Hello, and welcome back to Inc.’s 1 Smart Business Story. E-commerce sales have soared since the pandemic, but returns have climbed alongside them, quietly becoming a costly threat that's draining billions from entrepreneurs. 

From a used $6,000 laser hair package to a $10,000 outdoor stucco kitchen, online shoppers are making increasingly audacious returns. In 2024 alone, returns totaled an estimated $685 billion, of which 15 percent were reportedly fraudulent. 

The fallout is pushing some founders to abandon e-commerce altogether and prompting others to issue warnings to those looking to enter the space, particularly for those dealing in high-ticket items. 

In this piece, you will see how to:

BY ALI DONALDSON, STAFF REPORTER

As fraudulent returns and chargebacks surge, founders are developing tactics to protect their businesses.

A $10,000 outdoor stucco kitchen, a more than $1,000 order of shoes, a custom metal sign costing upwards of $5,000, an out-of-print board game the company never stocked nor sold, a $6,000 laser hair package that had already been used—these are just some of the items that founders and executives say customers have tried to return.

Since the pandemic, more and more consumers are shopping online—and asking for refunds. As e-commerce sales have boomed, so too has the epidemic of impractical and even fraudulent customer chargebacks. 

Cumulatively, the price tag for returns reached $685 billion in 2024, accounting for 13 percent of total retail sales, according to research from Appriss Retail and Deloitte. The report, which examined data from the U.S. Census Bureau and more than 60 leading U.S. retailers and surveyed 150 retail executives and 1,000 consumers, found that 15 percent of those returns were fraudulent. That adds up to as much as $103 billion in annual losses.

To see the stories, just open Reddit. The online forum is filled with pleas from exasperated business owners asking into the void: How do I deal with this absurd refund request?

One serial entrepreneur, who has spent more than 15 years in the e-commerce space selling luxury goods, told Inc., “The level of the cards being stacked against small and mid-sized businesses, it’s staggering.” 

Dealing with customer chargebacks was one of the factors that led him to sell his e-commerce business, which offered high-end outdoor furniture and kitchens, last year and leave the industry entirely. “It’s not worth it,” he says. “I wasn’t a $10 million business. I was a $1 million business. 

Losing $15,000 out of my bank, it’s a lot, and then you have to fight for that and stress over it.”

The problem is big enough that he does not recommend that other entrepreneurs enter the e-commerce space, especially if they are thinking about selling high-ticket items. “It’s not something I would get into without a really strong risk assessment of the chargeback system,” he says.

Not every sketchy customer chargeback is the same. As with any fraud, people get creative, but there are patterns. Sixty percent of the retailers surveyed by Appriss Retail and Deloitte reported incidents of so-called wardrobing: consumers buying an item, wearing it, and then returning it. Nearly half of retailers dealt with shoppers returning stolen merchandise.

Other obvious red flags include bulk orders. Rather than buying a couple of different sizes to try on and compare, shoppers purchase the same shoe in a dozen sizes or ten of the same bag, says Jim Green, the head of logistics and fulfillment at Everlane, the San Francisco-based direct-to-consumer retailer known for its capsule wardrobe staples. Customers also tamper with return shipping labels, he adds, so they can drop off an empty box or one filled with another, cheaper item that gets lost in transit. Then they can point out that their return box was initially scanned and request a refund. Green has also seen high-ticket packages delivered to one state and returned at a drop-off location halfway across the country the next day.

“It’s a considerable challenge,” says Green, who has worked in logistics and fulfillment for two decades. “As these technologies have improved and gotten more sophisticated, fraudsters have gotten more sophisticated…Plus, the increase of circularity and reselling makes it a little bit easier.”

The problem for e-commerce retailers is having to balance customer service up against the need to mitigate risk. “We want to try to make it as frictionless and easy for the vast majority of our customers, but you’ve also got to try to minimize the vulnerability to the tiny number of bad actors who are trying to commit fraud,” he says.

For those trying to get away with an absurd chargeback request, there’s typically a monetary sweet spot between $2,000 and $5,000, founders say. Consumers at the higher-end of the spectrum, spending more than $10,000, are not typically a problem. 

Sara Rinehart, a serial entrepreneur who has spent more than a decade in the beauty and medical spa space, employed a “CYA” or “cover your ass” policy in her booking and partnership contracts, including clear termination clauses to cover her bases.

The founder, who exited his e-commerce business because of chargebacks, says his “number one” defense was finding a good banker who could be his advocate. “Developing that banking relationship where you call up the banker,” he says, “that was a game changer.”

Other companies outsourced their risk management strategies as an increasing number of startups, including Happy Returns, Yofi, Chargebacks911, and Freeing Returns, have made this growing problem their business. A new generation of software and logistics companies has come to market with promises of helping consumer brands deal with the onslaught of customer chargebacks and fraudulent returns. The advent of AI has accelerated that push.

Happy Returns co-founder and CEO David Sobie says fraudulent returns were not the impetus for launching his Santa Monica, California-based business back in 2015, but that vulnerability has become a growth driver and a source of innovation for new services. Out of his 150 employees, a team of a dozen under his COO, Juan Hernandez-Campos, focuses on getting ahead of the chargeback scammers, scouring platforms such as Telegram and Reddit for fraudsters sharing tips and loopholes for returns.

“It’s sort of like a game of whack-a-mole,” says Sobie. “You find one way that fraudsters are exploiting a weakness in the system, and you then make changes.”

Last year, Happy Returns introduced an AI-enabled program to fight decoy fraud, or the practice of returning a similar, but lower-cost item in place of the higher-priced item the return was requested for. Think requesting a return for a $250 little black dress from Everlane and stuffing the return envelope with a $20 dupe from H&M. AI helps employees at drop-off mailing locations confirm that the item being returned is the one purchased.

“We certainly didn’t think, oh, 10 years from now, we’re going to be in the fraud prevention business,” says Sobie. “They are people who are trying to literally make a business out of defrauding merchants. Anything we can do to help thwart that is increasingly part of our job.”

Read more at Inc.com

Why does business news feel like it’s written for people who already get it?

Morning Brew changes that.

It’s a free newsletter that breaks down what’s going on in business, finance, and tech — clearly, quickly, and with enough personality to keep things interesting. The result? You don’t just skim headlines. You actually understand what’s going on.

Try it yourself and join over 4 million professionals reading daily.

Check it out