Retailer Daily

Fraud Costs Retailers $100B Annually

According to the 2009 LexisNexis True Cost of Fraud [pdf] study, consumer-facing fraud (fraud which does not include insider or employee fraud) costs retailers $100 billion a year. This dwarfs the $11 billion financial institutions lose and $4.8 billion consumers lose to consumer-facing fraud each year.

Identity Fraud Poses Serious Threat

Identity fraud causes a total of $48 billion in losses each year, shared among retailers, consumers and financial institutions. Overall, 20% of U.S. retailers reported an increase in identity fraud during 2008, with 46% of large retailers (those reporting more than $50 million in annual sales) and 24% of online-accepting retailers reporting increases. In addition, an estimated 9.9 million U.S. adults, or approximately 4.32% of the U.S population, were victimized by identity fraud in 2008. As a result of identity fraud, 43% of consumers will avoid certain retailers, compounding losses resulting from lost merchandise, chargebacks and fees and interest by impacting potential future sales. Identity fraud associated with certain retailers can also result in consumer lawsuits, especially when hackers illegally obtain personal consumer information from retailer databases. For example, supermarket retailer Hannaford Bros. faces a lawsuit from a single consumer related to a data security breach that occurred from December 2007 - March 2008. Claims from 21 other consumers in a class-action suit were dismissed. Two other major retailers, drugstore chain CVS Caremark and off-price chain TJX, Inc., both settled complaints relating to customer data security breaches in the past year. In February 2009, CVS settled FTC (Federal Trade Commission) charges stemming from alleged incidents of improper disposal of sensitive patient information in dumpsters in 2006. CVS agreed to enhance its retail waste disposal policies and training programs and instituted a chain-wide shredding program for confidential waste. In September 2007, TJX settled all consumer lawsuits resulting from a 2005 online security breach that may have exposed the credit card account data of as many as 96 million consumers. According to EWeek, TJX paid $6.5 million in attorney fees and offered consumers some discount and reimbursement programs. In March 2008, TJX settled separate FTC charges related to the incident by implementing a variety of new security measures, agreeing to third-party audits of its security measures every two years for 20 years, and submitting to FTC monitoring of its security compliance efforts.

Friendly Fraud Plagues Online Retailers

“Friendly fraud,” or fraud committed by consumers who order and receive an item, claim it was never delivered and issue a chargeback, is a particularly growing threat for online retailers. When total fraud losses of retailers which accept online transactions are broken down, the largest portion, 35%, results from friendly fraud. This equates to 0.4% of total online retail revenue each year being lost to friendly fraud. Another 24% of online retail fraud results from lost or stolen merchandise, 19% from identity fraud, 18% from fraudulent return/refund requests, and 5% from other types of fraud.

Credit, Debit Cards Lead the Way

Credit cards are the most common vehicle used to perpetrate consumer-facing retail fraud. Twenty-four percent of all retailers, and 43% of large retailers with a significant online presence, reported increased credit card fraud in 2008. Twenty percent of retailers, and 28% of large retailers with a significant online presence, reported increased debit card fraud in 2008. Only 1% of all retailers, and 3% of large retailers with a significant online presence, reported increased mobile payment fraud. However, considering how few retailers currently accept mobile payments, this percentage is worth noting.

Other Data Shows Increased Retail Crime

Other recent data also indicates that retail crime in general is on the rise. According to the fifth annual NRF Organized Retail Crime Survey [pdf], 92% of retail respondents were victimized by organized retail crime in the past year. This represents a 7 percentage point increase from the 85% of respondents who reported being victimized by organized retail crime in 2008. Two recent incidents support findings that organized retail crime remains a prevalent threat to the industry. A member of the Gambino organized crime family faces as many as 20 years in federal prison after pleading guilty to running a scam that used fake bar codes to dramatically reduce prices on goods at retailers including Lowe’s, Home Depot, Best Buy and Circuit City in New York and New Jersey. The stolen items were then resold or returned at profit. As part of the scheme, an associate of the scam operation got a cashier’s job at a Lowe’s store in an effort to steal customer identities and credit card information, although there is no indication any information was stolen. In addition, the May 2009 arrest of four New York state residents in Merrimack, NH for shoplifting at a Rite Aid store turned up evidence of a sophisticated theft ring specializing in stealing hair care products from pharmacies. The men, who were all charged with felony theft and felony receiving stolen property, allegedly had thousands of dollars worth of hair care products in their van, as well as maps detailing the locations of drugstores in several states along the East Coast. A February 2009 Datamonitor report indicates that retail shrink from theft, crime, and waste is having a damaging impact on retailers’ profit margins, with over half the losses attributable to point of sale (POS) shrink—loss incurred through cashier error, theft, and fraudulent transactions. The report predicts that global retail shrinkage will climb to almost $115 billion by the end of 2009. LexisNexis and Javelin Strategy & Research polled approximately 1,000 retailer fraud decision-makers in early 2009, and also conducted exclusive interviews with executives at major financial institutions and interviewed more than 4,800 U.S. adults, including 487 fraud victims. The margin of error is plus or minus 3.1 percentage points at the 95% confidence interval.