How to Prevent Fraudulent Returns and Other Benefits of Serial Number Tracking

Apps by Sellercloud, Ecommerce Industry

E-commerce fraud is a costly challenge online retailers face. By some estimates, retail fraud costs sellers $3.75 for every dollar lost. What’s more, 13% of all US e-commerce fraud costs in 2021 were attributed to returns fraud—a fraudulent scheme where customers take advantage of a business’s return policies to receive a refund for an item without actually returning it.

Return fraud can happen in a number of ways. Some of the most common include:

  • Claims that an item never arrived – A customer seeks a refund based on the accusation that the ordered item either did not get delivered to their address or that the item was stolen prior to receipt. Order tracking can be helpful in countering some of these instances, but it does little to combat claims of porch piracy.
  • Empty box claims – A customer seeks a refund by claiming that the item they ordered was not in the box when it arrived.

    The idea behind this scam is that while a delivery confirmation may exist for a package’s tracking number, either part or all of the expected order was supposedly not inside. This can be more challenging to validate than a non-arrival claim. It implies that there was an error in the packing and fulfillment process, not in transit.
  • Fraudulent returns – A customer claims to be returning an item for a refund, but does not actually return the item in question. This type of fraudulent return can be carried out in different ways. One of the most common is replacing merchandise with something of lesser value, but comparable in size and weight. For instance, an old or non-working cell phone charger is returned in place of the new one received from the seller.

    Since it is common for e-commerce sellers to issue refunds as soon as a return tracking number is issued, this type of fraud allows scammers to receive refunds before the seller realizes that their merchandise was not actually what was returned.

In each of these cases, there are steps you can take to help safeguard against the damage caused by return fraud. Many of the measures involve recording and keeping accurate records about your items, orders, and shipping. The combination of unique product serial numbers and a unified inventory management platform can be particularly useful.

While serial numbers and accurate inventory tracking cannot prevent all instances of returns fraud, they provide an important safeguard that can be utilized to minimize its impact on your bottom line.

What is a Serial Number?

A serial number (often abbreviated as SN, S/N, or Serial No.) is a unique identifier assigned to an individual product. Serial numbers can contain a combination of letters, numbers, and/or characters, and are typically assigned in some sort of predetermined sequence.

It is important to recognize that a serial number is not the same as a SKU, UPC, or barcode. All four are important and useful ways of identifying products and product variations, but a serial number is the only one of the lot that is truly a 1:1 identifier of a specific, singular item.

For instance, say a company has 1,000 units of a specific product. The products may all have the exact same UPC, SKU, and barcode since they are all, technically, the same item. However, each one of those 1,000 units would have their own individual serial number. This makes it possible to isolate and identify each individual piece within the larger product inventory.

By assigning serial numbers to components and products, your business has the ability to keep track of individual items throughout the inventory lifecycle and beyond. Tools like a comprehensive inventory management platform or a fully-featured warehouse management system (WMS) allow you to assign, record, and track serial numbers for each product. In doing so, serial numbers can be linked to critical data like lot numbers, production dates, and order numbers to provide a granular level of inventory management that would otherwise be impossible without serialization.

This can be helpful to your internal workflows in a variety of ways:

    • Improved order picking and packing accuracy – Serial numbers make it easy to locate the correct items for a customer’s order or the right components for assembling a product or kitted order. They also help to ensure that the right items end up in the right packages for shipment. 
  • Tracking item expiration dates – Serial numbers make it possible to set up alerts to ensure products that can no longer be sold are removed from shelves and kept out of customers’ orders.
  • Improved inventory valuation accuracy – Whether you opt for first-in-first-out (FIFO) or last-in-first-out (LIFO) accounting methods, serial numbers make it possible to prioritize stock usage by time on hand.
  • Internal asset management – Serial numbers allow businesses to assign specific tools, supplies, and hardware to the appropriate team members. This internal record-keeping of non-sales inventory helps to optimize internal workflows and safeguard against the loss of crucial business property.
  • Processing warranty claims and product recalls – Should you need to issue a recall or execute a warranty claim, a record of product serial numbers makes it simple to ensure the affected merchandise is correctly identified and only pertinent claims are processed.
  • Establishing product authenticity –  Being able to assure customers that your products are authentic is a growing concern for many brands. Serial numbers are a helpful tool in combating counterfeits and customers’ counterfeit claims. They are so effective that Amazon relies on serialization as the backbone of their Transparency product authentication service.

