By: John Mayleben
John is one of the nation’s first Certified Payments Professionals designated by the Electronic Transaction Association, an MRA consultant, and national expert on payment processing.
Retailers have been the target of theft since the beginning of time, and return fraud has been around nearly as long. Unfortunately, the bad guys have gotten even more sophisticated and have developed new ways to take advantage of the current business model and environment we live in today.
According to the National Retail Federation, for every $100 returned to a retailer, $10.30 of it was part of a return fraud scheme.
Return fraud is the act of seeking a refund on merchandise that was not purchased at your store for the amount being asked for in a return. Obviously the bad guys are after the cash or goods from a return and are looking to take advantage of a lapse in your asset protection protocols.
Return fraud can happen in a number of ways:
- Returning stolen merchandise –Seeking a refund on something they stole from you or another retailer.
- Pricing arbitrage – Seeking a refund on a previously purchased (from a competitor), lower-priced item that you have for sale at a higher price.
- Price switching – changing/replacing the price tag on an item with a higher price and then seeking a refund.
- Open box fraud – A variation of price switching, someone buys an item, opens the box, returns the item and then re-buys that same item at a discount because it is an “open box” that you offer at a discount.
- Broken item – Buying a new item from you and switching it with an identical item that is broken. A version of this is where the bad guy will buy an item, remove accessories and parts and then return the partial, now non-working item or an empty box.
- Wardrobing – Purchasing an item for short term use (clothing for a special event, etc.) with the intent to return it after the event is over.
While returns are a necessary part of the retail business model, you need to make sure that you have procedures and systems in place to protect your business from return fraud.
Preventing return fraud is a multi-step approach that starts with understanding your business and the frequency of returns within your business. If you see an uptick in returns or a change in the types of items returned, you may be being targeted by the bad guys for return fraud.
You need to have policies in place that help identify and prevent return fraud. All employees should know what the policies are and enforce them.
Here are some high-level policies that will help prevent this type of fraud:
- Only authorized staff can handle a return. This minimizes the opportunity where a “friend” of the sales clerk can work in collusion with a staff member to commit fraud.
- If you sell items that might be candidates for wardrobing, develop a price tag that would prevent someone from wearing the item to an event without removing the tag. When items prone to wardrobing are returned, make sure that they haven’t been worn or used before allowing the return.
- Create a list of serial returners. Make sure that you are tracking the items being returned and who is returning those items. If the same names pop up, develop a policy of only swapping for the same thing or limiting any return to a store credit. If you have a variable policy that includes store credit, make sure that you can track that future purchase and prevent someone from returning an item bought with store credit for a cash refund at a future date.
- Always require ID for a return.
- Always return the money via the same method of payment. Example: If they paid with a credit card, only return the money to that same card.
- Consider having a “no cash refunds” policy. If you only offer store credit, this removes a lot of the incentive and discourages the bad guys from attempting return fraud in your store.
- Establish limits on the time to return something. You could also have a tiered option. (Example: 10 days for a cash refund, 30 days for an in-store credit.)
- Require receipts. As you expect, most return fraud occurs without a receipt. You may want to have a policy of in-store credit only, if someone doesn’t have a receipt.
- If you allow multiple staff members to handle returns, keep track of who handles each return and review that to see if any one person is doing more returns than others. This may be a sign of collusion with a bad guy.
As with other aspects of running a retail store, you need to develop strong procedures and policies that are clear and concise, and then share them with your staff. With these policies in place, you will make yourself less of a target to the bad guys.
