Tag: fraud

OM in the News: The Inventory Return Scam

Retailers nationwide have seen online returns skyrocket over the past four years after rolling out generous returns policies to attract customers amid a pandemic-driven surge in e-commerce. The returns policies have helped change shopping habits: Consumers have grown accustomed to ordering items online in several sizes and colors, then returning what they don’t want.

Shoppers last year returned 17.6% of items they purchased online, valued at more than $247 billion and more than double the percentage of goods returned in 2019. Returns have become such an entrenched part of online commerce that companies have sprung up to handle the growing business. UPS acquired one of those specialized operators, Happy Returns, for $465 million.

The ease of shipping goods back has also given criminals new tools to exploit in an online environment in which buyers don’t need to interact with store employees–and the scale and organization of the fraud is getting more ambitious, and organized.  More than $100 billion in merchandise was returned fraudulently in the U.S. last year, estimated to be 9-15% of the $850 million returned goods retailers received in 2024-2025, reports Supply Chain Brain (Feb. 2, 2026). 

Organized criminal groups “are taking advantage of the omnichannel retail environment,” said on industry expert. In some cases, fraudsters are returning knockoffs in place of designer goods and sending back boxes full of bricks or other filler rather than the original items. Others are manipulating shipping labels to receive a refund just from mailing back an empty envelope. Fraudsters marketing their services on Telegram and through other websites often sell their services in return for a cut of customers’ refunds.

Apparel retailer PacSun recently noticed a sharp increase in returns of online purchases, including one customer who had returned some 250 orders worth $24,000.  PacSun had issued the refunds, but the company never received the actual merchandise at its warehouse. Instead, workers found “used or different merchandise returned in the box, or even empty shoeboxes.”

Some retailers such as Amazon are taking legal action. It just sued the refunding-services group REKK that it claimed was “responsible for stealing millions of dollars of products from Amazon’s online stores through systematic refund abuse.”

Classroom discussion questions:

  1. How can the quality control inspections engaged during returns processing be defrauded?
  2. How has e-commerce made this fraud easier?

OM in the News: The Credit Card of Tomorrow

credit cardSINCE the 1970s, paying with plastic has been pretty standard everywhere: Customers swiped their cards, signed receipts and took home their purchases. But after security breaches at Target last year led to the loss of personal data from as many as 110 million customers, the financial industry is racing to adopt technologies that will alter that decades-old ritual. To many, it is about time. The roots of the magnetic strip on credit cards extend back to World War II, ample time for thieves to learn to hack and steal those black lines of account information.

Credit card fraud totaled $5.3 billion in the U.S. alone in 2012, reports The New York Times (April 2, 2014), giving the industry plenty of incentive to devise a better system. The amount lost to fraud continues to grow 30-50% a year. Europe and parts of Asia have already used the system for the better part of a decade, while American merchants and issuers have balked, largely because of cost. Chip-equipped cards (called “E.M.V.” technology for “Europay, MasterCard, VISA”) cost $1.30 each to make, while a standard plastic card with a magnetic stripe on the back costs 10 cents. Retailers, too, have been loath to update their systems to accept chip technology because of the added cost.

“E.M.V. is going to cost billions of dollars to implement in this country,” says one analyst. But the system works. In 2005, when Britain fully phased in the E.M.V. technology, credit counterfeit card fraud was 25%; such fraud plummeted to 11% seven years later.

Visa, MasterCard and American Express all recently announced road maps for adopting smart chips, with the aim of forcing retailers and issuers to put E.M.V. in place by October 2015 in the U.S. By then, the liability for any counterfeit fraud will fall on whoever has not adopted the chip technology. From 17 million to 20 million chip cards have been issued in the U.S. But that represents just 2% of the 1 billion cards in use.

Classroom discussion questions:

1. Why is this an OM issue?

2. Why have the Europeans led in accepting the chip-equipped cards?

OM in the News: Don’t Even Think About Returning This Dress

Bloomingdales' tag reads "Returns Will Only Be Accepted If All Original Tags Remain Affixed"
Bloomingdales’ tag reads “Returns Will Only Be Accepted If All Original Tags Remain Affixed”

Chapter 12’s discussion of  services inventories notes that shrinkage and pilferage account for 1-3% of retail inventory loss. But BusinessWeek (Sept. 30-Oct.6, 2013) reports on yet another source of loss to retailers. Many merchants have long lived by the mantra that the customer is always right, adopting liberal return policies in hopes of winning the loyalty of free spending shoppers. But with a recent increase in the wearing and subsequent return of expensive clothes—a practice merchants call wardrobing—many retailers are taking a stronger stand against the industry’s $8.8 billion-a-year return fraud problem.

Bloomingdale’s just started placing 3 inch black plastic tags in highly visible places on dresses costing more than $150 as they are being purchased. The clothes can be tried on at home without disturbing the special tag. But once a customer snaps it off to wear in public, the garment can’t be returned. Similarly, Nordstrom uses silver-colored paper tags, similar to price tags, which are affixed high on the outer side seam under the arm of special-occasion dresses. They must still be attached for returns.

The department store chains are not alone in trying to outwit some unscrupulous customers. Electronics retailers have turned to hefty restocking fees to discourage short-term use of expensive electronics to watch events such as the Super Bowl.  Improper returns afflict a wide swath of products. Such “borrowing” also has become prevalent in fine jewelry, seasonal décor, and tools. Ditto for expensive video cameras popular at weddings. After the nuptials, the gear sometimes goes back into the package and off to the store for a refund. Some Victoria’s Secret stores are compiling lists of serial returners. And high-end outdoor goods retailer REI recently announced it’s ending its lifetime return policy after customers took advantage of its lenient rules.

Merchants say the costs are now too great to ignore. About 65% of retailers reported experiencing wardrobing last year, meaning 3.3% of their total returns were fraudulent.

Classroom discussion questions:
1. How is wardrobing an OM issue?

2. What are the risks of cracking down on wardrobing and other frauds?