Retail fraud is a significant challenge for businesses today due to the substantial financial losses and delicate balance to maintaining customer satisfaction and trust. In this comprehensive article, we will explore various types of retail fraud, their impact on businesses, and how to detect them. We’ll also delve into the role of voice security technology in fraud detection, highlighting Pindrop’s innovative solutions.

The impact of fraud on retail businesses

Retail fraud can severely affect businesses, leading to financial losses, increased operational costs, and reputational damage. Regardless of the size of the business, fraud is a real risk. Retailers with 1-20 employees were most likely to experience theft daily (17%). Businesses with 21-30 employees were most likely to experience theft a few times per week (31%). 

Fraudulent activities such as chargebacks, return fraud, and employee theft can significantly affect a company’s bottom line. Understanding the different types of retail fraud is crucial for implementing effective prevention strategies. Companies can lessen their exposure to fraud by adopting proactive measures and leveraging advanced technologies.

4 common types of retail fraud

1. Credit card fraud

Credit card fraud is one of the most prevalent types of retail fraud. It occurs when someone uses a stolen or counterfeit credit card to make unauthorized purchases. With the emergence of chip-and-PIN functionality, fraudsters are increasingly preferring online fraud avenues. There are several forms of credit card fraud:

• Counterfeit card fraud involves creating fake credit cards using stolen card information. These fake cards are then used to make purchases at retail stores.

• Card-not-present fraud happens when a fraudster uses stolen credit card information to make online or phone purchases without a physical card.

• Lost or stolen card fraud occurs when fraudsters use lost or stolen credit cards to make unauthorized transactions until the cardholder reports the card as missing.

According to Veritas Federal Credit Union, card-not-present (CNP) fraud is expected to account for 90% of the overall growth in U.S. card fraud losses from 2022 to 2024.

2. Return fraud

The National Retail Federation (NRF) reported $743 billion in merchandise returns in 2023. NRF Director Mark Mathews states, “Retailers continue to test and implement new ways to minimize losses from returns, particularly those that are fraudulent, while at the same time optimizing the shopping experience for their customers.” 

According to the report, around 14.5% of all purchases result in return, with higher rates for online purchases. For every $100 in returned merchandise, retailers will lose $13.70 to return fraud. Return fraud continues to be a growing problem for U.S. merchants, resulting in billions of dollars lost yearly and reaching $101 billion in 2023. Return fraud occurs when individuals exploit a retailer’s return policy to receive refunds or exchanges dishonestly. Common types of return fraud include:

• Return of stolen merchandise is where thieves steal merchandise and return it to the store for a refund or store credit.

• Wardrobing involves purchasing, using, and returning items for a full refund. This is common with clothing and electronics.

• Receipt fraud involves using counterfeit or altered receipts to return merchandise for a refund.

Pindrop provides these three steps to help protect call centers from refund abuse and fraud.

3. Employee theft

Employee theft is a significant issue for retailers, as dishonest employees can cause substantial losses. The average dishonest retail employee costs their employer $1,551.66, and the percentage of retailers that noted employee fraud as a growing priority continues to increase, noting internal theft as the second-largest factor in retail loss. 

Common forms of employee theft include:

• Sweethearting occurs when an employee gives away products to friends or family without charging them.

• Skimming involves employees stealing small amounts of money over time from cash registers or other transactions.

• Inventory theft is where employees may steal merchandise from the store’s inventory for personal use or resale.

4. Online fraud

E-commerce merchants in the United States reported an average of over 1,200 fraud attacks per month in 2022—a 50% increase from the previous year, and those losses from online payment fraud hit $41 million that year. With the rise of e-commerce, online fraud has become increasingly common. Types of online fraud include:

• Account takeover is where fraudsters gain access to a customer’s online retail account and make unauthorized purchases or changes.

• Phishing involves tricking customers into providing their personal or financial information through fake websites or emails.

• Carding is the practice of testing stolen credit card information to make small purchases online, verifying if the cards are still active.

How to better detect retail fraud

To combat retail fraud, businesses must implement robust prevention strategies. Here are some effective methods:

Voice biometric technology

Voice biometric technology is a powerful tool for helping to detect fraud. By analyzing unique vocal characteristics, this technology can authenticate customers and detect fraudulent activities.

Behavioral analysis

Behavioral analysis monitors customer interactions and behaviors to identify suspicious activities that may indicate fraud.

Anomaly detection

Anomaly detection uses advanced algorithms to identify unusual patterns in transaction data, helping to detect and prevent fraud in real-time.

Fraud detection and prevention platform

A comprehensive fraud detection and prevention platform integrates various technologies and strategies to provide a holistic approach to combating retail fraud. For example, Pindrop’s solutions offer advanced capabilities to help businesses protect themselves from a range of fraudulent activities.

Machine learning and AI

Machine learning and artificial intelligence (AI) can enhance fraud detection by continuously learning from data and improving the accuracy of fraud prevention systems. These technologies can significantly improve security, especially for online fraud.

Train employees to identify suspicious behavior

Employee training is crucial for preventing retail fraud. Educate employees on recognizing suspicious behaviors, such as unusual purchasing patterns or nervous customer interactions, and encourage them to report any suspicious activities immediately. Proper training can help employees identify potential threats and take appropriate action to help prevent fraud. Additionally, securing call centers in retail, which are often targets for refund abuse fraud, is essential for comprehensive protection.

Use Pindrop^Ⓡ Solutions for a robust fraud prevention solution

Retail fraud prevention is essential for safeguarding your business’s financial health and maintaining customer trust. By understanding the different types of retail fraud and implementing advanced technologies like voice biometrics and machine learning, businesses can effectively combat fraudulent activities. 

Pindrop offers cutting-edge voice security technology and fraud detection solutions tailored for call centers in the retail industry. By partnering with Pindrop, businesses can better protect their financial health. 

See how Pindrop helped the largest e-commerce retailer protect the customer experience while reducing fraud losses 3X.