Key takeaways
Customer returns are becoming unsustainable
Rising costs, fraud and lower resale value are increasing pressure on retailers.
Tighter return policies risk damaging customer relationships
Stricter rules can deter shoppers and create customer complaints.
Retail tech solutions come with compliance challenges
Tools improve accuracy but raise data, fairness and cybersecurity issues.
Retailers are struggling with the increasing number of customer returns, as the rise of fast fashion and online shopping has normalised ordering multiple items at once and sending back any that don’t make the cut. The issue is that returns require shipping, sorting, checks and fresh packaging, and each of these steps are costly. Returned items are not always able to be resold by retailers, and when they are, data from HSBC suggests that around half of those items sell for roughly 40% below their initial value. The increase in returns fraud, enabled by generous and flexible return policies, is contributing to this issue. According to findings by Appriss Retail and Deloitte, approximately 15% of returns in 2024 were fraudulent.
This comes at a time when retailers are already fighting the effects of cost inflation. Higher labour costs, exacerbated by the 2025 National Living Wage rise and National Insurance increases, have raised operating costs for retailers and are chipping away at their ability to absorb extra costs.
Against this backdrop, many retailers are turning to technology as a way to regain control.
How retailers are responding
Changes to returns policies
Retailers are tightening their approach to returns. Take ASOS: recent updates to its Fair Use Policy mean that certain users now face a charge of £3.95 per package if they are returning too many items, and in some extreme cases, customers may have their accounts closed. In assessing who will be penalised, ASOS looks at purchase size and frequency, and compares this to normal shopping behaviour using data analytics and AI. ASOS is not alone in its approach, and more retailers will be adjusting their return policies as the issue develops.
However, changes to return rules must be approached with caution, as data from Appriss shows that almost a third of buyers stop purchasing from retailers with restrictive policies. This puts retailers in a difficult position – they must find a way to reduce returns whilst ensuring they don’t lose customers. Reliance on the use of technology and automated decision-making to decide which customers should be penalised presents its own issues, with some customers already complaining that they have been unfairly targeted, and have not been granted a right to challenge the decision for their accounts being closed.
The data analytics tools used by ASOS (and other retailers) can be problematic where inferences about “suspicious” return patterns are drawn from biased or opaque data. If an algorithm incorrectly labels certain customers as breaching the Fair Use Policy, whether due to postcode‑linked assumptions or correlations with protected characteristics, this can lead to restrictions or charges without human review. This type of profiling raises concerns under the Equality Act 2010, the Consumer Rights Act 2015 and UK GDPR requirements, especially where individuals are unable to see how decisions were reached or challenge them. Regulators such as the ICO and CMA are developing guidance as part of the UK’s wider approach to AI oversight, with an emphasis on principles such as accountability, transparency and fairness.
Retail tech
Data analytics used for implementing returns policies is not the only technology that is being used by retailers. In fact, the returns problem can be an opportunity, not just a challenge, for retail tech companies. New technologies include virtual try on technologies, which creates a digital version of the customer by using a device such as a phone to scan their body or by taking a few simple measurements, and then shows how an item would look on them.
Fit prediction software uses patterns from past orders, preferred fits and return history to suggest the size most likely to work for that individual. RFID tags act like tiny digital labels that record where an item is as it moves through a warehouse or returns centre, allowing retailers to keep track of stock. The overall aim is to remove some of the guesswork from online shopping and cut down on avoidable returns.
Like the issues presented by using data analytics to enforce new returns policies, technologies such as augmented reality and sizing tools also present fairness risks if they are trained on unrepresentative datasets. Where certain groups receive less accurate recommendations, this can edge into direct or indirect discrimination under the Equality Act 2010.
Additionally, some tools such as virtual try-on technologies rely on biometric data, meaning they are subject to the UK GDPR and the Data Protection Act 2018. As biometric information is “special category data”, retailers must show that they have a legal basis for processing the data and have met a special category condition, such as receiving the customer’s explicit consent. This can be onerous.
Cybersecurity is also an important consideration. In the context of smart‑tracking, tools like RFID can create openings for cyber‑attacks if systems aren’t properly secured and monitored. Risks can stem from unencrypted data, weak network links, or poor separation between tracking tools and wider business systems. If exploited, these gaps could allow attackers to map store layouts, follow stock movements or access sensitive internal systems, potentially breaching data protection laws and the Network and Information Systems Regulations (UK) 2018. Retailers therefore need to build in strong controls from the outset, including encryption, device authentication and ongoing system audits.
Ultimately, retailers adopting these technologies need to balance the operational benefits with regulatory compliance, transparency with customers and responsible implementation.
How we can help
The returns problem is continuing to grow, and retailers who fail to adapt to changing customer behaviours, partly driven by fast fashion, are likely to see their profits fall. Even so, the concerns raised in this article also create opportunities. Our Technology team is on hand to support retailers in setting themselves apart by refreshing their returns strategy and investing in new technology while staying compliant with their statutory and regulatory requirements.
This article was co-authored by Trainee Solicitor, Morgan MacWilliams.
