From the April 2005 issue of Entrepreneur

Brick-and-mortar retailers have always had to deal with return fraud. But with so many sales happening online, e-tailers are beginning to rethink their return policies to minimize fraud. "Return fraud is a big concern for retailers and e-tailers," says King Rogers, CEO of consulting firm KingRogers International in Cook, Minnesota.

According to "Consumer Returns in the Retail Industry," a report that Rogers' company published last fall with The Return Exchange Inc., an Irvine, California, company that provides retail fraud and abuse detection products, return fraud accounted for 9 percent of total returns in 2003. While return fraud may not be as widespread for e-tailers as it is for large brick-and-mortar retailers--especially since consumers have to ship items back instead of simply walking into a store--it's still something e-tailers can't afford to ignore.

The Right Policy

Combating return fraud starts with posting a concise, reasonably restrictive return policy on your site. Such policies are important to online shoppers, according to a survey released in November 2004 by the NRF Foundation (an arm of the National Retail Federation), and the American Express Co. "The NRF Foundation/American Express 2004 Customer Service Survey" found that 70 percent of online consumers want returns to be accepted without problems, 70 percent want return policies to be clear, and 69 percent want them to be fair.

One company seeing the benefits of a fair and clearly written return policy is Ruby Lane Inc., a specialty online retailer in San Francisco that had sales of more than $1 million last year. The site encompasses about 1,400 individually owned shops selling antiques, fine arts, jewelry and other collectibles from around the world.

In 2003, Ruby Lane instituted a policy stating that buyers may return any item as long as they contact the seller and arrange for a return within three days of its receipt. The three-day window is "long enough for a buyer to determine if it's what they wanted, but short enough to avoid abuse, such as using the product and then returning it," says Tom Johnson, senior vice president, CEO and co-founder of Ruby Lane (with Jim Wilcoxson, 44, president and co-founder). One exception: Most Ruby Lane sellers do not accept returns on custom orders for jewelry and artisan items.

Before Ruby Lane instituted these rules, shop owners had their own return policies, with one guideline: Each shop had to have a "no sales are final" policy. "A lot of shops had an unconditional return policy, and a few of them got into trouble because buyers contacted them months later and said they wanted to return an item, and the sellers [had to accept the return]," says Johnson, 41.

Karen Frishman, director of marketing at Ruby Lane, says abuse only becomes a problem on the internet when sites neglect to make their policies known: "State a clear and concise policy in an obvious, easy-to-find area of your website, and the chances of abuse diminish considerably."

Return Technology

Some large retailers--like The Limited/Express, KB Toys and Staples--have begun using The Return Exchange's Verify-1 to track return fraud. Verify-1 stores a customer's ID and payment information when he or she returns an item. The system then compares variables such as return frequency, dollar amounts and/or timing against rules that form the retailer's return policy.

The Return Exchange says that only 1 percent of all consumers are responsible for fraudulent or abusive behavior. For the other 99 percent of consumers who don't regularly return merchandise, "retailers can offer a more liberal return policy," says Mark S. Hammond, chairman and CEO of The Return Exchange. Instead of a "no receipt, no return" policy or a 14-day limit, companies can give good customers 30 to 60 days to make returns, for example.

While mostly large retailers use Verify-1, Hammond, 48, says it could be more affordable and accessible to small businesses starting this year, since the company wants to partner with firms that provide cash register systems, point-of-sale systems or credit card processing equipment to small retailers. "If smaller companies are signing up for credit card processing through one of these companies, they could also sign up for return authorization," says Hammond.

Consumer advocates, however, have voiced concerns about this product--from the failure of merchants to notify consumers that their return activity is being monitored to the possibility that shoppers would be unfairly singled out. However, as long as e-tailers clearly state what they're doing, the system could be a big help to them. Says Rogers, "No matter what size your company, if your competition has a return management system in place and you don't, where do you think the bad guys are going to go?"


Melissa Campanelli is a marketing and technology writer in New York City.