Online shopping delivers unhappy returns to fashion retailers

Despite the recent increase in foot traffic to retail stores, Australian consumer behaviour has undergone a significant transformation in the wake of lockdowns that reinforced the convenience of online shopping. Consumers now demand greater freedom and flexibility as their browsing, shopping and purchase activities have shifted from in-store to primarily online.

Fashion retailers in particular are keen to improve the online shopping experience, providing more flexible return options, loyalty programs and exclusive online offers, combined with generous returns policies.

However, these incentives coupled with surging demand have led to a surge in return fraud.

Online shopping increases online fraud

According to Australia Post, Aussie households acquired 1.5 million more items every month in 2022 compared to the previous financial year, indicating a substantial shift to online shopping and delivery. While retailers across Australia have benefited from omnichannel and digital-only strategies, the inherent risks and challenges have become more apparent.

This is particularly apparent in the rise of false purchases, as fraudsters have successfully utilised online shopping as an effective channel for 'return fraud.' This presents retailers with the dual challenge of combating the online sales risk presented by fraudsters while maintaining a seamless and superior customer experience for genuine customers.

While there are cases of unintentional return fraud, such as an honest mistake made by a customer, the majority of cases are intentional. Forter has noted an increase in such malicious intent and identified five different types of return fraud.

Vulnerabilities of the fashion sector 

Apparel and accessory brands experience a number of challenges when it comes to return fraud, including the increased risk of transactions that remain on the balance sheet as a liability. As the pandemic unfolded, retailers were forced to become more generous with their returns policies to offer a wider range of sales options and encourage customer loyalty. Once stores, shopfronts and pop-ups re-opened further sales tactics and marketing campaigns were required, to lure customers back to the in-person experience of shopping.

This included the 'buy online, return in store' (BORIS) option, which has become a popular means of attracting in-store customers that are open to upselling or cross-selling.  Non-genuine customers trying to return items without a receipt are also more likely to succeed in a disrupted in-store environment where staff are keen to make buyers feel welcome. In fact, even before the pandemic, data from Forter indicated a 23% rise in BORIS fraud.

Another practice which has been keenly abused by 'wardrober' fraudsters is the freedom to over-order and try-before-you-buy. Longer returns periods, for a greater volume of goods, have meant they can keep and wear goods for even longer periods, before being obliged to return them.

Unfortunately, the current sales environment has left retailers reluctant to crack down on poor customer behaviour, as they're eager to encourage both in-store and online commerce. The key to this challenge is greater visibility into consumer behaviour, so that retailers can clearly identify the distinction between genuine valued customers and returns abusers.

Fraud detection, like sales, must be omnichannel

The future of fashion retail is omnichannel - both online and in-store purchasing cycles must integrate seamlessly to ensure the survival of a business. Identifying and detecting online fraud is only half the battle - retailers must become more adept at utilising this information to address the financial impact to their business and combat the behaviour of fraudulent online shoppers.

The most effective type of fraud protection is AI-powered detection engines that help retailers  locate suspicious activity and identify known fraudsters, while reducing the amount of false-declines (i.e. legitimate transactions that are mistaken for fraud and denied).

Fraud software should ideally track returns KPIs and analyse sales data so that retailers can:

• Approve or decline every transaction, to effectively block returns-abusers from placing more orders
• Approve or decline every returns initiation at the point of the returns request (online, in-store or by phone)
• Flag suspicious accounts, to actively enforce store policies at the account-level (e.g. categorising repeat offenders as ineligible for free returns shipping or restricting them to 'in-store returns only').

Retailers need to utilise digital technology and online sales channels to ensure they meet the expectations of the modern customer and take advantage of rapid changes to the retail sector. But unless they evolve their fraud detection capabilities to match these increased risks, it's worth asking what price they are willing to pay for new customers.