Emily Homer, PhD, CFE
As I was waiting for a friend at a retail store during the recent holiday season, I overheard a front-end manager talking with a security officer. The manager described that another employee had noticed some suspicious behavior: customers of the store brought a small scale from home and were seen weighing gift cards using the scale. The pair discussed why the customers would have been weighing gift cards, with the manager suggesting that it may be to determine how much it would cost to mail the gift cards. As she departed, she said to the security officer, “Or it could be some sort of fraud.”
I smiled at the mention of fraud, which the security officer noticed. We got into a brief discussion of how fraud can be committed in retail stores. The officer described a gift card scam her store had uncovered: scammers removed the silver strip over a gift card’s PIN, noted the card number and PIN, and replaced the silver strip. They were then able to track the gift card’s usage. Once the gift card was purchased, the scammers were able to steal the funds, victimizing both the store and the unsuspecting customer who bought the compromised gift card. The security officer’s description is a variation of gift card draining.
While it may seem like a lower-level scam, gift card fraud has real consequences for retailers. An analysis of data drawn from the Federal Trade Commission’s Consumer Sentinel database found that gift card scams have led to a consumer loss of $148 million. Both the Federal Trade Commission and the 2023 National Retail Security Survey have reported increases in gift card scams in recent years. More specifically, 57% of the 177 retail brands responding to the National Retail Security Survey reported an increase in gift card scams from 2022 to 2023.
A second scam common in retail settings is the return scheme. These schemes involve fraudulently victimizing a retailer during the process of completing a consumer return and refund. One study by Riskified identified many common return schemes on a scale of “friendly fraud” to serial abusers and professional fraudsters. These schemes included coupon abuse, false damage claims, item-not-received scams, authorized reseller abuse, empty box returns, photoshopped return labels and, most severely, fraudsters using the dark web to exploit returns policies.
The National Retail Federation contributed additional return schemes, including the return of shoplifted/stolen merchandise and returns using counterfeit receipts. Consumers will also return items after using or wearing them, intending to informally ‘rent’ the items as opposed to purchasing them (a practice sometimes referred to as wardrobing). In their “2023 Consumer Returns in the Retail Industry” report, the National Retail Federation reported that its survey respondents reported $101 billion loss to returns abuse and fraud.
Regardless of its form, retail fraud is a concern for many retailers and a reality of doing business. In the study by Riskified of more than 300 merchants, nine out of ten reported experiencing significant costs from multiple fraud and abuse schemes. However, there are ways that merchants can attempt to combat losses to scams including gift card and return schemes. Some suggestions include:
Review returns and refund policies for loopholes. Consider eliminating cash refunds for purchases not made in cash, implementing a time frame for allowable returns, offering store credit instead of a cash refund and requiring receipts when making a return.
Make quantitative data available regarding customers’ purchase and returns history. Review the data for abnormalities.
Require returns to be made in-person so an employee can physically verify the item’s condition and determine the authenticity of the sale and receipt.
Keep gift cards close to the registers or behind them to increase the risk of detection for scammers attempting to tamper with gift cards.
For online retailers, give detailed and accurate item descriptions so the customer has a greater likelihood of getting what they want without the need to return. Offer ways for customers to virtually see the items on themselves or in their homes before purchasing.
Consider automating processes to identify transactions that require further investigation. Riskified suggests that, where possible, companies use automated processes to identify customers who return large numbers of purchases and review item-not-received claims to identify those that might not be authentic. These processes can help detect fraud and determine if specific individuals’ purchasing ability should be restricted.
Rates of retail scams often rise at specific times and under specific conditions. The study from Riskified found that 70% of merchants reported an increase in abuse during the summer shopping season and 67% reported an increase during the post-holiday season. Rates of retail fraud and abuse also increase with rising inflation. However, combatting these forms of retail fraud should be a concern for companies regardless of the time of year or circumstance.
SOURCE: ACFE Insights – A Publication of the Association of Certified Fraud Examiners