While the battle against fraudulent returns and claims is a well-studied adversary in today’s retail environment, with fraudulent returns and claims representing a $103+ billion annual loss, retail finance organizations still tend to view return and claims fraud as operational or customer service issues, rather than as a burgeoning financial concern.
The ROI of return fraud prevention begins with advancing strategic initiatives and investments that reduce returns and claims abuse in a structured, scalable manner, driving real business value and properly categorizing returns as a path to improving working capital and generating positive cash flow.
Returns and claims: a cornerstone of total retail loss
For CFOs tasked with safeguarding a retailer’s profitability and sustainable growth, return and claims abuse must be considered a financial variable that can be adjusted to shorten a retailer’s cash conversion cycle.
Examples of these margin-eroding behaviors are “wardrobing,” or “renting”, where consumers purchase an item, use it, and then fraudulently return it for a refund. Additionally, there are non-fraudulent cost drivers, such as “bracketing,” which involves buying multiple products to try out and returning most, or all, of them.
To effectively measure return and claims fraud, teams must include these fraud types in a broader Total Retail Loss (TRL) framework. This approach will help reveal their complete financial impact. When assessed accurately, Total Retail Loss (TRL) goes beyond just shrink and theft; it also includes all types of financial and operational losses, such as fraud, administrative errors, and compliance issues.
Four key findings retail CFOs can’t ignore
- Appriss Retail and Deloitte recently uncovered that 15% of all returns and claims are fraudulent.
- Returns and claims fraud are now among the most damaging contributors to total retail loss, costing retailers $103 billion in 2024 alone.
- Repeated false claims for lost, damaged, or unsatisfactory items result in unwarranted refunds or replacements. In 2024 alone, claims-related losses hit $35 billion—with 10.5% deemed fraudulent.
- The cost of processing returns varies widely; McKinsey estimates that inefficient return channels can add an extra $5 to $6 in expenses per item.
How retail CFOs can quantify and track the impact
Tackling returns and claims fraud requires a unified approach where retail finance teams rely on the insights of Loss Prevention and Operations to capture detailed data on refund activity, appeasements, and excessive returns. By collaborating in a task force-like structure, CFOs and finance teams can drive the initiatives. At the same time, these adjacent organizations can leverage AI & data analytics to uncover correlations between returns abuse and inventory distortions, restocking costs, and fraud-related chargebacks.
While returns are viewed as a source of margin leak and a reduction in net sales, it’s also essential that the ROI of return fraud prevention takes into account the impact returns and claims abuse have on gross margin, labor costs, and customer lifetime value.
Collaborating across functions (Finance, Loss Prevention, Operations, Human Resources, Reverse Logistics)
Finance departments must partner with various internal teams to fully execute on unifying all data points, thereby uncovering and resolving returns fraud and inefficiencies.
- Loss Prevention and Reverse Logistics to trace fraud’s full lifecycle—from handling returns, managing the flow of returned merchandise, and ensuring that the process is optimized to prevent fraudulent returns.
- Work with Human Resources to address questionable employee behaviors and implement training and awareness on patterns of returns abuse, particularly with high-risk tactics like appeasements and false claims wherein a customer incorrectly claims an item they ordered was not received (known as “INR fraud”), was damaged, was incomplete, or was not what was expected.
- Align with IT and Operations to ensure seamless data flow across return channels (store, ecommerce, call center), enabling day-to-day processes such as inventory management, supply chain, and store operations to be tracked and executed smoothly. Additionally, seamless data integrations will ensure the consistent enforcement of return policies, which all customer-facing employees are required to follow and be measured against.
The return fraud prevention KPIs and metrics retail CFOs must track
With so many metrics available, it can be challenging to determine which KPIs should be fed into retail finance performance reports once returns and claims abuse is identified as a path to increasing cash flow.
The first step in minimizing losses and preserving long-term revenue is to establish clear and simple KPIs. Examples include:
- Measuring the reduction in fraudulent refunds
- Tracking the percentage of false claims year-over-year (YOY)
- Reducing reverse logistics costs
Additionally, it’s essential to evaluate the downstream effects of these initiatives, such as:
- Decreased labor demands
- Lower shipping and restocking costs
- Fewer inventory write-downs
When executed correctly, these reductions in fraud and abuse can be compared to the overall increase in available working capital and benchmarked against the costs of technology and/or training solutions required to implement this initiative. Together, these elements help build a credible return fraud prevention ROI model for addressing returns and claims abuse as a broader enterprise-wide initiative.
Making the business case for tech investment
Retail CFOs often face a dilemma regarding technology investments, as these are frequently viewed as cost centers that provide little business value. It is essential to clearly articulate the benefits of enterprise-wide technology investments, such as AI-enabled, real-time returns protection. This way, the impact on business operations becomes evident, and an ROI of return fraud prevention model can be readily applied to these purchases.
AI-powered return authorization solutions (such as Engage from Appriss Retail) can help identify fraud in real-time without penalizing legitimate customers. This way, the throughput of genuine versus potentially fraudulent transactions can be quantified under the premise of time saved and margins protected. Additionally, lifetime customer value can be scrutinized to determine whether a more personalized, profitable return experience leads to increased customer retention and sales.
Metrics are key, and value cannot be justified without defining success.
By setting measurable goals to reduce returns and claims and communicating these goals across the organization, retailers can build a culture that prioritizes proactive fraud prevention. Retail finance organizations can then continuously measure ROI while adjusting strategies to ensure alignment with business objectives, maintaining transparency, particularly around return fraud and claims-related losses.
When handled properly, investments in economically sound returns and claims fraud strategies can enhance relationships with consumers, vendors, and supply chain partners. However, it’s essential to protect profits in the face of returns fraud by adopting a more sophisticated approach. For more insights, check out our latest guide, “The Bottom Line: How Returns and Claims Fraud Drive Total Retail Loss.”
