The holiday season is meant to be a boost for retailers, but behind the scenes it has become one of the most expensive times of the year due to a sharp rise in return fraud. As shoppers send back millions of items after Christmas, logistics giant UPS has begun deploying artificial intelligence (AI) to help retailers identify fake and fraudulent returns before they become costly losses.
This move reflects a broader shift in retail logistics: returns are no longer treated as a simple customer service issue, but as a major operational and financial risk that requires advanced technology to manage.
Why Return Fraud Is a Growing Problem
Return fraud occurs when customers seek refunds but return an item that differs from their original purchase, like a fake product, a less expensive alternative, or even an empty container. Although this has been present for years, the issue has escalated quickly with the rise of online shopping and more lenient return policies.
In 2025, American shoppers are projected to send back almost $850 billion in products, accounting for roughly 16% of overall retail sales. Unfortunately, approximately 9% of those returns are believed to be deceptive, resulting in losses of tens of billions of dollars for retailers each year.
The issue becomes more pronounced during holiday shopping. Retailers face pressure to swiftly handle refunds to satisfy customers, resulting in reduced time for manual checks. Fraudsters exploit this rapidity, aware that inundated systems are prone to overlook discrepancies.
UPS’s AI Solution: Smarter Returns, Not Slower Ones
To address this challenge, UPS, through its returns subsidiary Happy Returns, has introduced an AI-powered system known as Return Vision. The tool is currently being piloted with major apparel brands such as Everlane, Revolve, and Under Armour.
Rather than replacing human workers, the AI acts as an early warning system. It scans data linked to returns and flags transactions that show unusual or suspicious patterns. These might include:
- Returns initiated before an item is officially delivered
- Multiple returns tied to linked email addresses or accounts
- Packaging or item characteristics that do not match the original order
- High-value items returned repeatedly by the same customer
By identifying risk early, retailers can focus their attention on the small fraction of returns most likely to be fraudulent, instead of inspecting everything.
How the System Works in Practice
Happy Returns operates a “no-box, no-label” return network with around 8,000 return bars located inside stores such as Ulta Beauty, Staples, and UPS locations. Customers simply bring their item, which is scanned and bundled with others for shipment.
At processing centers, AI-flagged returns are separated for closer inspection. Human auditors then open these packages, photograph their contents, and compare them against what was originally sold. These images and outcomes are fed back into the system, allowing the AI to learn and improve over time.
Interestingly, fewer than 1% of all returns are flagged, but roughly 10% of those flagged cases turn out to be genuine fraud. With the average fraudulent return valued at around $260, even a small detection rate can translate into substantial savings.
Why AI Matters More Than Manual Checks
Traditional return checks rely heavily on staff experience and random inspections. While effective at small scales, this approach struggles when millions of packages arrive within a short period. AI excels here because it can:
- Process vast amounts of data instantly
- Detect patterns humans might overlook
- Apply consistent criteria without fatigue
- Continuously improve with feedback
For UPS, this technology also strengthens its position as more than a delivery company. It positions itself as a strategic partner in retail operations, offering data-driven solutions that protect revenue.
Limits of AI and Remaining Challenges
Despite its benefits, UPS acknowledges that AI is not a silver bullet. Some forms of fraud, such as “wardrobing,” where customers wear items and return them, are still extremely difficult to detect automatically.
There is also a delicate balance to maintain. Over-aggressive fraud detection risks falsely accusing honest customers, which can damage trust and brand loyalty. This is why UPS emphasizes human oversight alongside AI, ensuring that final decisions remain contextual and fair.
For retailers, AI-enabled returns management could significantly reduce losses, protect profit margins, and make return policies more sustainable in the long term. It also helps justify generous customer-friendly return policies without leaving companies exposed to abuse.
For consumers, the impact may be subtle but important: faster processing for legitimate returns, fewer blanket restrictions, and a system that targets abuse rather than penalizing everyone.
A Glimpse into the Future of Retail Logistics
UPS’s deployment of AI reflects a broader trend in logistics and supply chains, where technology is increasingly used not just to move goods, but to protect value and integrity across the retail lifecycle.
As e-commerce continues to grow and fraud becomes more sophisticated, AI-driven tools like Return Vision are likely to become standard rather than exceptional, reshaping how retailers think about returns, trust, and efficiency.
