In the United States, return and refund fraud has escalated into a significant challenge for retailers, resulting in substantial financial losses. In 2024 alone, fraudulent returns and claims cost U.S. retailers approximately $103 billion, accounting for over 15% of all returns.
This surge in fraud encompasses various deceptive practices, including “wardrobing”—where customers purchase items with the intent to use and return them—and false claims of non-receipt or product damage. A notable 76% of shoppers admitted to embellishing return reasons to avoid fees, marking a 39% increase from the previous year.
First-party fraud, often termed “friendly fraud,” is particularly concerning. This occurs when consumers exploit return and refund policies for personal gain, such as disputing legitimate transactions. Research indicates that 42% of Gen Z shoppers have admitted to committing such fraud.
The financial impact is profound, with each dollar lost to fraud costing U.S. merchants an estimated $4.61 in 2025—a 37% increase compared to five years earlier.
To combat these challenges, retailers are implementing stricter return policies and leveraging advanced technologies. For instance, Target has revised its return policy to assert the right to deny returns, refunds, and exchanges to prevent fraudulent activities.
Addressing return and refund fraud requires a multifaceted approach, balancing customer satisfaction with robust fraud prevention measures. John-David Klausner, GM International, at Loop, recommends these top 5 strategies:
- Work within the law. Don’t get steamrolled by it
The UK has some of the most consumer-friendly legislation in the world. Under the Consumer Contracts Regulations 2013, customers can cancel most online purchases within 14 days of receipt and have another 14 days to return them—giving them a minimum 28-day no-questions-asked return window.
That law exists for good reason. But some customers exploit it to “try before they buy,” wear items and return them, or bracket multiple sizes and styles with no intention of keeping most.
Legally, retailers can’t refuse those returns outright. But you can inspect returned goods and deduct value from refunds if items show signs of wear or misuse. The key is having clearly defined policies and fair, consistent enforcement, especially when the refund is partial.
- Scrutinise post-window returns with structure and fairness
The Consumer Rights Act 2015 gives consumers a 30-day window to reject faulty goods for a full refund. After that, they’re entitled to a repair or replacement within six months—and in some cases, up to six years.
Many brands are seeing a rise in fraudulent fault claims, especially after the initial return window has closed. To counter this, retailers are tightening how they assess claims:
Requiring video evidence of damage or defect
Using serial number verification to confirm authenticity
Asking customers to return the item before processing a refund
This approach prevents opportunistic abuse while still supporting genuine claims—helping teams make better decisions, faster.
- Leverage AI to detect risky behaviour – ethically and compliantly
Machine learning has transformed returns fraud detection. Platforms like Loop can flag suspicious behaviours, such as unusually high-value return volumes, repeated abuse of refund policies, or inconsistent return reasons. This allows retailers to automatically route those transactions for manual review, enabling them to take action before losses mount.
However, merchants must be careful with how they use customer data. Under the UK GDPR and Data Protection Act 2018, brands are legally required to:
Be transparent about what data they collect and why
Provide customers with access to their data
Offer a clear appeals process if returns are denied based on fraud detection
Used correctly, AI is a valuable fraud deterrent. But customers must retain control over how their data is used and have the right to challenge decisions when appropriate.
- Build tiered policies that respond to different risk levels
A common pitfall is treating all returns equally. In 2025, more retailers are applying tiered controls based on the risk profile of the transaction or customer.
Examples include:
Requiring manual approval for returns over a certain value
Offering instant refunds only to customers with low return rates
Limiting the number of returns allowed per customer per year
Setting stricter policies for high-return-rate items, like seasonal fashion or luxury goods
This segmentation allows retailers to preserve a great experience for the majority of customers while managing the small minority responsible for most abuse.
- Invest in proactive insight, not reactive fixes
Returns fraud isn’t static. The methods used by abusive customers shift constantly and so must your defenses. Retailers with best-in-class operations regularly analyse return data to identify emerging abuse patterns. For example, some Loop clients have discovered that certain SKUs or geographic regions are disproportionately linked to high rates of wardrobing, prompting targeted policy updates or inspection processes.
The goal is to move from reacting to fraud after it happens, to designing policies that anticipate and prevent it. That mindset shift, towards continuous improvement, is what separates brands that merely cope from those that lead.
A new era of returns management
Returns used to be seen as a cost of doing business. In 2025, they’re increasingly a source of competitive differentiation. Brands that strike the right balance between generosity and accountability will not only protect their margins but also earn trust from customers who value fairness and transparency.
It’s true that the UK’s consumer laws favour the buyer. But that doesn’t mean retailers are powerless. On the contrary, by implementing smarter technology, setting thoughtful policies, and investing in continuous returns optimisation, brands can regain control.
Fraud may be rising… but so is the capability to fight back, ethically and effectively.
