5 Types of Retail Fraud and How to Prevent Them

By Randy Hayashi
In Merchant Tips and Insights, Merchant News and Info

Retail fraud is on the rise. CNBC reported that last year the “level of fraud as a percentage of retailers’ revenues has climbed to 1.58 percent year to date from 1.47 percent,” compared to 2016. Not only that, but according to a 2018 survey by the National Retail Federation, fraud remained the top payment-related challenge faced by retailers.

Yup, fraud is a huge problem in retail, but the good news is there are steps you can take to prevent fraudsters and other shady parties from escaping with your hard-earned revenue.

Discover more about choosing the right credit card processing for your retail store!

Here are some of the common types of fraud in the retail sector and what you can do to prevent them:

1. Credit Card Fraud

Credit card fraud can come in a number of forms, but here are some of the most common incidents seen by merchants:

Using a Stolen Credit Card to Make a Purchase

This one is pretty straightforward: a customer tries to buy something from you using a stolen credit card. When the transaction takes place and real owner of the cards reports it, you, the merchant, may be liable for the charge.

That’s why it’s important to take the necessary precautions to spot and prevent stolen credit cards from getting swiped. Here are some suggestions:

Follow procedure to the letter – Follow the right procedure when completing transactions at the point of sale. Depending on your business, steps may include asking for identification, verifying the card’s expiration date, etc.

Be aware of suspicious behavior – It also helps to be aware of behavior commonly associated with fraudulent transactions. These may include:

Hesitation or uncertainty when providing personal information. For example, if they’re unsure of their zip codes or family name.
Rush purchases – Visa warns against rush orders. “While often perfectly valid, rush orders are one of the common characteristics of “hit and run” fraud schemes aimed at obtaining merchandise for quick resale,” says their guidelines.
Random orders. Visa’s guidelines also advise merchants to be wary of customers “who don’t seem to care if a particular item is out of stock — ‘You don’t have it in red? What colors do you have?’ — or who order haphazardly — ‘I’ll take one of everything!’ Again, orders of this kind may be intended for resale rather than personal use.”

Verify the card’s validity – If you suspect that someone is using a care that’s been stolen or tampered with, consider calling in a code 10 authorization to the card issuers.

Using a Counterfeit Card to Make a Purchase

While it’s true that counterfeit credit card fraud has dropped by as much as 75% since the introduction of EMV chip cards, it does still happen from time to time.

According to American Express, the physical appearance of the card will usually offer clues of fraudulent activity, so make sure that you familiarize yourself with how specific payment cards are supposed to look, and the signs of tampering.

Similar to dealing with stolen credit cards, if you suspect that you’re handing a counterfeit card (or one that’s been tampered with) get in touch with the card issuer to alert them.

Here’s an additional tip: read through the credit card acceptance and fraud protection guidelines of the card issuers you work with. Brush up on the dos and don’ts of credit card acceptance and see to it that you and your team are armed with the right knowledge so you can protect yourself should fraudulent activity take place.

Learn More

Start with the following resources:

2. Chargeback Fraud

Chargeback fraud (also referred to as friendly fraud) is a practice where the consumer files a chargeback on a legit transaction.

This type of fraud is quite common in eCommerce. A consumer will purchase online using their credit card processing, and then once they receive their items, they will initiate a chargeback with the card issuer claiming that they either never received the product or that they didn’t authorize the transaction.

Essentially, the goal is to get the products for free.

One of the best ways to deal with chargeback fraud is to keep your records in order. When a chargeback is initiated, the bank will ask you for proof to verify the transaction is real. Such documents may include POS records, signatures, credit card verification, IP address information, proof of delivery and more.

You should also implement measures to prevent chargebacks from happening in the first place. These may include taking steps like:

Verifying higher-than-average transactions
Flagging unusual activity — i.e., if the billing address is too far away from the shipping address
Verifying the billing address of the customer.

3. Employee Fraud

Employee fraud can come in various forms, including issuing false refunds, skimming off the top, and engaging in sweet hearting (i.e., giving away merchandise to friends, family, and colleagues).

Like most things, the best way to “deal with” employee fraud is to prevent it from happening in the first place. You can do this by:

Running Thorough Background Checks

Conduct broad and thorough background checks before hiring an employee. Consider running checks on a candidate’s education, employment, criminal history, driving history, and social media.

Keeping Your Employees Happy

Often, employees steal because they’re dissatisfied with their employer. Some feel they aren’t treated or paid well, so they express their resentment through theft. Others may feel that they’ve been wronged by the employer and are acting vindictively.

Whatever the case, you’ll prevent a whole lot of employee theft by creating a positive and empowering work environment. Treating employees with respect, recognizing their achievements, and offering perks and fair compensation all go a long way in reducing (or even eliminating) internal theft. Plus, you’ll boost staff performance while you’re at it.

