Nov 12, 2005

Returns fraud

Fraudulent and abusive returns are a major source of losses for retailers around the world, costing US retailers $16 billion annually and dwarfing bankcard fraud estimated at $3 billion. Over half of returns fraud is attributed to customers “renting” merchandise for free by purchasing a product, for example an expensive camcorder, using it once to record a wedding or graduation, then returning it for a full refund. Returns fraud also occurs when merchandise is stolen and then returned using receipts that may have been forged or found in trash bins. Thieves also “shoplist” at stores by obtaining a receipt, then shoplifting the items listed on the receipt and returning the items for a full refund.

Bank cards are often at the centre of returns fraud schemes. Thieves purchase items using stolen credit or debit cards, and then return them for a refund on another bank card. In other cases, thieves have broken into shops and used the merchant’s payment terminal to refund hundreds of transactions using stolen debit cards, which were then immediately used to withdraw cash at ATM machines.

Some retailers no longer provide refunds at all, and give vouchers or gift cards instead. Other retailers require customers to present a picture ID such as a driver’s license when they return an item, so the clerk can check a database for possible abuse. All of the current approaches are inconvenient, obtrusive or both.

Why not use EMV? Chip cards were designed primarily to combat bankcard fraud but the technology is sufficiently adaptable to support many other features. Why not take advantage of the chip to identify returns fraud and abuse in addition to bankcard fraud? A solution which leverages chip card technology to automatically identify potentially fraudulent or abusive returns, with no need for the cost and effort of operating a database and authorization service, and no need to ask the customer for a picture ID, would benefit banks, merchants and customers. And it would put the banking community in the excellent position of helping retailers solve major, quantifiable problems.

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