Retail’s Latest Fraud Risks, and How to Counteract Them
The retail sector, including grocery, is fraught with the risk of fraud. Data reveals retailers in the United States and Canada incur an average cost of $3 for every $1 of fraud and, in 2023, the U.S. retail sector lost a total of $60 billion to payments fraud. Gone are the days when retailers had only physical theft to worry about, with thieves skilled in sleight of hand or bending the truth regarding returns, faulty products or refunds.
The aspects of threat exposure faced by running a grocery business have proliferated, and now retailers must deal with the consequences – their revenue, brand reputation, supplier relationships and customer safety are on the line.
[RELATED: Hannaford Pharmacy Launches Elder Fraud Program Across Maine]
Why Is Fraud a Rising Issue for U.S. Retailers?
Risk research details that 60% of e-commerce merchants and 53% of retailers report an increase in fraud throughout 2023. What is changing?
The first and most important reason that fraud for retailers is on the rise is the transformation of the shopping experience itself.
As retailers fight for dominance, they eye more efficient systems to ease customer journeys and lower operational costs. As part of this, digital interactions across brick-and-mortar retailers have increased exponentially. The majority of these processes, such as smart-scan shopping, self-scan tills, and click-and-collect functionalities – which have increased the opportunity for buy online, pick up in store (BOPIS) fraud – were in the works before the COVID-19 pandemic. Still, the virus only sped up the rollout of these systems.
What emerged was an opportunity for criminals to take advantage of systems still in their infancy, both in how they work and the level of staff training to recognize when a digital process is being used for fraud.
The main threats retailers face, through an increase in digital functions, are underage ID, return fraud and “friendly fraud,” whereby a customer takes advantage of customer-first policies by mobile banking providers to charge back an item they actually received. This is a rising issue that equates to losses of $117.47 billion globally over 2023.
Retailers aren’t going to remove digital systems to combat rising fraud. Taking a step back may reduce the risk of fraud, but it will also damage market share, profitability and brand reputation for customer-centric shopping. That being the case, what does a retailer do to balance risk and operational advantage?
On-premise security guards still have an important role to play, both as a deterrent and a disruptor to fraud perpetration. When it comes to combating the rise of new fraud methodologies, however, digital challenges require digital solutions.
Fake IDs
First, to overcome the use of fake IDs for the purchasing of age-restricted goods, such as alcohol – which can incur heavy fines or the removal of a retailer’s license should underage users check out undetected – businesses need to advance their verification solutions.
Products exist on the market that use cutting-edge technology, such as AI-powered document verification, biometric analysis and automated identity document updates, to successfully identify most fake IDs. These functionalities can be done almost as quickly as a physical check, which doesn’t impede the customer experience.
[RELATED: What Grocers Need to Know About Mobile Driver’s Licenses]
Equally, mobile driver’s licenses (MDLs), currently used in 13 states, will become increasingly more accepted by the U.S. general population. MDLs should provide a way for consumers to take more control of the way their ID is verified. Storing information such as passport credentials in a mobile wallet not only enhances security for both businesses and individuals – IDs can be lost, stolen or duplicated, after all – but it will also increase the ease of showing and scanning an identity, making the process more efficient from both sides.
Return Fraud
When it comes to return fraud, identity verification solutions have proved effective in various retail environments. In this case, system security is enhanced with fraud prevention in mind, requiring customers to scan IDs upon returns, detecting fraud in real time. In one use case, Rouses Market saw a 36% reduction in total value of returns within the first five weeks. The same technology and process can also be used in the same way to combat BOPIS and delivery fraud.
Friendly Fraud
Lastly, when it comes to countering friendly fraud, existing market solutions can help.
While detailed record-keeping, clear return and refund policies, and accurate billing are also required to combat friendly fraud, financial providers’ systems still lean heavily in the customer’s favor. While this is a good thing, particularly when a customer’s refund or return is genuine, it doesn’t do enough to protect the business when it’s not.
In terms of the technologies and verification processes that can help with combatting friendly fraud, businesses might have to work on a benefit-of-the-doubt process. It’s very hard to stop friendly fraud on the first attempt. However, if a business has systems in place to verify the identity of a customer requesting a return or refund, automated and smart-learning systems can flag when the customer tries again, even if this is done in person, at a different store or in a different state.
[RELATED: Special Report - 2024 Grocery Tech Trends]
Of course, businesses may face an interaction in which a customer asks for a chargeback for legitimate reasons on various occasions. However, some provider systems include data and trends analysis that can increase the likelihood of flagging friendly fraud when it’s actually occurring. These systems will only get smarter in the near future, giving businesses the confidence and assurance to identify friendly fraud.
The Retail Opportunity Remains
Brick-and-mortar fraud will always be present; it’s up to individual business to decide how much they want to invest in systems designed to combat it. One point to remember is that market solutions can make businesses safer and more pleasurable from a customer experience perspective by marrying operational assurance with opportunities for increased customer loyalty, spending and return purchases.
Businesses that take the time to get their anti-fraud solutions sorted out, with diligent processes and thorough training added on top, will find revenue protection and customer satisfaction far easier to obtain in the near future.
