Minding the Store

Jun 01, 2005 9:30 PM  By

As a multichannel merchant, you have to deal with fraud on many levels, from orders placed with stolen credit cards to employee pilferage in the warehouse. And once you enter the retail channel, it opens up a whole new level of fraud opportunities. Sure, there’s the risk of customers shoplifting. But perhaps even more potentially harmful is store point-of-sale (POS)-based fraud.

Employees operating your cash registers can create numerous opportunities to steal from you — price overrides, refund fraud, void fraud, invoicing scams, and more. Happily, there is software to prevent shrinkage at POS, systems that work on the basic premise that there are patterns to all business transactions. Such software uses sophisticated algorithms designed to help spot exceptions to the norm — thus, “exception-based” reasoning — and to alert management when particular employees or transactions either divert from the norm or fit in with a recognized illegitimate pattern. Such divergences are noted over time or, with sophisticated enough technology, in real time, and the warning flags go up.

Let me call you sweetheart Much like inventory, retail fraud comes in a variety of shapes and sizes. One of the primary methods used by employees is “sweethearting,” theft carried out by collusion between an employee and a customer. It is so named because it most often occurs between a cashier and his family members or friends. With sweethearting, a cashier may fail to charge the customer for some items or may ring up only one item of a multiple purchase. Or in stores with no bar code scanning (certainly not yours!), the cashier may ring up an item with a lower price or ring it up as a cheaper item. In another variation, a cashier may apply discounts where they are not justified.

A survey by the Washington-based Food Marketing Institute reported that 25% of employee thefts could be attributed to sweethearting. Many large retailers use closed-circuit cameras to both detect sweethearting and intimidate employees out of trying it — but ironically, with video surveillance now commonplace, these tools have lost their ability to frighten anyone into submission. They’ve also inspired would-be practitioners of retail fraud to find more-sophisticated ways to avoid visual detection.

An example of this kind of fraud evolution is in the substantial losses experienced by many retailers ever since more and more began converting paper gift certificates into electronic gift cards. In the May 2005 issue of the National Retail Federation publication, Stores, writer Liz Parks explains that dishonest employees can “launder” gift cards, steal them outright, or switch or convert cards. The result: Consumers walk away with a zero-value card while the employee pockets the card with the monetary value. Gift cards bought with stolen credit cards or bad checks may be sold for 50%-90% of their value on Internet auction sites, and gift cards given in exchange for returned merchandise have helped to perpetrate chargeback fraud.

Dave Johnston, XBR product manager for Cleveland-based business analytics tools provider Datavantage, told Stores that all types of retailers are now putting programs in place that ensure that they can report properly on gift cards — with some thinking of buying customer-facing readers for use during transactions. Having the consumer, not the employee, swiping the card “prevents the employee from taking possession of the card and being able to do any kind of an illegal exchange,” Johnston said.

Surprisingly, the fraud-avoidance benefit to this kind of do-it-yourself strategy is a key motivator behind a related trend: the self-checkout. Such technology has been increasing in popularity, having gained a foothold at major supermarket chains before spreading to big-box retailers such as Home Depot. Reports indicate that retailers can turn to self-checkout to help curb their theft losses.

Self-checkout isn’t appropriate for all retail operations, of course. But loss prevention software pretty much is.

By defining criteria that each transaction must meet and alerting management if they are not met, such software helps retailers prevent fraudulent credit and check transactions as well as employee discount abuse, sweethearting, and personal order processing; it can also help reduce returns fraud.

