Combatting Return Fraud: A Growing Challenge In The Digital Age

When a charge shows up on your credit card statement from a stranger named Fred Bloggs, you might grow suspicious. And it may require considerable backtracking to realize that Fred sold you artisan candlesticks at his farmers market stall last month.

Sometimes, however, consumers do not bother to look back and end up challenging charges they actually made. These chargebacks (when an issuer reverses funds back to the cardholder) are known as “friendly” or first-party fraud. While they might be considered “friendly” compared to when a third-party fraudster steals a credit card number, they are fraud, nonetheless. Even mistaken chargebacks must be investigated, which cost time and money.

Then there are the not-so-friendly types of first-party fraud, including return fraud. This is when buyers knowingly return merchandise to a different retailer from where it was purchased or falsely report that a product ordered online did not arrive. These fraudulent activities cause significant losses for merchants and have become more common due to the massive uptick in online shopping since the pandemic. All of this is a major factor contributing significantly to the nearly $900 billion in fraud losses for merchants last year.

Understanding the impact of return fraud — and finding a way to stop it — is critical for merchants looking to safeguard themselves against financial loss.

Losing returns on return fraud

Return fraud has been around for a long time. For instance, we’ve all heard tales of people “wardrobing,” when they buy clothes, wear them and then return the items with the tags in place. But just as digital scams are growing more sophisticated and costly, so too is return fraud.

“Bricking” refers to buying expensive goods and replacing them with cheaper alternatives. For example, a high-end chip in a gaming computer might be swapped for a low-quality one. A fraudster might return a computer for a full refund, either claiming it’s defective or that they simply don’t want it and then keep or sell the expensive chip. Or consumers might buy an ultra-expensive beauty cream and replace it with a supermarket brand — or even plain yogurt — before returning the “unused” container.

Retailers face significant challenges with returns. Whether they are legitimate or fraudulent, returns require time, shipping costs, administrative fees and communication efforts, in addition to any monetary losses retailers suffer. Handling repeat offenders may require banning them — which can lead to retaliation through negative reviews. At the same time, making the return process more difficult for legitimate customers can harm brand reputation, affecting sales and customer loyalty.

Where data fits in

As fraudsters uncover more vulnerabilities, merchants must respond quickly and creatively to mitigate risk. One significant challenge is that refunds are often issued before a returned product is inspected. Retailers must balance the need for a seamless customer experience with the growing risks of fraud. This is where data and artificial intelligence (AI) come in. Companies are now leveraging their vast data resources to identify suspicious patterns early to minimize the impact and, in some cases, prevent fraud from occurring. For example, based on data they have collected, some merchants could offer store credit or delay refund fulfillment when a consumer initiates a return.

For first-party fraud, AI can track patterns and behaviors using transaction insights to help combat return fraud. For example, if a consumer regularly buys a particular brand at a specific retailer but then claims one charge is fraudulent, it’s highly likely that the consumer simply forgot making that purchase. Merchants can use the data to gently jog a shopper’s memory.

Engaging in these informed conversations with cardholders works. Since last year, when Mastercard introduced its First-Party Trust program — which uses transaction insights to help determine if a chargeback is legitimate — participating merchants have seen a 15% to 20% reduction in chargebacks related to first party fraud. This data-driven approach gives businesses tools to help them make better decisions about what constitutes legitimate fraud and to demonstrate to shoppers that it’s unlikely some contested charges were made by a third party. By confirming the absence of any of the usual hallmarks of identity theft, the First-Party Trust program exposes first-party misuse.

Importantly, data can act as the bridge across stakeholders and ultimately help build trust within the entire ecosystem. By using transaction insights to create clarity around disputed charges, businesses are better equipped to navigate the complexities of digital fraud, ultimately improving security for merchants, banks and issuers, as well as consumers.

Building fair and secure marketplaces

While technology is helping to mitigate its impact, return fraud remains a staggering issue, with nearly 95% of merchants reporting it as a significant concern. Retailers are in a challenging position because their role to provide exceptional service, especially regarding returns, makes them more vulnerable in an increasingly digitized world. Merchants must prevent fraud without compromising their reputation. The goal is clear: create a secure, frictionless experience for consumers while ensuring merchants can operate in a fair and efficient marketplace.

Mastercard hosts a bi-annual conference called ‘Point of Interaction,’ which brings together merchants, acquirers, and issuers to discuss the latest innovations, trends, and best practices in the payment industry. Among the critical issues that have been raised at the conference are first-party fraud and returns fraud. Mastercard is actively collaborating with its members to develop solutions to tackle these challenges.

Mastercard, alongside other industry leaders and stakeholders, including the Merchant Advisory Group, is working to uncover trends, risks and challenges to address return fraud in all its forms.

“First-party fraud is a significant challenge for merchants, and Mastercard is making important strides to address it, particularly through their First-Party Trust program, which was developed in collaboration with our extensive base of merchant members. We’re pleased to see these crucial steps being taken to reinforce trust among merchants, small businesses, issuers, acquirers, and most importantly, consumers,” said John Drechny, CEO, Merchant Advisory Group.

Through innovation, collaboration and data-driven solutions, we can move toward a future where fraud is not only detected but prevented, and everyone’s financial interests are safeguarded.

Source: https://www.forbes.com/sites/mastercard/2025/03/25/combatting-return-fraud-a-growing-challenge-in-the-digital-age/