Returns and Refund Management System

Reverse logistics and exactly-once refunds

Design a returns system that checks eligibility, issues labels, tracks the parcel back, grades the item, decides where it goes next and refunds the customer the right amount exactly once.

Overview

A returns system runs an order backwards. The customer asks to send something back, the system checks the policy, issues a label, tracks the parcel to a returns center, where someone inspects it, and then decides two things: what happens to the item (back on the shelf, sold as open-box, sent to liquidation, recycled) and how much money goes back, to which payment method.

Returns are a large part of retail. The US National Retail Federation (NRF) estimated that retailers expected 16.9% of their 2024 sales to be returned, about $890 billion, and 93% of the retailers it surveyed said fraud and other exploitive behavior was a significant issue for their business. So the system must be cheap to run at volume, pleasant for honest customers, and hard to abuse.

The interview usually centers on the money. A refund is a payment in reverse: it has to be correct to the cent, happen exactly once, and survive retries and failures in systems you do not control.

Questions to ask first

How many returns? — About 15% of 1 million orders a day: 150,000 returns a day, peaks after the holidays
Where do refunds go? — The original payment method by default; store credit or an exchange if the customer picks it
When is the customer refunded? — After inspection by default; at the carrier drop-off for low-risk returns
Partial returns and partial refunds? — Yes: any subset of lines, and deductions for damage where the policy allows
Marketplace sellers? — Out of scope; first-party stock only
Who is the payment provider? — A card processor with a refunds API and webhooks (examples use Stripe's documented behavior)

What you will be able to do

Walk a return through its states from request to refund, and say who moves it at each step.
Compute a line's refund amount to the cent, with discounts and tax spread correctly.
Record a refund so that retries, duplicate webhooks and concurrent approvals can never pay twice or pay more than was charged.
Choose when to refund (drop-off or inspection) by risk, and explain the trade.
Decide where a returned item goes, and handle a refund that fails after it succeeded.

Key concepts

Return merchandise authorization (RMA)
Policy snapshot per order
Refundable balance
Idempotency keys
Refund state machine
Pro-rated discounts and tax
Risk tiers
Grading and disposition
Outbox and webhooks

Functional requirements

Check which lines of an order can be returned, under the policy that applied when it was bought
Create a return (RMA) and issue a label or drop-off code
Track the parcel from carrier scans; handle returns that arrive in several parcels
Record inspection: grade, photos, notes; decide the item's next channel
Refund to the original payment method, or issue store credit or an exchange
Score risk and apply a policy tier (refund at drop-off, after inspection, or after review)
Show the customer the status of the return and the refund

Non-functional requirements

A refund is paid at most once and never exceeds the amount captured (strict correctness)
Every refund is traceable from the return, through the provider, to the ledger
Eligibility answers in under 300 ms at p99 (a target we chose)
Refunds are issued within one business day of the trigger event (a target we chose)
Provider outages delay refunds; they never lose or duplicate them

Interview questions

How do you make sure a refund is never paid twice?
Two partial returns on the same order are approved at the same moment. What stops them from refunding more than the charge?
Why not call the payment provider inside the database transaction?
How do you compute the refund for one line of a discounted order?
When should a customer get their money back?
What happens when a refund fails after it succeeded?
How do you detect return abuse without hurting good customers?
How does a returned item get back into stock?