Identifying Fraud

Over a 90-day period, a single individual returned products 40 times to a large retail chain. The dollar amount of products returned was more than the dollar amount this individual had purchased, analysis later determined.

In a similar scenario at another chain, a fraudster purchased 262 items and returned 183 items within a 12-month period. Again, the returns ($10,485) totaled more than the purchases ($8,643). Analysis later showed that the items were kept an average of 12 days and that, while the average purchase was $32.99, the average return totaled $58.90.

In a third incident at yet another chain, two individuals returned merchandise worth $1,851 to three different stores within a three-hour period.

Returns fraud and abuse cost retailers an estimated $15.5 billion in 2007, according to the findings of two surveys conducted last year among retail loss prevention executives. One study was done in the spring by the Gainesville, Fla.-based Loss Prevention Research Council (LPRC), the other was conducted in the fall by NRF.

What often makes it difficult to detect returns fraud is the lack of a uniform process for authorizing a return. All three of the incidents cited above were flagged after the retailers began implementing an automated return authorization program that uses statistical modeling to detect the abnormalities that point to possible fraud.

“Large chains have many stores and many cashiers individually making returns decisions,” says Tom Rittman, vice president of marketing for Irvine, Calif.-based The Retail Equation, which sponsored the LPRC study. “But retailers using a return authorization program can automatically and very quickly examine all return transactions and identify people who fall outside the norm on a returns score.

“As soon as someone falls [outside the retailer-defined definition] of normalcy, whether it’s measured in dollars or numbers of returns, we can identify it and electronically send the cashier a message to decline the return,” Rittman says.

Because a return transaction can be one of the most sensitive interactions between store employees and customers, a return authorization program can make the process easier for those “good” customers who typically account for 99 percent of all transactions. Such a process makes it easier for a cashier directed by the program to decline a return to tell a customer, “I’m sorry, but our system says this return cannot be authorized.” The cashier can give the customer a number to call to learn why the return was declined and to appeal the process, if they choose.

“By making it easy for customers to appeal a decline, management is able to provide a consistently high level of service,” says Mike Smith, senior vice president of loss prevention for Finish Line, a chain of 700-plus specialty stores that operate under the Finish Line and Man Alive banners.

The system “takes pressure off the cashiers when they have to decline a return and also makes it possible for us to have one consistent returns process applied evenly throughout our stores.”

Finish Line was scrupulous in selecting a returns software application that was easy for employees to use and easy for customers to understand. “We were most impressed by The Retail Equation,” Smith says. “We liked the extent of their history with their product, as well as their list of retail customers that were using it.”