Mar 14, 2006

Former Bush adviser arrested in return fraud scheme using credit cards

Retail return fraud, a $16 billion problem almost always linked to credit and debit cards, is back in the news again, with Time Magazine, The Washington Post, The New York Times and dozens of others reporting on a bizarre incident last week.

Claude A. Allen, who until recently was President Bush's top adviser on domestic policy, was arrested and charged with theft following a bizarre incident at a Target store that detectives allege was part of a year-long spree of fraudulent refunds that netted him more than $5,000 in credits to his credit cards. "He would buy items, take them out to his car, and return to the store with the receipt," a police statement said. "He would select the same items he had just purchased, and then return them for a refund."

Return fraud, also known as return abuse or refund fraud, is estimated to cost US retailers $16 billion annually, dwarfing ATM/debit card fraud estimated at $2.75 billion. The problem generated a good bit of media attention last Christmas, during the shopping season.

Banks don’t lose any money from return fraud. It’s the merchant’s problem. But a credit or debit card is almost always involved, so banks can help stop the practice. Why should banks care? Anyone who reads this blog knows that US retailers are angry about paying $27 Billion a year in interchange fees and not getting much for their money. Here is an opportunity to modernize the traditional payment card by providing a solution that helps fight retail return abuse and refund fraud and makes cards more relevant and attractive to merchants. In other words, an opportunity to protect all that interchange revenue.

Welcome is developing new technology that uses data stored within EMV chip cards to automatically authorize valid returns and refunds. It has no impact on a bank’s existing authorization systems, since it only requires data stored within the EMV chip. It simply requires the clerk to key in the original purchase date and the amount. In most cases, the refund is authorized instantly, making it more convenient and less expensive than the ID and database methods that merchants are currently putting in place.

I’d like to see this work on all cards already issued with XLS, so the cards don’t have to be reissued later, and merchants can simply activate the new feature in their payment terminals when they want to use it.

Prior post:
Returns fraud

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