Retailers Battle $76.5 Billion Return Fraud Surge with AI Technology
NEW YORK, N.Y. — Retailers across the United States are confronting a staggering rise in return fraud, which now accounts for nearly 10% of all retail returns and costs the industry an estimated $76.5 billion annually. With the volume of returns expected to reach $850 billion in 2025, companies are increasingly deploying artificial intelligence systems to detect and prevent fraudulent activities before refunds are issued.
Data from Happy Returns, a UPS-owned reverse logistics company specializing in boxless, in-person returns, reveals that nearly one in every ten retail returns involves some form of fraud. This alarming figure underscores the challenges retailers face in verifying returns quickly while minimizing losses. Happy Returns operates approximately 8,000 drop-off locations inside stores such as Ulta Beauty and Staples, as well as UPS centers, offering customers the convenience of returning items without packaging or shipping labels.
Return fraud typically occurs when a shopper requests a refund for a legitimate purchase but sends back a different, often cheaper or damaged, item. Retailers often issue refunds before thoroughly inspecting the returned merchandise, creating opportunities for deception. According to the National Retail Federation, returns represent nearly 16% of total retail sales, making the financial impact of fraudulent returns particularly significant.
Happy Returns is testing an advanced AI tool designed to flag suspicious returns before refunds are processed. This system combines automated flagging with in-person item verification and audit processes, which substantially lowers confirmed fraud rates within its network compared to industry-wide estimates. The company emphasizes that physical handling of returned products acts as a strong deterrent against common fraud tactics such as empty boxes, partial returns, and fake tracking numbers.
“If you never touch the product, you can’t actually know what’s being returned matches what was sold,” said a spokesperson for Happy Returns. This approach aligns with insights from Everlane, a retailer that credits its Return Bar’s physical verification process with discouraging fraudulent attempts. Jim Green, Everlane’s director of logistics and fulfillment, noted, “Just the fact of knowing an individual will physically handle and verify the product at the Return Bar deters fraudsters from even attempting to commit fraud.”
Despite these advances, fraudsters continue to evolve their tactics, including using lookalike products and counterfeit items to mimic legitimate returns. The challenge remains significant, prompting retailers to invest heavily in technology and processes that can keep pace with increasingly sophisticated schemes.
Return fraud not only inflates costs for retailers but also drives up prices for consumers and complicates inventory management. The use of artificial intelligence to combat this issue is part of a broader trend of leveraging technology to enhance security and efficiency in retail operations. The Federal Trade Commission and industry groups have highlighted the importance of such innovations to protect both businesses and consumers.
Experts believe that as the holiday season drives a surge in returns, the need for robust fraud detection tools will only intensify. Retailers like Happy Returns are leading the way by combining human inspection with AI-powered analytics to safeguard the integrity of the returns process.
For more information on retail fraud prevention and consumer protection, visit the FTC Consumer Protection site and the National Retail Federation. As the retail landscape continues to evolve, the integration of technology and human oversight remains critical in addressing the costly problem of return fraud.
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