Returns management systems help retailers spot potential fraudsters

From November 2007

By Liz Parks

When -- and how -- do you refuse a customer seeking to return an item without a receipt? You don’t want to turn a customer against you, but you can’t ignore the statistics: Fraudulent returns total $9.6 billion a year, according to figures from the National Retail Federation. The Return Exchange’s 2005 Retail Returns Study, which also tracks returns abuse, puts the figure at more than $17 billion annually.

Clearly, retailers need to establish some parameters and systems to ensure they are saying “no” to the right people. “Retailers are caught between a rock and a hard place when it comes to returns fraud, but technology is helping them,” says Bill Alford, president of Charlotte, N.C.-based International Lighthouse Group, a provider of loss prevention and risk management services.

Just recently, Alford was shopping at a CVS drug store when a man brought in an orthopedic bandage (retail value -- $15) he wanted to exchange. The cashier scanned the receipt, received an error message and called the manager.

The POS was tied to a returns authorization database, which informed the manager that a bandage of this type had already been returned on this receipt and that this store did not even carry that particular bandage.
The cashier “said he was sorry” and handed the receipt back to the man, who “muttered, ‘Oh well’ and walked out,” Alford says.

There are three basic ways that dishonest people can make money by disposing of stolen retail goods, says Joe LaRocca, NRF vice president of loss prevention. They can fence it on the street, at pawn shops or flea markets and make about 20 cents on the dollar; they can fence it via online auction sites and make about 70 cents on the dollar; or they can make a fraudulent return at a store.

The latter option, LaRocca says, is relatively low-risk and “gives them 100 percent of the retail value -- plus sales tax.”

Given the growth in returns fraud and the revenue that retailers are losing to it, the era of “no-question returns is going by the wayside,” says Cheryl Blake, vice president of LP services for Bloomington, Minn.-based Aspect Loss Prevention, which works with retailers like T.J. Maxx, Marshalls and OfficeMax.

Some companies – Blake mentions Target – “are very vigilant in that if a customer does not have a receipt, they do not get a return,” she says. A number of retailers are now issuing returns in the form of store gift cards rather than cash, “but that only gives these people something that is still very easy for them to sell to someone else” for upwards of 80 percent of face value, Blake says.

The approach that appears to be most effective in deterring fraudulent returns is automating the process, thereby taking the decision to grant a return out of the store’s hands.

Laurie J. Sorensen, vice president of LP and shortage control for Macy’s Northwest, says company policy requires customers to provide proof of purchase in the form of a receipt or a customer return label (CRL) to receive cash or credit back. Otherwise, the system will only allow store credit in the form of an easy exchange card or merchandise-only certificate.

A CRL containing the original purchase information “is placed on the merchandise tag and scanned at point of sale,” Sorensen says. “When a customer returns an item without a receipt, we are able to scan the CRL and identify the original tender, which they will receive a refund to.”

As a result of this system, “we have been able to provide better service to our customer and minimize losses due to fraud returns,” she says.

Some national chains supplement proprietary returns management systems with video surveillance solutions and exception-based POS reporting software.

Joe Davis, director of retail and security strategy for Atlanta-based Wren Solutions and a former LP director for Wal-Mart, says returns management systems can be a deterrent to criminals trying to make an illicit gain through return fraud and a perk for honest consumers who want to make a return, but have lost the receipt.

Within its proprietary refund management systems, one major retailer applies an algorithm to specific receipts, creating a unique number associated with that receipt throughout its lifespan. Depending on the payment method the customer chooses, that number can often be tied back to individual customers.

Using the refund management services of The Return Exchange, one national specialty chain says it significantly reduced its returns rate, saving tens of millions of dollars over the past three years.

Although the chain wishes to remain anonymous, its LP executive notes that The Return Exchange provided a way to achieve, through automation, a “consistent application of our returns policy while giving our customers a better shopping experience. Store employees love the policy because The Return Exchange takes the decision about authorizing a return out of the store’s hands.”

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