2012 Retail Returns Fraud: Focus On Your Biggest Losers

By Matt Pillar, editor in chief

U.S. consumers returned merchandise valued at more than $264 billion in 2012, according to the NRF. King Rogers Group and the Loss Prevention Research council figure that up to $17.2 billion of those returns are tainted by flat-out fraud or, at best, “friendly fraud” returns abuse such as “wardrobing,” or the return of used, non-defective merchandise.

According to the NRF 2012 Return Fraud Survey, nearly 83% of retail returns are “receipted,” meaning there is a receipt—albeit it 3.4% of the time a fraudulent one—associated with the return.

Outpacing this overall rate of returns fraud is a new and formidable challenge that LP departments have been slow to engage: cross channel returns. As online and mobile sales continue to grow at a rapid clip, many leading retailers are allowing  customers to return merchandise purchased on their sites to their stores.  By retailers’ own estimation though, 3.9% of those returns are fraudulent, and I suspect this estimate is considerably low. Only 19.3% of retailers identified fraudulent returns using e-receipts in 2012, the first time the NRF asked the question in its survey.

Any time you ask a question for the first time in a decade-running benchmark survey, a fair number of respondents won’t recognize the question or understand its meaning, and the result will therefore be misrepresented. In any case, fraudulent returns using either e-receipts or store receipts are often complete fabrications or digitally altered misrepresentations of store (paper or digital) and e-commerce receipts that go unchecked or unnoticed by store associates. As such, nearly three-fourths (73.1%) of retailers have added online return fraud as an activity for their LP teams to address, according to the survey.

Until cross-channel customer identification efforts get more sophisticated, those LP teams will have their work cut out for them. Too often (93% of the time, in fact) the presence of a receipt—any receipt—means the associate won’t require any further customer ID to process the return. As long as there’s no connection between the individual customer and her online/offline activity at the brick-and-mortar customer service desk, the threat of cross-channel returns fraud remains exposed.

While counterfeit receipts from complementary channels pose a challenge, they appear to be among the LP department’s lesser worries. While the survey says only 45% of retailers encountered receipt counterfeiting in 2012, a whopping 80.2% identified employee return fraud or collusion with external sources last year. Those pesky associates are the leading source of shrink in almost every category, and the most sensitive of them to deal with.

Of course, these stats increase significantly during the holidays. Returns activity jumps 22% during the holiday shopping season, and fraudulent returns activity jumps 35%.

Staggeringly, compared to last holiday season, the majority of retailers (83.1%) expect to keep their return policy the same in 2013, and far more (10.2% vs. 4.9% 2011) will loosen their policies to attract more shoppers during the holiday season.

Apparently, the more than $17 billion in loss, $1.04 billion in lost sales tax revenue, and more than 627,000 retail jobs lost at the hands of returns fraud and abuse are small prices to pay for a pleasant experience at the returns desk.

You can download the full report and nearly a decade’s worth of returns data from NRF, The Retail Equation, The Loss Prevention Research Council, and King Rogers Group here.