How E-commerce Refund and Return Policies Could Trigger Industry Collapse in the Long Run
The Competitive Refund Race: How Refund Policies Become Competitive Tools
Amazon’s return policies, which offer 30 day windows and refunds for defective items, have been crucial to its success but come with high costs—estimated at $300 billion in 2023. This expense, mainly from return shipping, triggered a competitive race in e-commerce, with platforms adopting aggressive policies like ‘No Reason Returns’ to outdo Amazon.
Other platforms quickly joined the movement, with Taobao (Alibaba), Shopee, and Temu implementing those returns policies. By 2023, Taobao introduced a "7 Days No Reason Return" policy, and Shopee adopted a similar policy with their "Change Your Mind" options.
As the competition grew, Pinduoduo took a step further with their Refund-Only policy, allowing customers to keep products and still receive a refund. This aggressive move, while attracting buyers, increased pressure on merchants, especially smaller sellers, who already faced slim profit margins. The flood of returns, particularly under refund-only policies, created an unsustainable environment.
Rather than joining the escalating competition, Amazon focused on long-term sustainability, tightening return policies in October 2023 by limiting returns on electronics and clothing and adding stricter verification. Meanwhile, Shopee and Temu continued their aggressive policies, escalating the pressure.
How Aggressive Return Policies Are Destroying Small Merchants
Aggressive return policies are severely impacting small merchants, reducing their profit margins by 20-30%. Some merchants, particularly those in China, face return rates that exceed 70-90%. For example, refund rates for Chinese beauty merchants approach 30%, and those in womenswear can be as high as 80%.
The “lenient” return policies in e-commerce are undermining profitability and fueling organized refund scams. Platforms like Telegram are becoming hubs for scam operations targeting major e-commerce platforms, such as Amazon, where coordinated efforts exploit return policies to secure refunds for non-returnable or used items. Additionally, Douyin (TikTok) and Weibo have become breeding grounds for tutorials that teach users how to exploit these policies, with some users reportedly earning 30 RMB for each refund. These tutorials and trends gained traction, particularly in China, where it’s referred to as “wool pulling”—meaning "taking advantage of people." While cases like wardrobing fraud (returning used or worn items for a full refund) had long existed, the rise of these organized scams and tutorials is significantly amplifying the issue, further straining merchants.
The growing frustration among merchants has led to direct protests and widespread outcry. Chinese suppliers have protested outside Temu’s office, demanding fairer and more sustainable refund practices. On social media, Amazon and Shopee merchants have voiced their anger:
"Imagine buying an item on Amazon, completely destroying it, and making a baseless claim against the seller while getting all of my money back." (X)
"Poor sellers. They ship the item properly, only to have it refunded and returned after being used because the buyer changed their mind. I’m quitting Shopee and moving to TikTok—this is how you treat sellers?" (X)
In response to these predatory policies, merchants in China have created hashtag “20 thousand merchants unite to fight no-fault refund only” (#2万名卖家组团硬刚无理由仅退款#) on Weibo and reached number 10 on Weibo’s Hot Search list with 16.87 million views. This widespread sentiment highlights the serious damage these policies are inflicting on small businesses. They even resorted to extreme measures, such as visiting customers’ home addresses to reclaim products. This is a clear indication of how desperate small businesses have become in the face of aggressive and unsustainable return policies.
System Consequences: Economic Ripple Effect
Aggressive return/refund policies are driving small and medium-sized businesses (SMBs) out of the market. China's ongoing property crisis and low consumer spending further weakens business confidence, limiting investment and economic growth.
If these trends persist, the closure of SMBs will result in fewer job opportunities for younger generations, contributing to higher youth unemployment. For example, in Fushun, the closure of coal mines has already led to economic decline, with many young people leaving in search of better opportunities.
Furthermore, a decline in global demand from markets like Europe and the U.S. is weakening China’s e-commerce sector and factory orders. This will harm manufacturing output, potentially leading to factory closures. Such developments could undermine China’s recovery efforts through recent monetary policies, creating a cycle of instability that may mirror the unemployment spikes seen during the COVID-19 pandemic.
In response, China’s regulators, including the State Administration for Market Regulation and the Ministry of Commerce, have expressed concerns about e-commerce policies allowing customers to claim refunds without returning items. Regulators have urged companies such as PDD Holdings, the parent company of Temu, to revise their refund policies in order to protect businesses from financial instability.