Fraud schemes affect the bottom line at every retailer that accepts returns (see BW Online, 8/5/05, "Many Unhappy Returns for Retailers"). Mark Hilinski, co-founder of The Return Exchange, a software company that provides fraud- and abuse-detection products to retailers, has been tracking these schemes and trends since 1999. He came to the business with sales and marketing experience in technology and services from Risk Data Corp. and HNC Software.
For the first year, The Return Exchange handled straight customer returns for retailers before focusing on collecting and analyzing data to prevent fraud. "There hasn't been a central repository for this kind of information," Hilinski notes. "So we've been doing store surveys, talking to managers, and trying to identify things along the way."
BusinessWeek intern Elizabeth Woyke recently spoke to Hilinski from his base in Irvine, Calif., about the new, high-tech ways thieves are scamming stores' return policies -- and what retailers can do to protect themselves.
Q: What's new about return fraud?
A: Return fraud has existed for years. But the schemes have gotten more sophisticated. The quality of scanners and printers has increased, and that has allowed the same kind of scams to be replicated in new ways.
The days where you used to cross out numbers on a receipt and fill them in with a typewriter are gone. Now you have receipts that are scanned in and altered and reprinted. You can even print receipts in the parking lot, because everything's portable.
Q: How does receipt fraud work?
A: What's really on the rise is that journal tape, the [paper] that runs through registers, is somehow being taken out of store rooms and registers and sold. You can do a lot once you have this tape. There are printers you can buy at your local electronics center that can reprint and recast receipts fairly well.
If I have a receipt for $100 for a sweater and I copy it, now I have the ability to take back as many of those sweaters as I can get my hands on. Some people also get receipts from the trash or reuse their own receipts multiple times. Within receipt fraud, that's fairly easy to do if there are no controls.
Q: Aren't most stores able to recognize a forged receipt?
A: If your system is smart enough to be able to track receipted returns, which we're in favor of and is a service we provide to some of our clients, that's great. Then, if you have a receipt for three items that are $100 apiece and you return $300 on that receipt, there's no way to return more on it.
But if I have a receipt and you're not tracking returns by consumer, I could do that once a day [until my live receipt expires]. We've even seen Web sites that were offering to buy and sell live receipts that were under 90 days old paid for in cash. All you have to do is get these garments or products and take them back.
Q: Is receipt fraud the most common return-fraud scam?
A: The largest group in this category of fraud and abuse is still by and large the "renting" population. That's the customer that comes in and buys on Friday, wears on Saturday, and returns on Sunday, on purpose.
Of course, it's not always clear who's doing that intentionally. The way we look at it is, someone making returns 50 times in one day at 12 different stores, you could argue pretty easily that that's a problem. We're talking about a very small percentage. Within a one-year period 75% to 80% of consumers don't make returns. Of those who do, only 1% fall into this outlier category.
Q: Does this mostly affect clothing retailers?
A: We've also been seeing an increase in the "renting" of consumer electronics. In the last five years, there has been an uptick in high-end digital video cameras, for example. You don't think of people "renting" cameras, but people do exactly that for graduations, weddings, special events. We see a lot of that being taken advantage of.
Q: It seems people aren't ashamed to do this.
A: We're seeing both an uptick in numbers and in the brazen attitudes of consumers that utilize this. They're not sheepish anymore about bringing things back.
It could be a pair of tennis shoes that they've worn for 90 days and the soles are wearing out. And they say, "Listen, these don't fit anymore, I'd like a new pair because I've got a prom date tonight" or whatever.
We see a lot of this out in the open, whereas before we think it was less visible. Consumers feel they're entitled to make a return at any time for any reason. And that seems to be more pervasive now than it was five years ago.
Q: What about this other kind of return fraud, price arbitrage?
A: At its simplest, price arbitrage involves buying differently priced, similar-looking items and returning the cheaper one as the expensive item.
Let's use watches as an example. You may have a $100 timepiece and one that's very similar that costs $50. And the only thing that's different is maybe the inside face. The store associates don't necessarily know the look and feel of every single watch that they sell. So if I buy the $100 and the $50 one and go home and put the inexpensive one in the expensive box, I'll get my $100 back and I'll give them the $50 watch.
Those watches aren't being taken out of the box and checked. The employees are trying to move the transaction along and provide great customer service.
Q: How exactly does return fraud cost stores money?
A: A certain percentage of returned merchandise must be discounted or discarded in order to sell it. For example, out-of-season clothing may go directly to the sale rack. The lingerie department in most department stores may discard returned items for health reasons.
In the best-case scenario, the item gets put back on the shelf exactly where it was and the next consumer buys it. The problem is, by allowing a return that's fraudulent to come back into the store you lose the gross margin on that sale. You don't get that back in the new sale. You also lose restocking time, which is time an associate could be spending with a consumer on a new sale.
Q: What role do auction Web sites play in all this?
A: Retailers have stopped giving cash back in many different cases. Instead, they do refunds in the form of gift cards or store credits or store value cards. If a crook can get enough of those, he might sell $2,500 worth of gift cards for $2,000 online. It's a benefit for the buyer, who gets a discount and will use those gift cards. And the person who has manipulated the return-scam system has a way to [make money]. But the retailers lose out.
They're also a way for people to get liquid. If I want to make money [as a shoplifter], the best way for me to do that is to return [stolen goods] for full value plus tax. In the case where I'm unable to do that, as with our retailers who are able to stop that from happening, Web sites can be a great place to resell merchandise that was acquired inappropriately.
Q: Is the Internet exacerbating return fraud in other ways?
A: [Return-fraud] information is shared over the Internet publicly, in different blogs. If I want to steal from ABC retailer I can go and search pretty quickly for the best way to do it, the best time of day, the best store in some cases.
Web sites keep popping up and getting shut down -- by the groups themselves so they don't get caught or to maintain some sort of distance. We've seen the same site available, then offline two minutes later, then available again 30 days later and then dead for three months.
Some seem to have short shelf lives, because the retailers find out about them and call authorities. On the retail side, it doesn't take them long to get organized-crime units involved from the operations side or loss prevention side and alert the appropriate authorities.
Q: Are more people starting to realize this is a problem?
A: Retailers have struggled with this for years. People are starting to talk more openly about it, we're getting more information about the problems, and we have better tools and technology to help retailers combat them.