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How Return Fraud Erodes Your Bottom Line

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The National Retail Federation reported a staggering $10.9 billion loss in 2014 in retail income due to return fraud. This is based on numbers from 60 retailers surveyed. The holiday alone accounted for $3.8 billion of that amount.

This is an increase of over $1 billion from last year. Much of this is caused by organized retail crime. Most retailers aren’t even aware of how prevalent this is.

Roughly 38% of those polled said they’ve seen an increase in credit card fraud returns. That is slightly higher than the roughly 30 percent that reported seeing an increase in debit card fraud.

Another form of return fraud involves gift cards. Pricey purses might be stolen and then returned for in-store credit that is issued to the deceitful customer by means of a gift card.

Bob Moraca, the NRF’s vice president of loss prevention, explains that gift cards are sold online. People who want cash badly enough are willing to sell a $100 gift card for $80.

 “By selling the gift card online, criminals can receive up to 80% of the retail value, versus 10-20% on the street corner,” says Joseph LaRocca, vice president of loss prevention at Retail Partners, a consulting firm in Los Angeles.

Retailers are putting some stricter measures in place to prevent the pawning of gift cards by thieves. For instance, some retailers have sent legal notices to these marketplaces to restrict resale of these cards, while others, says LaRocca, “are using sophisticated technology to block these companies from checking the value of the cards online.”

Other ploys involve people buying expensive items and paying for the extended service plan, only to call the service provider and complain about the item being faulty and demanding and getting a refund. One scammer hit on the same company over 200 times in 2 weeks, pocketing a lot of cash.

Another reason for the rise in fraudulent returns are e-receipts. Retailers also saw a large increase (from 70% to 82%) of returned merchandise that was purchased via fraudulent or stolen payment methods.

 “The problem of return fraud has forced many retailers to adopt policies that require customers who are returning merchandise to show identification,” the report said. “Retailers estimate that 14% of the returns made throughout the year without a receipt are fraudulent and as a result, over 70% now require customers returning items without a receipt to show identification. Even when a receipt is present, more retailers polled this year say they ask for identification.”

The Return Exchange, a company that provides fraud and abuse detection products to retailers, suggest stores review their return policy every year and update it to keep up with new methods of return frauds.

They suggest looking for “red flags”—areas where a store is suffering measurable losses due to return and fraud abuse: the return rate has increased in two of the last three years; average markdown rates following a return are increasing; the percentage of returned merchandise you are able to resell has declined.

 A common form of return fraud is “wardrobing” or “renting”: a customer buys merchandise, uses it briefly and returns it as if it is new. More than half of return frauds are of this type.

Employee fraud—return fraud that involves an employee’s help, such as an employee providing receipt stock to a fraudster—was found to be involved in 8.7 percent of all fraudulent returns.

They recommend not basing decisions on intuition but on hard data about returns, including sales and markdown rates of returned items. They add that staff should be trained on the policy and expected to enforce the policy uniformly.

TAGS: retail, retail trends, retailers, management, loss prevention,
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