Customers tired of waiting for their return to be processed? You tired of processing returns? Incentivize exchanges and just automate it already.
If you want to play it safe, then turn this setting off. When it's off, each return request will go into a queue for your team to review, so you can make a decision, and then finalize it.
However, if you want to be a little more daring, you can turn on Auto-finalize Exchanges. What happens is that if your customer chooses to exchange all their items (i.e. they don't want a gift card or a refund), they can qualify for a faster exchange. Once the return label gets scanned by the carrier, then the request will automatically be approved and the new order with the exchanged items will be created.
So if you trust that your customers will send back the right items and you don't feel like you need to wait for it to arrive at the warehouse and deal with the hassle of inspecting every return, take this setting for a spin.