Retail returns fraud

There's yet another downside to this painfully weak economy: Retail crime is on the rise. And it's not just an increase in shoplifting and petty thievery — bricks-and-mortar retailers are seeing a hike in more sophisticated schemes, primarily in returns fraud.

As it is, returns fraud costs retailers more than $10 billion annually. And with the economy in a tailspin, loss prevention experts say it is only going to get worse.

According to the National Retail Federation's 2008 Returns Fraud Survey, released in November, retailers will see a total of about $219 billion in returns from sales made in 2008 — a 19% increase over the $178 billion in returns recorded in 2007. Of those returns, about $11.8 billion will be fraudulent; an increase of about 8% over last year's figure of $10.9 billion.

“All of the financial crimes that retailers are experiencing are trending up,” says Paul Jones, vice president for asset protection for the Retail Industry Leaders Association (RILA) and the former head of loss prevention for apparel retailer Limited Brands.

Criminals have several strategies to fraudulently return goods. There's receipt fraud, in which falsified, stolen or reused receipts are used to return merchandise. This is an area where the scammers are getting increasingly sophisticated, Jones says.

“With the computers and the printers we have today, realistic receipts aren't a problem — [criminals] have it almost perfect at this point,” he says. Some fraudsters keep the computers, scanners and printers in their cars so they can quickly produce fake receipts in the store's parking lot.

“That's something that we never even would have thought of three years ago,” Jones says. “But it's happening today on a regular basis.”

Price arbitrage typically involves a criminal using the price tag or packaging from a higher-priced product to return a lower-priced item and pocket the difference. For example, a crook might buy two watches, and then return the cheaper one in the box that the more expensive watch came in.

Some criminals will even take a chance that the sales clerk won't open the box of the returned item, and they'll fill it with rocks or objects of about the same weight.

Then there's “wardrobing” or “renting”: This is when a customer buys merchandise for an occasion — a dress for a dance, a video camera for a wedding, a big-screen TV for a Super Bowl game — with the intent to return it when the event is over. Sometimes this returned merchandise can be resold quickly, at full price, but often it can't.

It's actually not illegal to buy an item, use it and then return it for a refund, says Joe LaRocca, vice president of loss prevention for the NRF. But retailers must fight this type of fraud because it's growing in popularity: About 64% of the retailers that participated in the survey said they witnessed this form of fraud in 2008, up from 56% in 2006.

Striking a balance

So how can retailers protect themselves against fraud? The challenge for retailers is coming up with ways to curb returns fraud, while at the same time allowing lenient return policies to remain in effect to please their customers.

“Retailers recognize that taking back returns is part of the customer relationship,” says LaRocca. “They know that customers will come back to the store to buy items with confidence, when they know they can come back and return those items that don't quite work for them.”

The first line of defense is to enact policies that make it harder for criminals to make fraudulent returns. Most retailers already have basic returns policies with stipulations, such as requiring a receipt for cash returns.

It's typical to issue refunds only in the same form of currency used for the purchase. For example, if the item was purchased with a credit card, the retailer will issue a credit only to that same card.

Offering store credits or equal exchanges to limit or eliminate cash refunds can help you curb returns fraud. So can limiting the length of time you will allow for returns.

But you need to train employees to spot returns fraud and enforce the store's returns policy when they do encounter it. And there is a lot of ground to cover in terms of training employees how to handle every type of situation.

For example, Jones says, many of the people committing returns fraud today purposely cause unpleasant confrontations at the register to get the clerk rattled and expedite the transaction.

“They'll try to create scenes at the cash register, and make the sales associate uncomfortable enough to accept the items,” Jones says. “Then it becomes a bad experience for the good customers who are waiting in line to buy — and it becomes a troubling atmosphere.” Jones says some retailers have adopted a policy of simply accepting returns when this happens, “just based on the safety aspect — they don't want people creating scenes in the store.”

Retailers need to support employees by putting up signs at the registers and printing the policy on receipts. “Your associates will do the best they can, but the more you can support them systemically with clear signage and good training, the better off they will be,” Jones says.

Crime-stopping systems

Most catalog and Web merchants already have the data to track returns fraud, but stores may need to implement an automated return authorization system. “A majority of the national or larger retail chains have some system in place to monitor or manage returns transactions,” LaRocca says.

Returns fraud was a problem when Jones was at Limited Brands. The retailer went from an internally-built program to implementing an outside system from The Retail Equation in 2004, he says. The system saved Limited Brands $50 million within the first 18 months.

Systems from vendors such as The Retail Equation and ACI Worldwide keep track of fraudulent returns activity by requiring customers to present some basic form of identification when making a return.