5 Types of Retail Fraud and How to Prevent Them

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.

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 purchasesVisa 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.

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 something online using their credit card, 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 sweethearting (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 combat them.