By Rich Johnson on September 24th, 2010 • 12 comments
We’ve all heard the stories about businesses taking advantage of their customers, but it isn’t as common to hear about customers scamming the stores. This hidden side of fraud has become a huge problem for businesses both online and in person. Some estimates find that retailers lose $16 billion a year due to the sly tactics of sneaky criminals, and some of their crime isn’t even illegal. Below, we explore the fraud to so often goes undetected – consumers taking advantage of retailers.
This damaging behavior takes place when a person charges a big purchase to their card, and then files a fraud claim with the credit card company. Friendly fraud is different than someone stealing a card and making fraudulent purchases in that person’s name, because the card owner is the one making the dishonest charges. PayPal explains that customers performing friendly fraud often claim that the item was never shipped, or that the wrong item was shipped, or that they never authorized the charge at all.
Online stores are big targets for friendly fraud because of the anonymity of Internet transactions. In fact, The Wall Street Journal reported that “an online jewelry site and a travel site were seeing 50% spikes in the practice since [fall 2008].”
Arbitrage is another type of retail fraud that involves swapping differently priced but similar items for a higher return. To illustrate this concept, imagine a computer hard drive. Most hard drives look extremely similar, but a 1 terabyte drive is certainly much more expensive than a 20 gigabyte model. A person committing arbitrage might purchase both hard drives and then place the cheaper one in the expensive one’s box and return it for a full refund.
BustAThief reports that 52.4% of retailers are affected by price arbitrage, making it one of the most serious retail cons in terms of scope. Unlike some of the other forms of fraud on this list (such as wardrobing, discussed below) arbitrage is actually a crime punishable by law. The problem is that so many of these cons go undetected because the unsuspecting employee simply re-stocks the box and puts it back on the floor for sale. Days, weeks, – even months – might pass before another buyer takes that exact piece home, opens the box, and discovers that arbitrage has taken place.
Due to the unique look of some items, arbitrage is not an option. When truly audacious fraudsters encounter this problem, they try a different approach – replacing the item with something completely different. Take for example the person who purchased a Nintendo DS from Wal-Mart and replaced it with a bunch of rocks. Sealing the box back up, he returned it to the store and the lackadaisical service desk employee never even thought to check. Since the box felt heavy enough, he received a full refund, and the box of rocks was then re-shelved and sold again.
This kind of fraud is much more risky than arbitrage, simply because if the employee ever decided to open the box, the customer would have a lot of explaining to do. But that doesn’t mean it doesn’t happen. Take for example the man who purchased a Macbook Pro from Best Buy and got it home to find a paving stone where his laptop should have been. Though it was not completely proven that someone stole the computer and replaced it with a brick, one finds it hard to imagine Apple doing it as a cheap prank.
Also known as “renting,” wardrobing merchandise involves buying a high-priced item, using it for a special occasion, and then promptly returning it for a full refund. Though not actually illegal, the practice is damaging to retailers, affecting their sales figures forcing them to discount perfectly good merchandise because it has been slightly used. SixWise reports that wardrobing effects 56% of retailers, and commonly occurs with expensive dresses that will likely only be worn once (such as a prom dress).
Wardrobing doesn’t only happen with clothing. Consumer advocate blog The Consumerist reports that dishonest transactions like this happen with many different kinds of items, including digital projectors needed for a single business presentation. The real danger in wardrobing is that those who commit the fraud don’t see it as a problem. “When I rent something, I’m taking good care of it,” said Deignan, the man who wardrobed the digital proctor. “…It made me look good when I saved my company $600 in rental fees for the projector.”
The return of stolen goods might be the most sweeping form of customer fraud in retail. Affecting 92.5% of businesses according to BustAThief, this kind of fraud involves a customer stealing items from a store, and then returning them for a cash refund or store credit. Despite the obvious fact that stealing is illegal, WholesaleNewsletter points out that some businesses make the process quite easy for thieves to take advantage of.
Like many other retailers, Costco allows customers to return items even when the customer does not have a receipt. Customer satisfaction is the most important aspect of their business model, and their return policy reflects this priority, but it also opens them up to victimization from crafty thieves.
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