Keep your refund policies from breaking the bank

Liberal return policies are great for business in that they encourage customers to take a chance on merchandise that might otherwise languish on the shelves.

Unfortunately, people can exploit loopholes in your refund procedures. And the resulting theft - called "return fraud"- can have a costly impact on your business.

Return fraud is any effort to collect a refund on merchandise not legitimately purchased. "Return fraud is likely to increase at retailers due to the impact of this major recession," says Los Angeles-based security consultant Chris McGoey (www.crimedoctor.com).

How big of a problem is it? Some 9 percent of returns are fraudulent, according to a study from King Rogers Group, a security consulting firm in Eden Prairie, Minn. And, according to the Loss Prevention Research Council (LPRC), Gainesville, Fla., nearly 70 percent of retailers state that return fraud is an important issue to their stores, and two out of three consider their current return procedures to be "ineffective" or only "somewhat effective" in deterring return fraud.

How It's Done

Return fraud occurs in a few different ways. Sometimes shoplifters will leave your store with concealed goods, then return with the merchandise in clear sight to establish the appearance of a legitimate purchase. These thieves commonly claim they lost their receipts and often request waivers of your usual documentation requirement.

Other thieves will buy merchandise on sale and later return the item for a full-price refund.

Still other thieves are more straightforward: They'll cart merchandise from the back of your store directly to the returns counter. They might present receipts obtained from previous purchases or found in a trash can outside your store.

Stop The Crime

Maybe return fraud will always be with us. That doesn't mean you can't take steps to protect yourself. "A lot of times retailers haven't put methods in place to make illegitimate returns more difficult," says Howard Levinson, president of Expertsecurity.com, a Norton, Mass., consulting firm.

Here are some ways to reduce this costly crime:

1. Position your return counter near the store entrance.

"People walking in should have the ability to return items right away," says Levinson. From a security standpoint, shoplifters will hesitate to be observed hauling items from the back of your store to the front to seek a refund. They will hesitate even more if your return area is separated physically from the main store floor by walkway barriers.

2. Require receipts for refunds.

Many retailers are anxious to avoid upsetting customers, so they often drop the requirement for a receipt when something comes back to the store. That's an open invitation to return fraud.

"In recent years some stores were starting to get very lenient about the receipt requirement, racking up any losses from fraud as part of the cost of doing business," says Doug Rector, president of Northwest Loss Prevention Consultants (www.nwlpc.com.), Renton, Wash. "Today retailers are becoming less lenient."

Requiring a receipt is a good idea, but it's not a panacea. As we have already seen, some thieves will return stolen goods using receipts obtained from legitimate purchases. Other thieves can reproduce receipts using modern technology.

And then there is the individual who has received a gift without a receipt, and the honest customer who has lost one. In both cases, you want to avoid unnecessary inconvenience and may want to bend the rules. "You need to maintain some balance between being careful of your profits and being customer friendly," says Levinson. "It's something you always need to deal with."

3. Train your staff to process returns correctly.

Your staff needs to know what your policies are, then follow them and communicate them to shoppers. "Good policies and procedures will keep return fraud at a reasonable level," says McGoey. "The difference in success at any retailer is staff training and compliance with the policies."

Post your policies in the store and print them on receipts. You can state simply: "A valid receipt must accompany all returns."

Get proactive. "If a customer buys a high-end item, the employee at the terminal should say, 'Be sure to keep your receipt because we will not take a return without it,'" says Rector.

Employees should follow policies consistently when individuals bring items to the return counter. Exceptions should be subject to approval by a manager.

One more thing: Everyone needs to be prepared for the habitual thief who has learned that creating a commotion can bully the return desk into granting a refund. "When denied refunds, thieves will almost always act in a belligerent way," says Levinson.

Communicate Your Rules

If there is no magic solution to the problem of return fraud, well-designed procedures can at least be a big help. Your challenge is to strike a balance between security and customer service.

"You have to be explicit about your return policies," says Rector. "As long as consumers know what your rules are, the incidents of inconvenienced legitimate customers should be few."

Consistent policies will help reduce crime by raising the security profile of your store among repeat offenders. "Eventually word gets around about which stores offer easy refunds and which do not," says Rector. "People talk."