Every day, retailers across the country issue refunds to customers. The reasons range from a bad fit to the wrong color to a changed mind. The transactions are generally simple — the customers get money or a credit card refund and the store gets merchandise that it needs to resell.
But too often, the transactions turn out to involve refund fraud, a crime that, according to one study, cost 15 surveyed retailers more than $450 million.
Retail refund fraud takes many forms. In some cases, people return merchandise they never bought from your store. In other cases, employees steal items and then pass them to non-employee cohorts who return them to the stores for refunds. They then split the proceeds. (See below for examples of other fraud tactics.)
The goal for your company is to prevent or reduce instances of refund fraud while maintaining superior customer service. Here are nine tips that can help you battle this crime:
- Require receipts. This doesn't eradicate refund fraud, but it is a powerful deterrent. As an alternative, get the name, address, and phone number of the person returning the merchandise and ask for a reason. For added security, require a picture ID, preferably showing the person's address. In certain cases, some retailers even make follow-up phone calls to verify that the customer whose name is on the refund slip is the same person who made the purchase and the return.
- Set cash limits. When the price of the merchandise exceeds a set amount, send the refund by mail. Don't publicize the ceiling, however, since thieves might simply grab merchandise that falls just under the limit.
- Give gift receipts. In these cases, the purchaser of an item gets a receipt that doesn't include the price and can be included with the gift. The store maintains the price information in its computers and the recipient comes in and presents the receipt for the return.
- Use credit vouchers. These eliminate the need to hand out cash. Thieves generally don't want to fill out forms or show IDs, so requiring basic information for vouchers helps deter fraud. Vouchers are handy when customers want to return items without sales slips, when the items are gifts, when the returns come a long time after the purchase, or when the items are purchased by third parties with checks or credit cards. Number the vouchers sequentially and require managers or supervisors to authorize returns with their signatures. You can add to the deterrent factor by requiring two approval signatures for all refunds, cash or otherwise.
- Mine data. The information you gather during the returns process contains a wealth of fraud-fighting information. Look for fraud clues such as the same phone number on file for multiple refunds by different customers, disconnected phone numbers, and addresses that are close to where an employee lives.
- Confirm payment. Before initiating a refund, make sure your business received the initial payment. Some criminals purchase merchandise with checks that bounce or credit cards that have been reported lost or stolen. Confirm the payment later if it's not possible at the time of the refund. You may still uncover a pattern of employee or customer fraud.
- Centralize refunds. Limit the number of employees who can issue refunds. This helps ensure your company's refund policy is being followed and helps deter employee fraud.
- Monitor refunds. Keep an eye on factors such as average return amounts, the employees giving the refunds, the frequency of refunds by sales location, and the type of merchandise returned. Watch for a higher frequency of returns when particular employees are on duty. In addition, rely on surveillance cameras and the observations of security officers.
- Perform bag checks. Many retailers check the bags of customers coming into the store. But another way to prevent internal theft is to routinely look into the bags of employees exiting the store at the end of their shifts. Also, limit the number of entrances and exits.
The best time of the year for refund fraudsters is the post-holiday rush to return gifts. In the chaos, they might go unnoticed amid legitimate customers seeking refunds or exchanges.
How the Cons Work
Refund fraud can be creative and tricky. Here are just a few of the scams to watch for:
- A thief steals merchandise from your store or elsewhere and then returns it for a store credit. The shoplifter uses the credit to make a legitimate purchase and then tries to convert that to cash with another return.
- Technologically inclined criminals create authentic looking receipts with a scanner, computer and printer.
- In some cases, criminals comb through trash near the store entrance to find discarded receipts and use them to make fraudulent returns of matching items stolen from the shelves.
- A person posing as a customer picks up merchandise from a rack or shelf, walks over to the customer service desk and simply asks for a refund.
- A person buys discounted merchandise at another store and tries to return it to your store for full price, pocketing the difference. A variation is to bring in a higher-priced item, exchange it for lower-priced merchandise and pocket the difference. This one gets worse: The fraudster now has a new item and a legitimate receipt and returns later for a full refund.
- Thieves work in tandem to return an item. One distracts the employee, the other replaces the original item with a counterfeit, and the employee never notices the switch. This fraud is often played out with small, expensive items such as jewelry.