Information on Merchant Accounts,
Ecommerce and Credit Card Processing

November 15th, 2006 by Jamie Estep

Merry Christmas, Return Fraud and the Holidays

Filed in: Fraud |

Caught StealingWith the busiest shopping season for many retail and internet merchants right around the corner, businesses are prepping for the holiday chaos. The busy shopping season also brings the largest season for consumer fraud. Consumer fraud against merchants including ‘return fraud’ costs businesses billions of dollars a year.

With an estimated 3.5 Billion dollars of return fraud during this holiday season, it is very likely that most businesses will be affected by return fraud in some way.

What is return fraud?

Return fraud is when a consumer returns merchandise to a store, with a purpose other than a genuine return. I did some research on return fraud, and found a couple of main types of return fraud that businesses will see.

Returning multiple items on the same receipt is when a customer will return a quantity of an item on a single receipt, by making multiple copies of the receipt. They may purchase additional items at discount and then return them to another store with high prices using fake receipts.

Returning a lower priced item in a higher priced item’s packaging. This would occur when a customer purchases two similar looking items at a very different price. The customer would then put the lower priced item in the higher priced package, return it and keep the higher priced item for themselves.

Renting Stuff is a very common type of fraud for electronic and clothing retailers. A customer will buy some electronic device, or some piece of expensive clothing, use it and then return it. Businesses usually cant sell the returned goods for full price, and take a loss when they discount it. This is more common with higher dollar merchandise.

Stolen Merchandise Returns occur when someone tried to get a refund on merchandise that was stolen, often from the same business the return is taking place at. Employees may also steal merchandise and then have an acquaintance return it for cash.

Counterfeit Money actually tops the entire list of the most common form of return fraud, and can consist of fake checks, or counterfeit cash used to pay for merchandise, and then later the customer tries to return it for real cash.

Employee return credit fraud is one of the most common types of fraud that exists. An employee will issue a credit on their own, or a friend’s credit card through a business’s credit card terminal. This is often overlooked by managers or employers as it can appear as a legitimate refund.

How return fraud costs a business:

Businesses lose to return fraud in several ways. They may be buying merchandise that they never sold, or that was stolen from them.

Businesses may not be able to resell the merchandise that was returned if it were heavily used, or it was simply something that cannot be resold.

A business may be making a payment to one of their employees, or may be loosing money by accepting a deceptively returned product.

Ways to combat return fraud:

A business should have a very clear return and refund policy outlined for their customers, and they should stick to it. I think it should be fair, as there are situations where returns are completely legitimate, but strict enough to stop some of the fraud that is likely to occur.

Businesses should not accept returns without a receipt, and if they do decide to accept a return without a receipt, store credit should be issued instead of cash. Also, if a customer made a purchase with a debit or credit card, the return should always be credited to that exact card. This is also an important chargeback prevention measure. If a business gives cash and then the customer charges back a transaction, the business can lose the chargeback in addition to the money they already refunded.

Implementing a system that keeps track of returned receipt numbers will prevent fraud from copied receipts. For some businesses this may not be a cost effective option, but some system should be used to keep track of returns in the event that electronic means are unavailable.

Employee return credit fraud can be combated by having a business’s credit card machine or POS system to require a password or key to perform a return. Most credit card machines and POS systems can be setup with some type of security to prevent this type of fraud.

Return fraud normally occurs on Friday, Saturday, and Sunday.
Since these are the busiest shopping days, fraudsters go because there is a good chance that their return will be overlooked.

Who’s a target?
The biggest targets of return fraud aren’t necessarily large retailers, as these companies often have complex returning systems designed to prevent return fraud. Target now only allows two non-receipt returns per year, per customer, and many other super retailers are taking similar measures. Take the time to look at your current setup and determine if you are a possible target of return fraud.

Your customers make your business possible, but not every person who visits your store is doing it for legitimate purposes. It is always a good practice to make customers happy, but care should be taken that a business isn’t being taken advantage of in the process.

Comments are closed.