Columnist Eric White writes the LPXtra blog and is director of retail strategy for Wren Solutions, and formerly served as a loss prevention executive for Walmart.
The NRF estimates that return fraud during the holidays is 23 percent above full year rates, due in large part to 20 percent higher return rates and seasonal hiring practices.
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Return fraud is no small problem for retailers. The National Retail Federation's (NRF) 2009 Customer Returns in the Retail Industry Report estimates industry-wide return fraud and abuse to be in the $9.6 to $14.8 billion range. Return fraud represents a particular problem during the holidays. NRF estimates that return fraud during the holidays is 23 percent above full year rates, due in large part to 20 percent higher return rates and seasonal hiring practices.
Yet with an estimated 34.8 percent of gift recipients returning at least one gift item during the holiday season, according to the same report, retailers simply must accept returns in order to provide good customer service. And so retailers pursue the delicate balance between serving their legitimate customers and protecting themselves against fraud. Here is some insight into the different types of return fraud and ideas for striking that balance between customer service and fraud prevention.
The many faces of fraudulent returns
Return fraud comes in many forms, offering criminals a variety of ways to steal cash and goods from the retailer. Each of the different ways takes advantage of different weak points in the retailer's return policy.
"Wardrobing" is a practice in which the customer purchases the merchandise, uses it, and returns it. This kind of fraud is generally perpetrated by the "personal use thief," who may not even perceive the practice as theft. The 16-year-old who really wants to wear a certain dress to prom may not realize the gravity of this activity. However, this leaves the retailer with used or damaged inventory which must be written off or significantly discounted. This kind of theft may also include the return of items that have been broken or damaged through use, claiming that the product was damaged prior to purchase. Although the damage was not the retailer's responsibility, many people feel "entitled" to bring it back to the store because the retailer will accept it.
Some fraud is perpetrated by organized retail criminals who are out to make large sums of money off of fraudulent transactions. They may return merchandise purchased with fraudulent tender. Organized retail crime (ORC) rings may also perpetrate large volumes of return fraud by using an extensive and elaborate network of players. Serious criminals work in rings and pay "boosters" to steal items from designated stores. Then they pay other people to go return those items for a refund. The use of a large network of individuals makes it difficult for retailers to flag individuals as high risk because each booster is conducting only a single part of the transaction. Another trick is to have someone enter the store and purchase a designated good to get the receipt for it, and then return to the store through a different entrance to steal one or more of that same item. Then they have a receipt as "proof of purchase" should they be stopped at the door, and they have a receipt to enable return of the stolen item. Using these rings, it is possible to perpetrate return fraud on a massive scale with any single retailer.
Internal theft is another category. This kind of fraud can get expensive quickly, as employees have full access to resources and can commit fraud as frequently as desired. The employee may receive a legitimate return from a customer and then simply rescan the item for a second time, taking the cash from the register for themselves. This type of return fraud costs retailers double, as they now have registered in the system that they have two of the returned items on hand in inventory, when they actually only have one. Another trick is to have a friend purchase an expensive item in closed packaging and then replace that item with another, lesser or no-value item before returning it in the packaging to the store. The employee then processes the return with receipt, purposely failing to open the packaging and, if questioned, claims that they did not think to look in the packaging.
All of these losses add up for retailers and force them to put policies in place to protect themselves.
Tightening the loopholes
Retailers have done a lot to tighten the loopholes, which previously made return fraud easy. For example, by requiring a receipt, retailers can greatly reduce return of items that may not have even been purchased at that store. Receipt returns also make it easier for retailers to verify the price of the goods purchased.
Retailers have also cut down on the attractiveness of receiving cash for refunds by reimbursing to credit cards as opposed to handing out cash. This deters thieves who are looking for immediate cash returns. Exchange-only and in-house credit return policies also cut down on fraudulent returns made in order to access cash.
And the future holds even more exciting prospects for retailers when it comes to preventing retail fraud. As RFID and other emerging item-level tracking technologies gain prevalence, retailers will have the capabilities to track purchases by item, as opposed to by SKU, as is done today. This will eliminate the problems of multiple refunds made on a single product. It will also provide detailed information on when and for what price the item was purchased and avoid unintentional or purposeful returns of sale items for full price. Item-level tracking can also prevent out-of-warranty credits and returns by providing a record of exactly when that particular item was sold and when the warranty expires.
The best policies
The trick for retailers is to successfully manage that balancing act between protecting themselves with policies, while simultaneously offering great service and giving legitimate customers an opportunity to return items that they do not want, like or somehow do not work for them.
There are some golden rules for retailers when it comes to managing returns policies. For one, communication is key! Establish clear return policies and clearly and outwardly communicate them to customers. If customers understand the return policies, they can make decisions accordingly and won't be surprised if and when the time comes when they need to make a legitimate return. For example, train cashiers, especially during the holidays, to clearly communicate with customers, "If you need to return this, you must have a receipt and it must be within 90 days of purchase." Or: "If you should need to return this item for any reason, we are happy to issue you an in-store credit." Customers who understand the returns policy will be more comfortable with their options.
Another tip is to evaluate situations on a case-by-case basis and get management involved when needed. If a legitimate customer has a unique situation, then a manager needs to be pulled in to make a judgment call. In the end, no amount of technology or communication should inhibit the manager's authority to make a decision to take care of the customer.
It's important to track odd returns and/or repeat offenders. By using driver's licenses, credit cards and video surveillance, retailers can create a track record of abnormal activities or repeat offenders, flagging them for investigation. While retailers should enter into transactions assuming that they are legitimate (because the vast majority are), it is not necessary to fall victim to repeat offenders. Retailers can easily flag transactions, credit cards, or even individuals who have questionable intentions so that they are refused service on their next visit.
As retailers work toward technologies that continue to close the window on return fraud through more specific, item-level tracking, loss prevention professionals can protect themselves by being aware and making smart decisions when it comes to putting policies around how, when and where items may be returned.
About the author: Eric White leads the retail strategy practice at Wren, providers of physical security solutions used by some of the world's most innovative and respected retailers. White has 20 years of experience in loss prevention, asset protection and physical security and writes about his experiences in the Wren LPXtra blog. White can be reached at firstname.lastname@example.org. To learn more about Wren's solutions, visit www.wrensolutions.com.