers

When a merchant identifies abuse patterns, they need to tread carefully, understanding when to — and when not to — make returns harder for individual customers. If blanket restrictions are put in place, they punish all customers — and the merchant. Nearly two-thirds of consumers (65 percent) said they would stop buying from an online retailer after a bad returns experience, according to a Talker survey conducted for Signifyd.

Seventy-two percent of merchants have added return fees in the face of fraudulent and abusive returns, according to the National Retail Federation. The temptation is understandable, but fees create friction and damage customer loyalty. A better approach is risk-based decisioning. Loyal customers receive faster refunds with low-friction journeys, while higher-risk claims are treated with more oversight. With one in 10 online returns being fraudulent, real-time decisioning should be table stakes for separating legitimate customers from bad actors.

Online retailers are facing the dilemma of digital shrink because it hides in everyday post-purchase moments like refunds, returns, and policy exceptions. But trying to resolve these issues by adding more friction to more buying journeys is short-sighted. To avoid damaging relationships with happy, returning customers, merchants need to put the right steps in place to identify risk signals beyond the checkout page, where their loyal customers will be distinguished from abusive behaviors.

The retailers that treat returns holistically and as a data-rich part of the customer journey will be better positioned to protect both margins and customer loyalty.

Nicole Jass is senior vice president, enterprise strategy, Signifyd, an online retail fraud protection company.