As valuable as serial numbers are as internal data points and product identifiers, they are equally as valuable to sellers after products have left the warehouse. In particular, serial numbers can serve as a strong line of defense against return fraud.

How Serial Numbers Can Protect Your Business Against Return Fraud

Many of the most obvious safeguards against returns fraud involve waiting for a return to arrive back at your location, confirming the correct product was received, and then issuing the refund or exchange to the customer.

If a returned product has a serial number that has been recorded and linked to a particular customer, order, and shipment through your inventory management and/or WMS platform(s), this confirmation process is simple. If the serial number matches the number on record, it is an honest return that can be processed according to your returns policy. If the serial number does not match, you have the grounds to reject the return or exchange as a possible fraud.

All that said, how to handle and process returns is a delicate dance for omnichannel online sellers. Customers have come to expect fast, easy, no-hassle returns policies that lead to fast refunds and/or exchanges with minimal back-and-forth. 

Even with a streamlined reverse logistics workflow, this process takes time—time that customers have been conditioned to reject, largely due to the speedy refund and exchange policies of leading e-commerce marketplaces.

Third-party marketplaces dictate specific rules for how and when returns are issued. Most of these protocols are customer-focused, as marketplaces want to keep shoppers coming back to their platforms for future purchases. Even though most marketplaces offer sellers the ability to customize aspects of their own returns policies, there are consequences for failing to satisfy customers and/or comply with marketplace terms.

What this means is that many of the terms and conditions for how returns are initiated, evaluated, and processed are almost entirely out of sellers’ hands. In some cases, returns are authorized automatically, resulting in refunds or replacement orders showing up on your account before you have the chance to receive the returned product. 

Customer-friendly returns policies like these make it easier for bad actors to game the system and claim refunds and exchanges without carrying out an honest return. Furthermore, these policies also tend to skew in ways that place the burden of proof for return fraud claims squarely on sellers’ shoulders. This is an area where serial numbers can be particularly beneficial.

To start with, you want to have documentation that shows the movement of a serial-numbered product as it moved through your fulfillment workflow, was shipped to a customer, and the shipment was reported as delivered by the carrier. From there, if the serialized product is not returned (or the exact item was not returned), you have the groundwork for filing a claim with the third-party marketplace and/or filing a police report. The fact that the serial number is attached to the end-to-end journey of the item in question adds a layer of specificity and provenance that a nonserialized item’s sale would not have. Simply put, you can make a much stronger case for fraud with a serialized item than a nonserialized one.

Unfortunately, as many sellers will attest, fraud and retail are inexorably linked. There are inevitably times when even documentation and due diligence will either fail to deliver the results you are entitled to or simply cost too much time and effort to pursue. That said, utilizing serial numbers is a smart, extra layer of protection against fraud with plenty of additional operational upside—particularly for sellers of high-value items.

A reliable omnichannel inventory management platform like Sellercloud makes it possible to not only create and assign serial numbers, but to streamline the process of tracking the flow of each serialized product across its entire life cycle including receiving, storing, and shipping products. To learn more about how the Sellercloud family of tools and products can help optimize your e-commerce business, contact us directly for a free demo.

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The Sellercloud team is dedicated to providing you with insights and content that can help guide your business strategy in a meaningful way. With 10+ years in the e-commerce space, our goal is to share our knowledge and ideas with you to help you achieve your business goals.