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Happy Returns data, The UPS-owned reverse logistics company shows that nearly one in 10 retail product returns in the U.S. involve fraud. Retailers currently lose about $76.5 billion a year due to this problem.
To slow down these losses, Happy Returns, a company that specializes in returning online purchases from boxless stores, is testing a new artificial intelligence a tool that flags fraudulent returns before they are returned.
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Return fraud costs U.S. retailers billions of dollars, with nearly one in 10 returns flagged as suspicious, according to Happy Returns. (Photo by Tim Boyle/Getty Images)
How return fraud works in the real world
Refund scams often seem harmless at first glance. The buyer demands a refund for a legitimate product. Instead of sending back the real item, they send back something cheaper, damaged, or completely different. Retailers often issue refunds before anyone even checks the product. This speed allows you to evade fraud and increases costs.
Industry data from Happy Returns and the National Retail Federation shows that retailers will process about $850 billion in returned merchandise in 2025, representing nearly 16% of total retail sales. According to the same study, about 9% of these incomes are fraudulent. The report also notes that many shoppers admit to some form of return policy abuse. It's important to note that because Happy Returns conducts in-person product inspections and uses AI-powered automated flagging and audit processes to identify discrepancies, the rate of confirmed fraud across its network is much lower than the industry-wide estimate.
Why Boxless Returns Changed the Equation
Happy Returns operates nearly 8,000 in-store personal returns collection points such as Ultra Beauty and staples, as well as at UPS offices. Customers can return eligible items without a box or shipping label, and refunds are often issued immediately after inspection. As with any returns channel, fraud attempts may occur, but in-person delivery, product inspection, consistent labeling and auditing help keep the rate of confirmed fraud well below industry averages.
Happy Returns says its no-box, no-face-to-face model already blocks many common scam tactics, including empty boxes, partial returns and fake tracking numbers. “If you never touch the product, you can't know for sure that what you're returning is what was sold,” the company says. Everlane says physical handling itself acts as a deterrent. “The very fact that a person will physically handle the product and check it at the returns counter deters fraudsters from even attempting to commit fraud,” said Jim Green, director of logistics and fulfillment at Everlane.
However, Happy Returns acknowledges that scam tactics continue to evolve. Lookalike products and counterfeits can closely resemble the real thing, making subtle differences difficult to spot without careful inspection.
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Happy Returns is testing a new artificial intelligence system designed to detect fraudulent retail returns before a refund is issued. (Photo by Helen H. Richardson/The Denver Post via Getty Images)
How Return Vision uses AI to detect fraudulent returns
Happy Returns is testing its new artificial intelligence system with select retailers this holiday season, including Everlane, Revolve and Under Armor, as return volumes surge.
The new artificial intelligence tool is called Return Vision. It starts working the moment a customer initiates a return online. The system looks for unusual patterns in the timing, frequency and location of returns. One return may seem normal on its own. When these signals overlap in a suspicious manner, the return is flagged for review before a refund is issued.
At pickup points, workers can scan product barcodes and see photos of what the product should look like. They may dismiss obvious inconsistencies on the spot. Once returns reach Happy Returns centers in California, In Pennsylvania and Mississippi, tagged packages are sent to auditors. Items are opened and photographed, including front and back images and identification labels.
These photos are fed back to the AI system, which compares them with official product images and past transaction data. Human teams review the AI's assessment and make the final decision. The goal is not only automation. It adds multiple layers of verification that make fraud harder to hide.
Early results show how effective AI is in identifying returns fraud.
Happy Returns is still in the pilot phase and reports that Return Vision is already showing early results. Less than 1% of revenue flowing through its network is flagged as high risk. Of these flagged returns, about 10% are ultimately confirmed as fraud. The average loss prevented per confirmed case is just over $200.
Happy Returns says the system focuses on high-confidence cases, allowing most customers to process returns without delays. The company notes that the tool does not eliminate all forms of abuse, such as wardrobe hoarding when customers return worn-out items.
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Boxless and in-person returns help retailers reduce common fraud tactics such as empty boxes and fake tracking numbers. (Photographer: David Paul Morris/Bloomberg via Getty Images)
Why retailers are turning to artificial intelligence to stop return fraud
Happy Returns isn't alone in turning to artificial intelligence to stop return fraud. Amazon and FedEx offer packaging-free returns and use automated systems to identify risky behavior. US Postal Service introduces similar services. In retail, 85% of merchants surveyed say they use artificial intelligence or machine learning to combat fraud. Many say the results have been mixed. Happy Returns says combining behavioral signals with physical product verification helps bridge gaps that data-only systems often miss.
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Kurt's key takeaways
Retail earnings have changed, and so has the fraud associated with them. Easy shipping and instant refunds have made life better for consumers, but they have also created new vulnerabilities. Happy Returns is betting that artificial intelligence, combined with hands-on control, can tip the scales in favor of retailers. Early results suggest it may help, even if it's not a panacea. As fraudsters adapt, retailers realize they need to adapt faster.
Should retailers slow down the instant refund process if it will help stop return fraud, or should convenience always come first? Let us know by writing to us at Cyberguy.com
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