The High Cost of Holiday Return Fraud: $3.8 Billion Joe Raedle / Getty Images

The High Cost of Holiday Return Fraud: $3.8 Billion

Holiday shopping season isn't just the period when retailers make most of their money; it's also when they lose the most to retail return fraud.

Retailers estimate they will lose about $10.9 billion to return fraud this year, and $3.8 billion will be lost to return fraud this holiday season alone, up slightly from last year’s $3.4 billion, according to a survey released by the National Retail Federation.

Overall, retailer loss prevention executives polled by NRF estimate 5.5% of holiday returns are fraudulent, similar to last year’s 5.8%. Nearly all (92.7%) say they experienced returns of stolen merchandise in the last year, similar to last year’s 94.8%.

In what NRF saya is a troubling sign that organized retail crime continues to present significant challenges for retailers, 78.2% say they saw returns fraud by organized retail crime groups, up from 60.3% last year.

“Today’s sophisticated technology does well keeping criminals at arm’s length but often isn’t enough to completely stop the unethical practices of organized and individual retail fraud occurrences,” says Bob Moraca, NRF’s vice president of loss prevention.

“Return fraud has become an unfortunate trend in retail thanks to thieves taking advantage of retailers’ return policies to benefit from the cash or store credit they don’t deserve,” he notes. “Additionally, many of these return fraud instances are a direct result of larger, more experienced crime rings that continue to pose serious threats to retailers’ operations and their bottom lines.”

NRF says online retailers are noticing increasing return fraud instances with e-receipts, with more experiencing return fraud with the use of e-receipts (18.2% vs. 15.5 % last year). There also was a significant jump in retailers seeing return of merchandise purchased with fraudulent or stolen payment methods, from 69% in 2013 to 81.8% this year.

About a quarter (25.5%) say they witnessed fraudulent returns using counterfeit receipts, down slightly from 29.3% last year, and 81.8% have dealt with employee return fraud or collusion with external sources, down from 93.1% last year.

A growing issue is the practice of “wardrobing,” or the return of used, non-defective merchandise such as special occasion apparel and certain electronics. Although companies employ tactics to curb the practice, 72.7% say they experienced wardrobing in the past year, up from 62.1% in 2013.

With 14.1% of the returns throughout the year made without a receipt fraudulent, 70.9% of retailers now require customers returning items without a receipt to show identification. Even when a receipt is present, more retailers polled this year say they ask for identification (25.5% vs. 12.3% last year.)

Overall, retailers report only 3.5% of online purchases returned to their stores to be fraudulent, which is good because 87% say they allow customers to return merchandise bought online to their brick-and-mortar stores, up from 82.5% last year.

When asked about return fraud and different types of payment, 72.7% say they witnessed an increase in gift cards/store merchandise credit fraud in the past year, 38.2% saw a rise in return fraud using credit cards, while 45.5% reported no change in fraudulent credit card use from 2013. In addition, 30.9% say they saw an increase in debit card fraud.

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