Understanding Retail Fraud: Types, Causes, and Preventative Steps to Take

Retail fraud occurs in a myriad of ways and can be difficult to track and measure. A study from the National Retail Federation reports $61.7 billion in shrinkage in 2019 – and those numbers are on the rise. 

Each retailer will face some form of fraud, and trends in retail fraud will vary. As such, you must be educated and vigilant in understanding the fraud trends your  business faces, and be prepared to pivot if a new trend emerges. In this post, we discuss common trends of internal and external retail fraud, and how retailers can prevent and address them.

Internal fraud

While retailers always want to assume the best of their employees, internal fraud and theft can still take place in a retail business. Though the majority of retail employees do not commit fraud against their employer, it is still an eventuality that retailers must prepare for. Below are a few common forms of internal fraud and strategies to prevent them.

Sliding

Sliding takes place when an employee purposefully obstructs the barcode of an item, making it appear as if it was scanned. This form of theft can be difficult to detect, especially with mobile POS systems, but taking preventative measures and monitoring for indicators is key in thwarting sliding.

To mitigate this type of theft, retailers should instate a policy where employees are not allowed to process transactions for friends and family. Though it may be impossible to accurately recognize all friends and family of an employee, enforcing this policy is a step in the right direction. Ensuring all register areas and mobile checkout stations have surveillance is also critical in discouraging this behavior.

Cash register tampering 

Cash register tampering can take many forms, and any irregularities in transactions should be monitored and documented. A couple common types of register tampering include cash theft and false voids. Cash can be stolen directly, or in conjunction with a partner (for example, giving extra change in a purchase or refund). 

Falsely voiding transactions is another form of fraud and voided transactions should be monitored and inventory checked against the SKUs used in voided transactions. As such, overages and shortages should be monitored and followed up on when evidence suggests theft.

Loyalty fraud

Many retailers have a loyalty program which is usually tied to a phone number and has rewards incentives ranging from discounts to gift certificates. An employee can easily abuse this program by entering in their personal loyalty card information and reaping the rewards. 

However, this can be easily tracked and should be continuously monitored. Retailers should analyze loyalty transactions looking for phone numbers which are used an inordinate amount or have large balances. Accounts with unusually high transactions and balances should be monitored and investigated appropriately, and a policy should be clearly stated and enforced to mitigate this form of fraud.

Sweethearting

Sweethearting is a form of internal retail fraud and involves the employee giving away or improperly discounting merchandise, often to friends or family. While this form of fraud is easy to understand, it can take many forms. Employees can defraud the business by discounting merchandise, sliding, voiding purchases after the customer leaves the store with the merchandise, performing inappropriate refunds, and the list goes on.

Identifying this form of fraud can (and should) be done with a two-prong approach: using analytics to spot trends and unusual transactions, and paying close attention to suspicious employee behavior. A modern POS system should include data and analytics to identify trends in transaction manipulation such as applying promotions or an unusual amount of transaction voids. This data, paired with surveillance can go a long way in identifying this kind of internal theft.

Vendor theft 

Many retailers rely on vendors for any number of services. Some common vendor-retailer relationships include product shipment delivery and housekeeping services. These relationships are vital to the business, but external access to a retail location’s back of house can pose risks, theft being one of them. Vendor theft happens when a third-party vendor steals from a retailer. 

This type of theft can be decreased by practicing due diligence in who is allowed access to the store, performing thorough screenings of third-parties, monitoring surveillance footage, and developing and adhering to security practices that decrease the opportunity for theft.

External Fraud

Customer fraud and theft also comes in many forms, and trends will vary based on a number of factors. While a loss prevention team may be out of reach for smaller businesses, it is important to train employees on theft and fraud indicating behaviors, monitor surveillance footage, and follow up appropriately when fraud and theft are detected.

Credit card fraud

Credit card fraud can take many forms and was responsible for $26.85 billion in loss in 2019. Payment fraud can include stolen card information and fraudulent chargebacks. Fraudsters steal card information for existing accounts, or personal information to open accounts and make purchases. 

This type of fraud is common, and depending on the objective, there are varying indicators. Preventing credit card fraud requires diligence by staff to recognize the warning signs and take consistent measures to stop fraudulent transactions. Retail associates should be trained to follow proper verification measures and look for warning signs of risky transactions. Some common signs of fraud include seemingly random or rushed purchases, phone orders where billing and shipping don’t match, and hesitation or inconsistency in providing personal information.

Refund fraud 

Refund fraud can be considered an umbrella term for several types of retail theft. This includes, but is not limited to:

• Price switching – tampering with the price tag by putting a lower price on an item before purchasing, or returning an item with a higher price than originally ticketed.
• Employee fraud – in this scenario, this form of internal theft is when an employee assists someone in returning stolen or fraudulent goods.
• Buy one, steal one – when one item is purchased and one is stolen, and both are returned. Depending on a store’s return policy this can be done with a combination of return without proof of purchase, card lookup returns, and returning one item with a receipt.

The bottom line: there are many forms of return fraud. And like fashion, some will go in and out of style. Some retailers may also be subjected to specific types of fraud depending on their return policy, staffing, and other variables. Key to preventing return fraud is staff shrinkage training, attention to theft trends, documentation, and enforcement of return policies.

Wardrobing 

Wardrobing is a type of refund fraud where a purchase is made with the intent of wearing the items and returning shortly after. For example, someone might purchase an item for a special occasion, tuck the tags away or re-attach after wearing, and return the merchandise for a full refund. These items may not be identified immediately by the associate accepting the return and can result in damaged merchandise.

Preventing wardrobing involves training employees to carefully examine merchandise for wear (regardless of tags being attached), developing and adhering to a comprehensive return policy, and documenting repeat offenders to look for patterns of fraudulent returns.

Gift card fraud

Fraudsters may also use stolen credit card information to purchase gift cards, and then use the funds immediately. Another way gift cards can be compromised is tampering with the access information on the cards. This is done when someone copies a gift card’s information and once legitimately purchased by someone else, draining the gift card before the intended recipient can use it.

To combat gift card fraud, retailers can enforce a waiting period for gift card purchases to ensure the transaction processes correctly and does not become a chargeback issue. Retailers can also secure gift cards so their information cannot be accessed prior to a purchase.

Friendly fraud

Friendly fraud is also known as chargeback fraud and falls under the refund fraud umbrella. This is initiated when a legitimate purchase is made and the customer reports the purchase as fraudulent or not delivered when shipping, thus initiating a chargeback and keeping the merchandise. This can happen with in person transactions, but is most common with online purchases.

Sometimes friendly fraud is caused by customer confusion. For example, if a merchant’s name and description is not clear, customers may mistake this as fraud when looking at their transactions. This type of fraud is also commonly perpetrated by disgruntled customers, so prioritizing customer satisfaction and delivering great service is an important step in prevention. Merchants should work to prevent friendly fraud first, but in the event this is a persistent problem, retailers should document repeat chargebacks and blacklist future purchases.

Final words

The list above and techniques to combat retail fraud does not cover all scenarios, and retailers should keep their finger on the pulse of fraud trends, and work with other retailers to share information when possible. A common theme emerges in all types of fraud: training, monitoring, documenting, and appropriate follow through are critical in preventing and managing retail fraud.