With March recognized as “Fraud Prevention Month,” retailers are presented with an opportunity to examine their operations and policies that protect their bottom line in today’s tough economy. It’s no secret that sales are down; however, what many retailers don’t realize is that the rise in fraudulent and abusive returns is a contributing factor, costing them millions in profits. In fact, according to the National Retail Federation (NRF), returns and exchanges increased almost 20% over the past year. More and more, desperate consumers are using returns as “the new cash” creating a devastating effect on unwary retailers.

Return fraud can take many forms. For example, with “wardrobing,” customers buy merchandise for short-term use with the intent of returning it after they have used it. Dresses for special occasions, video cameras for weddings, or big-screen TVs for a Super Bowl game are some of the most commonly “wardrobed” items. Receipt fraud is another common form of fraud, in which customers use falsified, stolen or reused receipts to return merchandise. (Did you know that there even a Web site where a shopper can order and print false receipts?)  Others simply shoplift the items in question and return stolen merchandise for the full retail price. Price switching, in which customers put a lower-priced tag on merchandise with the intent of returning it for full retail price; and price arbitrage, in which customers buy similar-looking but differently-priced merchandise and then return the cheaper one at the more expensive price, are also examples of fraud and abuse. Lastly, employee fraud is a serious problem for many retailers, whose employees assist customers in returning stolen goods for full refund price in order to get a piece of the action.
           
Paul Jones, vice president of asset protection for the Retail Industry Leaders Association (RILA), makes a compelling case for the use of data-centric solutions to refund management.

“Of all the solutions and applications available to retailers today, I believe that refund management is the most underutilized,” Jones explains. “Many retailers have implemented in-house systems that add value, but the increased data analytics provided by [some] solutions can save you millions of dollars in shrink and refund expenses, and drive profitable sales.”
           
One such solution, Verify-1®, a return authorization tool utilized in more than 12,000 stores in North America, is uniquely designed to take the subjective nature out of the return process, tagging only those customers who consistently commit fraud while, at the same time, protecting valued customers’ personal information by storing it in a secure database. In a study involving five retailers, Verify-1 reduced the return rate an average of 7.5% over a 90 day period, equal to over $6 million for every billion dollars in gross sales.
           
The Retail Equation’s solution focuses on repeat returners and targets those with suspicious activity. For example, one returner purchased 262 items in a one year period for a total of $8,643. However, this same person returned 183 items in the same period for a total of $10,485. On the surface, these returns may have seemed legitimate; however, by using shopper-centric technology to target the actual dollars and cents amounts of those returns, it became evident that this customer was actively engaging in fraudulent behavior. Likewise, another couple returned $1,851 across three stores in a three-hour time span, in some cases returning the exact same items more than once. Sales clerks at the three different stores were unaware of their activity at other stores; however, the system put out an alert based on the items and dollar amounts returned.
           
Retailers must be proactive if they are to protect themselves from fraud and abuse. This includes implementing a variety of approaches for fraud prevention, including:

• Proper Training – Work with staff to properly train them on company return policies and to follow up that they  are utilizing those guidelines. This includes warning employees of the ramifications if caught processing fraudulent returns.
• Utilizing Technology – Implement return authorization programs such as Verify-1 to prevent fraudulent return activity, take the subjective nature out of the return process and protect customers’ privacy.
• Adequate Staffing – Provide proper staffing to increase positive interactions with customers as well as to deter fraud.
• Education – Remain updated on the latest fraud trends and work closely with staff to employ prevention strategies.
• Learning from Peers – Join a retail trade association like NRF or RILA and leverage the loss prevention expertise of your peers.

Today’s economy is bringing out the best and the worst in people, causing businesses to become more innovative and to look for cost-effective ways to meet their customers’ needs while increasing their profits. Unfortunately, it is also causing some consumers to resort to illegal means to make a quick buck and to get things they did not pay for. While many retailers recognize the importance of dealing with fraudulent and abusive returns, they must fully understand the effect these returns can have on their bottom line. However, smart businesses today understand that a penny saved is quite literally a penny earned; and they are taking proactive steps to thwart fraud before it occurs.

About the Author: Tom Rittman is vice president of marketing for The Retail Equation, the industry leader in retail transaction optimization solutions. The company’s applications use statistical modeling and analytics to predict consumer behavior, and its software-as-a-service delivery enables retailers to achieve significant and measurable return-on-investment. Its solutions are operating in more than 12,000 stores in North America, supporting a diverse retail base of specialty, department, sporting goods, auto parts and more. For more information, visit www.theretailequation.com.