Using Anti-theft Tools and Technology

There are a number of tools and devices that can curb employee theft. Things like security cameras and video analytics software can often detect theft when human eyes miss certain details.

Also, check if your POS system has any security features you can take advantage of. For example, some systems allow you to set permission levels that can restrict access to certain functionalities or tasks.

So if you’re looking to prevent employees from processing bogus refunds, see if your POS allows you to restrict refund access to managers instead of being available to everyone on your staff.

4. Return Fraud

One of the most common types of fraud in retail, return fraud happens when:

Someone returns used items
Someone returns products that were stolen
Someone returns merchandise using counterfeit receipts

Preventing return fraud starts with having a strong return policy. While policies for dealing with returns will vary from one merchant to the next, you may want to implement rules such as:

Requiring a receipt before accepting returns
Ensuring that all tags are intact before honoring a return
Processing refunds using the same payment type as the original transaction
Setting a deadline for returns
Requiring identification when accepting items and then checking against other retail databases to see if the customer engages in excessive returns

5. Gift Card Fraud

Gift card fraud may not be as common as other types of retail fraud, but it can still cost you. As Consumer Reports, puts it, “The FBI estimates that gift card fraud losses are in the low single digits as a percentage of sales, but gift card sales run about $130 billion a year.”

Gift card fraud can occur both internally (i.e., when retail employees steal gift cards) and externally (i.e., when someone redeems a stolen or counterfeit card).

Depending on your store, you can prevent gift card fraud by:

Requiring card activation at the point of sale, so the card would be unusable until it’s officially paid for.
Keeping your gift card displays visible and/or secure to prevent theft
Restricting people from redeeming gift cards instantly. Merchants such as Broadway.com discovered that gift cards redeemed within 3.5 minutes or less had an 80% likelihood of fraud. To address this, Broadway.com declared that certificates valued at $500 and above cannot be redeemed until 96 hours after the purchase.

Stay on Top of Your Game to Combat Fraud

You work hard to keep your business running, so the last thing you want is for thieves to take advantage of you. Prevent that being on alert for these 5 types of retail fraud and take measure to lessen the effect of payment processing.

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FAQs about Retail Fraud

Q: What is retail fraud and why is it a concern for business owners?

Retail fraud refers to fraudulent activities that typically take place within a retail business, such as credit card fraud, chargeback fraud, employee fraud, return fraud, and gift card fraud. It’s a significant concern for business owners as it can lead to financial losses and damage to the business’s reputation.

Q: What are some common types of retail fraud?

The most common types of retail fraud include credit card fraud, chargeback fraud, employee fraud, return fraud, and gift card fraud. Each of these types involves different methods of scamming a retail business for financial gain.

Q: How can retailers prevent credit card fraud?

Retailers can prevent credit card fraud by following correct procedures at the point of sale, being aware of suspicious behavior, and verifying the card’s validity. They should also familiarize themselves with the physical appearance of genuine payment cards to detect any signs of tampering.

Q: What is chargeback fraud, and how can it be mitigated?

Chargeback fraud, also known as friendly fraud, involves a consumer filing a chargeback on a legitimate transaction to get the purchased items for free. Retailers can deal with it by keeping all transaction records in order. Preventive measures include verifying higher-than-average transactions, flagging unusual activity, and verifying the customer’s billing address.

Q: What forms can employee fraud take, and how can it be minimized?

Employee fraud can include issuing false refunds, skimming off the top, and engaging in ‘sweethearting,’ which involves giving away merchandise to friends or family. Preventive measures include conducting thorough background checks during hiring, creating a positive work environment to ensure employee satisfaction, and leveraging anti-theft tools and technology.

Q: How can retail businesses prevent return fraud?

Return fraud can be prevented by implementing a solid return policy. This can include requiring a receipt before accepting returns, making sure all tags are intact before honoring a return and setting a deadline for returns.

Q: Can gift card fraud be significant for retail businesses?

Even though gift card fraud may not be as common as other types of retail fraud, it can still lead to significant losses. Preventive measures include requiring card activation at the point of sale, keeping gift card displays visible and secure, and setting rules that restrict immediate redemption of high-value gift cards.

Q: What are some general best practices for preventing retail fraud?

Retailers can prevent fraud by implementing strong internal controls, educating employees on fraud prevention, adopting advanced security technologies, and creating and enforcing strict return policies. In addition, using top-level identification software and analyzing customer behavior and transaction data may also help in fraud detection and prevention.

Q: Can digital technologies help in retail fraud detection and prevention?

Yes, digital technologies, including AI and Machine Learning, are increasingly used in retail fraud detection. These tools can analyze customer behavior and transaction data to find patterns indicative of fraudulent activities.

Q: How can verified and clean IP addresses contribute to retail fraud prevention?

Verifying and ensuring clean IP addresses can be effective for retail fraud prevention, especially for eCommerce businesses. A clean IP address adds more authenticity to the transaction and reduces the chances of fraudulent activity.