PinchAI creates a risk management platform for ecommerce businesses to handle post-purchase challenges

Return Fraud: A Growing Challenge for Retailers

What was once considered a routine business expense—return fraud—has rapidly evolved into a significant threat to retail profit margins.

Historically, retailers viewed product returns as a necessary part of enhancing customer satisfaction, especially with the rise of online shopping and the expectation, popularized by Amazon, that returns should be easy and hassle-free. However, as return rates have steadily increased and fraudulent tactics have become more advanced, this perspective has shifted. What used to be seen as a simple service cost is now recognized as a major operational risk that can no longer be ignored.

PinchAI’s Proactive Approach

Arthi Rajan Makhija, co-founder of PinchAI, recognized this shift early on and set out to address the problem before it reaches the warehouse. PinchAI positions itself as the first post-purchase risk management platform in the industry. Instead of treating returns as isolated incidents, PinchAI integrates data from checkout, return initiation, and warehouse processes to create a comprehensive view of customer intent.

“Returns are now a permanent part of shopping,” Rajan explained. “Amazon normalized returns as a standard part of the buying process, and now they actively influence how people shop.”

Changing Risks and Rising Abuse

Return patterns are not going away, but the risks retailers face are evolving. According to PinchAI’s data, about a quarter of all online purchases are returned, with even higher rates in clothing and footwear. While most returns are legitimate, a small percentage is quietly eating into profits. Around 5% of returns are total losses, and another 10% are returned in a used or damaged state, making them unsellable as new.

The most common form of abuse is “wardrobing”—customers buy items for a specific event, use them, and then return them. This practice is especially prevalent in apparel. Another tactic, known as SKU swapping, involves buying a new product, then later returning an older version in its place. In both scenarios, warehouse staff are often the last defense, but by then, the financial damage has already occurred.

“Catching fraud at the warehouse is too late,” Rajan emphasized. “The loss has already happened by that point.”

Pinpointing the Source of the Problem

PinchAI’s analysis reveals that a small group of customers is responsible for the majority of returns. Approximately 7% of shoppers account for 70% of all returns, and just 0.5% are behind nearly all severe abuse. Despite this, most retailers still apply the same return policies to everyone.

“This approach ends up penalizing your most loyal customers,” Rajan noted. “Broad policy changes hurt your top 20% of customers far more than the small group of abusers.”

Personalized Return Management

PinchAI enables retailers to tailor the return process to individual customers. Shoppers with a strong track record can enjoy quick, seamless returns and instant refunds, while those flagged as high-risk may face additional checks, delayed refunds, or notifications that their activity is being monitored. Often, simply making customers aware that their behavior is tracked is enough to prevent abuse.

(Photo: PinchAI)

How the System Works

The platform connects customer identity with their entire shopping journey. Individuals with fraudulent intentions often display distinct behaviors, such as immediately targeting high-value products and completing purchases rapidly. Others may browse extensively, read reviews, and shop across various categories. PinchAI tracks not only the purchase but also the logistics and return process, offering a complete perspective that traditional systems miss.

Measurable Results

This comprehensive visibility is delivering results. Retailers using PinchAI have reduced return rates by about 8% by proactively blocking only abusive returns or introducing targeted friction. At the same time, they have seen a 20% increase in retention among their most loyal customers by streamlining the return experience. The system has also automated roughly 80% of return reviews, freeing up operational teams from manual work.

Environmental and Financial Impact

Retailers are also facing the environmental consequences of returns. PinchAI estimates that nearly 30% of returned products ultimately end up in landfills, while many others are sold at steep discounts, resulting in financial losses.

Investor Confidence

PinchAI’s innovative approach has attracted significant investment, recently securing $5 million in seed funding from Dynamo Ventures and Infinity Ventures, with additional support from Defined Capital and PayPal Ventures. For investors like Dynamo’s Jon Bradford, the real value lies in PinchAI’s ability to unify fragmented post-purchase data and reveal hidden threats to profitability.

“This team understands how disconnected systems can quietly undermine margins,” Bradford commented. “PinchAI brings all those signals together into a single intelligence platform.”

The Path Forward for Retailers

As return rates continue to rise and fraudulent tactics become more sophisticated, Rajan believes retailers must act quickly to modernize their approach. Relying on outdated policies and manual reviews will force businesses to choose between protecting profits and maintaining customer loyalty—a choice she believes is no longer necessary.

“The future is about finding the right balance,” Rajan said. “You can safeguard your business from the small percentage of abusers without alienating your loyal customers. But that’s only possible if you truly understand your shoppers.”