Now that the holiday shopping frenzy is almost over, merchants are bracing for a less-welcome wave of business: merchandise returns. But it’s not all those sweaters that never seem to fit right that are the big headache. Instead, post-Christmas marks the prime season for retail return fraud. According to a National Retail Federation survey, return fraud cost retailers an estimated $8.9 billion in 2012, with nearly 30 percent occurring during the holiday season alone. Overall, the survey shows that about 4.6 percent of holiday returns are fraudulent.
Of the 60 retailers surveyed, 96.5 percent reported being ripped off by criminals who collected refunds for stolen items this year, and almost half said they’d received counterfeit receipts. Nearly two-thirds of the retailers said customers had returned items they’d worn or used.
NRF spokesmen were not available for comment, but Vicky Brock, chief executive officer of Clear Returns, a Scotland-based startup that’s developing data analysis software to track and prevent retail fraud, shed some light on the costly problem of wear-and-return fraud. “A lot of people think that when they return something, it’ll go straight back on sale,” Brock says. “But it may never get back on sale—by the time it’s been sent back to distribution, repackaged, if it’s in a condition for sale, it could have been discontinued of discounted. In some cases, it’ll just get shredded.”
Wear-and-return fraud may be an even bigger problem than stores realize. In interviews conducted with 65 shoppers, Clear Returns found that 10 percent admitted to having worn and returned an item. “But when we asked them what their naughtier friends might have done, that really opened the flood gates,” Brock says. “Nearly 25 percent said they knew somebody who did this on a more regular basis. … Their techniques ranged from putting plastic wrap on the bottom of shoes to particularly choosing outfits that have labels in a non-visible place, through to removing labels and reattaching them.” Some offenders, she says, also purposely damage items and claim they were defective upon receipt in order to be able to return them, even at stores with stringent return policies.
Clear Returns, which is still testing its software in partnership with three retailers, including a New York-based leisure wear manufacturer, is primarily focused on helping merchants predict, at the point of sale, which items will most likely be returned, so that stores can better manage inventory. But the startup’s software may also help prevent wear-and-return crimes. “When it comes to fraud, we’re trying to identify the people who do it more habitually,” Brock says. Once they’ve been identified, stores can tighten security.
In the case of online sales, stores may even go so far as disallowing serial offenders to make certain purchases by declaring an item out of stock. “You may never want to do that,” says Brock, pointing out that more often than not the customer is innocent. “Or you might want to get to a point of certainty where you’ve predicted that it will happen nine times out of 10 … and on the tenth time, you choose to make it out of stock.”
So far, retailers have taken few steps toward fraud prevention, beyond making customers show an ID when returning items. About 83 percent of retailers surveyed by the NRF said they made no changes to their holiday return policies this year, and 10.2 percent actually loosened their policies to make returns easier.