The cost and cost-effectiveness of such software installations, as always, depend on a wide set of variables, including the size of the business (in terms of both dollar value and the number of POS terminals and locations), type and frequency of transactions, number of employees, classes of merchandise, and existing or needed systems and infrastructure. All of these conditions make it virtually impossible to ascertain a set or “typical” price for such a system — or so software vendors assert. But the rule of thumb is that such investments can be gauged by the length of time needed to achieve a return on investment. According to a 2004 AMR Research alert, “Shrink Reduction Strategies — Proactively Control Lost Inventory,” current users of sales audit and loss prevention software report measurable ROI in 3-12 months. And now, just a few of the vendors in this area:

  • Applied Systems Intelligence (ASI) is a Roswell, GA-based software products and engineering services company that offers Fraud Detection Associate, a solution designed for payables, receivables, insurance, banking, and POS. ASI says the software will detect problem situations and issue alerts in real-time, allowing for corrective intervention prior to substantial losses being incurred. Using this technology in unison with existing systems and data, ASI contends, will result in a quickly measurable ROI.

    ASI’s software offers active detection of anomalous transactions and behaviors associated with theft or unethical purchasing and payables practices; advanced trend analysis using a hybrid approach coupling artificial intelligence with advanced statistical analysis; and advanced pattern recognition and identification.

  • CRS Retail Systems, based in Newburgh, NY, provides retail management software, hardware, and services. Its CRS Retail Suite is designed to integrate the entire multichannel retail enterprise, linking stores in real-time to one another and to corporate applications at the home office. As part of this system, CRS LossPrevention offers tools to decrease shrinkage, improve the effectiveness and efficiency of investigators, and provide detailed evidence and case management to aid in prosecution. It includes Exception Report Management that can be run on demand or scheduled to run behind the scenes, identifying problem areas and summarizing suspicious activity so that investigators can immediately concentrate on these areas rather than search the database from scratch. Its Quick Focus analysis tools research transaction activity without waiting for reports to run. Key data points are conveniently hyperlinked for detailed drilling down to discern whether suspicious activity or patterns are fraudulent.

    Barnes & Noble has added CRS’s Focus Loss Prevention module to the CRS Retail Ovation system it uses to run nearly 6,000 active terminals nationwide. CRS reports it was able to load historical data into the system during implementation so that the bookseller could begin realizing the benefits of the system immediately.

  • Datavantage is, as mentioned, the developer of XBR Loss Prevention. According to the Cleveland-based company, whereas other loss prevention systems can take several days to report a suspicious transaction, XBR can flag incidents almost as they happen. The system is designed to use exception-based reporting methods to immediately address transaction types that include refund fraud, void theft, fraudulent credit-card activity, dropped sales, employee discount abuse, multiple redemptions of gift certificates, misuse of petty cash, manually keyed credit cards, cash refunds and postvoids after hours, cancels and midvoids, employees processing their own sales, price overrides, and no sales.

    Smart & Final, which operates nonmembership warehouse stores for food and food-service supplies in six western states and northern Mexico, uses XBR to funnel data from all of the chain’s 235 stores into one server, to more accurately locate patterns of fraud that were previously like finding the proverbial needle in a haystack. Natural grocer Wild Oats Markets is another chain that has been using XBR, since April 2002. According to William Navarre, national director of loss prevention, Wild Oats processes all the transactions on a daily basis. “We have 12 different control points set up,” he explains. “We utilize them to see if there are any trends relating to fraud or any training issues we may have.”

    An example of just how complicated — and intriguing — the technology integration possibilities have become is in companies that have linked their closed-circuit TV (CCTV) systems to the POS software. Tom Rittman, director of marketing for Datavantage, says that with the transition from analog to digital video, retailers now have the ability to time- and date-stamp their CCTV video and, through connectivity with the corporate office, identify a suspicious transaction through the POS software, then pull up that specific transaction on video.

    Rittman reported that Finish Line, a sporting goods retailer, is combining XBR with Viewops online video service from New York-based Ivex, while Smart & Final uses its digital video to dial into the stores to review suspect transactions and quickly determine whether they’re fraudulent or a result of lax training. Wider adoption of such integrated technology depends on the increased availability of broadband connections.

