The current state of returns in online retail

One of the largest financial drains on e-commerce platforms today is the significantly increasing rate of returns & refunds. Nearly a third of all online purchases are returned, creating a heavy financial burden on retailers. In the U.S. alone, companies spend an estimated $50 billion annually on processing returns.

The environmental impact is also huge, with returns contributing to massive landfill waste and millions of tons of CO2 emissions. This negatively affects a brand’s reputation and ESG commitments. 

The business costs of refunds on e-commerce platforms

The increased demand for refunds directly affects retailers' profitability. In 2023, U.S. retailers lost approximately $400 billion due to returns, accounting for approximately 14.5% of total retail sales.

On top of this, 57% of retailers say that returns negatively impact their day-to-day operations, and 20% have had to increase product prices to offset the cost of customer returns.

Card not present fraud (CNP) and its impact on refund costs

While some refunds come from genuine customers, there is a spiraling threat from criminals who use stolen credit-card details in increasingly sophisticated ways.

The total cost to an online seller for a fraudulent transaction often exceeds twice the amount of the transaction itself, as the merchant cannot recover the shipped goods and must also refund the scammed customer.

On top of this, banks closely monitor fraudulent activities and may impose fees for each chargeback. Excessive fraudulent transactions can lead to higher card fees or even the closure of merchant accounts.

Refunds to cards take longer & cost more than A2A refunds

Refunds processed to credit cards are not only time-consuming but also costly. Credit card refunds can take 3-5 business days, while debit card refunds can take up to 10 business days. The average credit card processing fee ranges between 1.5% and 3.5%, but can reach up to 6% when including all transaction fees. These delays and costs are detrimental to both customer satisfaction and the retailer's bottom line. In contrast, instant bank payments enable a more efficient alternative, allowing funds to be received instantly and refunds to be processed quickly.

This also decreases the workload of customer service teams, with fewer queries relating to refund status. 

How to tackle the issue 

Retailers can implement several strategies to mitigate the impact of CNP fraud and reduce the cost and time associated with refunds. However, the three most important are:

1. Invest in enhanced fraud detection: By utilising advanced fraud detection systems, you can identify and prevent fraudulent transactions before they occur. Solutions that automate CNP due diligence processes via secure PSD2 protocols reduce CNP fraud, refund costs, and reputational risk.
2. Increase A2A refunds: Facilitate and promote instant bank payments. These will lead to quicker and less costly refunds compared to debit & credit card.
3. Embrace Open Banking (PSD2): Open Banking, a secure system that allows third-party financial service providers to access banking information, is now widely used by consumers and businesses. Using Open Banking for optimising the refund process, significantly reduces the time and cost associated with processing returns by enabling instant bank payments, and dramatically cuts fraudulent purchases and refund requests.

By adopting these measures, retailers can significantly reduce the financial burden of returns, improve customer satisfaction, and safeguard their profitability in an increasingly competitive market.

How Semla can help retail brands cut the cost of refunds

To combat these challenges, businesses must adopt advanced fraud-fighting technologies, such as Semla. Semla significantly reduces CNP fraud, refund costs & reputational risk by automating CNP due diligence processes via secure PSD2 processes.

By leveraging secure PSD2 processes and next-gen technologies, Semla automates the verification of payment cards, ensuring refunds and purchases are issued only to legitimate account holders.

By doing this, paperwork related to due diligence can be cut, as well as alleviating the burden on already overstretched customer service teams. Further to this, by using Semla online retailers can demonstrate they took all steps required to meet local compliance regulations. As the costs related to refunds see no signs of slowing down, brands must act now to protect their business.

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