Prevent Return Fraud

Return fraud is a problem that plagues retailers all year round, however, holiday crowds and overflowing shelves provide greater opportunities for dishonest shoppers to take advantage of retailers. Last year, retailers estimated that, of the $46 billion of merchandise returned during the holiday season, $3.5 billion involved return fraud, according to the NRF’s Return Fraud Survey. To fight this enormous loss, retailers must take steps to address this issue, even in the midst of the busiest shopping season of the year.

Return fraud can take many forms and it is not uncommon for employees to be involved, ringing up a fake return, for example, and pocketing cash from the register. In this case, no inventory is returned, so the loss is recorded as shrink, and the fraud may never be detected. Detection is, in fact, the first step in fighting return fraud, and this can be extremely difficult.

Whether the product is good as new, damaged, opened, worn, stolen or a lower-priced item being passed off as the higher-priced version, return fraud can be broadly categorized as occurring either with a receipt or without. Fraudulent returns not accompanied by a receipt are particularly difficult to detect. Even when a receipt is presented, it may have been forged, manipulated or stolen, and the mere presence of the receipt can give the employee processing the return the sense that the return is valid. The advent of electronic receipts is creating new problems as perpetrators of fraud have become more skilled at manipulating them as well.

The methods used to prevent return fraud are as varied as the methods employed by abusers to perpetrate this type of theft. The key is to use resources wisely and concentrate prevention efforts in three main areas. They are:

Technology. In addition to a robust return authorization system to aid in identifying serial abusers, video monitoring at the point of sale and throughout the store can be a strong deterrent. At the register, tempted employees will know they are being observed and, in the aisles, cameras at merchandise level will ward off theft proactively. If they can’t steal it, they can’t return it.

Policies. While overly strict policies may alienate some customers, a strong returns policy can be effective in deterring would-be abusers. Limit the time allowed for returns; require identification when there is no receipt; offer merchandise credit or exchange for purchases made on a gift card, a friend or family member’s credit card or returned with a gift receipt; and only issue refunds in the same form of currency as the original purchase. Internally, ensure that your policies for processing returns are clear and audit frequently to ensure they are being followed and enforced consistently.

Employees. Pre-employment screening has been shown to be effective in identifying individuals who are predisposed to unwanted behaviors and can be a valuable tool in fighting internal theft and fraud, especially as many retailers are doing additional hiring for the holiday season. Furthermore, training in return fraud detection can boost loss prevention efforts to identify dishonest activities and has the added benefit of letting employees know their activities are being observed. When audits indicate that policies are not being followed, re-train to ensure employees know what is expected of them.

Regardless of strong return processes and well-trained employees, be sure to audit frequently to verify processes are being followed. This will ensure that the customer’s experience during the return process is a positive one. The trick is to strike a balance between a flexible returns process that appeals to honest customers and efforts to detect and isolate abusers.

Andrew Wren is CEO of Wren Solutions, a loss prevention technology provider helping leading retailers reduce loss and increase profits. Wren is responsible for corporate and product strategy, leveraging his more than two decades of security technology expertise. To learn more about Wren Solutions, visit To hear Wren speaking with Independent retailer, listen to this podcast.