  • IntelliQ, a London-based analytics company founded in 1991, now focuses on retail, primarily in the European market. The company’s flagship solution is RetailKey Loss Prevention, designed to combat internal fraud, error, and procedural weakness, finds patterns in billions of electronic POS transactions. RetailKey is designed to spot all the sources of internal shrinkage. Its major functional areas include refund analysis, discount abuse, and credit-card abuse (to spot suspicious activities relating to specific credit cards, including collusion between staff members). The company says, however, that RetailKey can look beyond these specific areas to focus on voids, no-sales, price overrides, dump codes, and specific departments or products as well. IntelliQ further contends that its system minimizes the burden of loss prevention reporting on overstretched IT resources and can provide ROI in a few months.

  • LP Network, dba Security Source, is both a hardware and software vendor and a services provider. The Andover, MA-based company says it goes beyond traditional loss prevention by offering a suite of asset protection solutions and services that help control shrinkage and lower costs. The solutions are said to easily integrate with all brands of loss protection hardware and data, allowing companies to leverage their existing infrastructure.

    A Security Source client, high-tech tools and gifts cataloger/retailer Brookstone, wanted to have an integrated view of data from a variety of sources, including POS exceptions, audit programs, and inventory transfers. The company’s vice president of loss prevention, Wayne McBrian, says Security Source helped identify critical information and perform in-depth analysis needed to optimize Brookstone’s LP program investment. Security Source correlated actual shrinkage with store factors including returns, destroyed merchandise, CCTV presence, and other key metrics, allowing Brookstone to focus more strategically. One analysis showed that target stores that had received CCTV installations along with other loss prevention initiatives realized an average shrinkage reduction of $24,000 per store, period over period, along with a significant reduction in false returns.

  • NSB Group assumed its position as a retail solutions leader in North America and Europe when the Montreal-based company acquired STS Systems in December 2000. NSB offers the Connected Retailer suite of solutions, including loss prevention, CRM, and sales analytics. By analyzing a central data mart of store-level transactions, it automatically detects patterns of fraudulent activity and procedural violations that break user-defined business rules. It has an exception-reporting engine, drill-down capability, and dynamic assignment of severity status codes.

    Dollar General, a retail chain with more than 6,200 stores in 27 states, cited increasing shrinkage rates as a main reason it missed analysts’ expectations in the third quarter of 2002. The company selected NSB’s solution to bring the problem under control. Dollar General’s director of asset protection, Jerry Snider, reports that the system was user-friendly, with investigators in the field able to log in from their laptops to look at recent occurrences in their assigned group of stores. A side effect of the installation was the discovery that it helped uncover other patterns of fraudulent activity. “If you’re dealing with someone who is conducting false transactions, there may be other problems such as back-door security or theft of goods,” notes Snider.

  • Retail Expert collaborates with clients to enhance their perspective of loss prevention and reduce shortages; its solutions are used by some of the nation’s top apparel, housewares, grocery, gift, and drug retailers. The flagship product, NaviStor, permits management of critical loss prevention data by exception and benchmarking of key shrinkage indicators to reduce shortages and increase profits; it also provides a scorecard to track cashier and store performance. Another product, NaviScript, is designed to reduce shortages and increase profits in pharmacies. And the Woburn, MA-based company’s NaviTrack is designed to help manage and reduce shrinkage among direct-store-delivery (DSD) vendors.

  • Trax Retail Solutions in Scottsdale, AZ, offers ShrinkTrax, which combines intelligent data-mining and analytics, narrative action plans, employee behavior modification, in-store operational best practices, case management, and ongoing effectiveness management services. It identifies dishonest and underperforming cashiers while maximizing customer service and checkout efficiency. Besides ShrinkTrax for POS, modules include Shrink Trax for direct store deliveries to monitor activity at the time deliveries are made; ShrinkTrax for Scales, providing tracking and analysis of data from the perishables departments; and ShrinkTrax for CCTV, linking in-store CCTV systems to transaction data.

The company says it incorporates the employee behavior modification process to help build a culture of “shrink awareness and accountability.” Trax trainers works with store managers on how to identify and manage the behaviors that enable shrinkage to happen in the first place.


Jeff Morris is a freelance writer based in South Salem, NY, who writes frequently on technology and retail topics.