December 17, 2004
The War Against Retail Return Abuses
By Evan Schuman, eWEEK
With the holiday season comes fruitcake, traffic jams and an anticipated onslaught of must-be-returned gifts from well-meaning (and possibly colorblind) friends and relatives.
But sprinkled amongst those gift-receipt-clutching consumers are what the industry considers thieves: people who deliberately use return policies to steal. The tactics vary, from "free customer rentals"—where someone purchases an outfit, wears it to an event, and then returns it the next day—to those who purchase two items that look similar but are priced very differently and then switch the boxes so they return the cheaper item and get the refunded money from the higher-priced item.
The issue is anything but trivial for retailers. A Harris Poll released this week found that 91 percent of consumers interviewed considered return policies and processes as important to their decision about where to make a purchase. It also found that almost one-fifth of U.S. adults have held onto unwanted merchandise four or more months, before trying to return it to the retailer, according to the survey sponsored by Newgistics.
"It's an issue that a lot of consumers care about," said Blake Zeff, communications director for U.S. Sen. Charles Schumer (D-NY), who "wants retailers to cut down on these (return) policies, these excessive policies."
A California-based company called The Return Exchange looked at the situation and saw an opportunity to use a standard Windows-based SQL Server database approach to apply customized rules to identify customers whose buying patterns made them look like return abusers.
Here's how it's supposed to work: A customer walks in and attempts to return a product. The clerk asks for identification and enters that into the system so that all of that customerÕs purchases can be linked.
The identification information and the return data is automatically sent (either using dial-up, a broadband VPN or a direct T1 connection) to a database that The Return Exchange has set up exclusively for that particular retail chain. That database can be accessed—on The Return Exchange's server—by anyone in that company's IT department.
When that database (called Verify-1) sees what it considers to be a return abusive pattern, it will reject that return, in the same way that a POS would reject a stolen credit card. The clerk then would give the customer an 800 number to The Return Exchange, which would then investigate the case.
Retailers are reporting billions of dollars of annual losses from return abuses and The Return Exchange sees this as a way to combat such fraud.
But U.S. Senator Schumer sees it differently. He held a news conference this week in front of an East Side Sports Authority store and identified them and a handful of other retailers—including Express, KayBee Toys, The Sports Authority and Guess—as essentially blacklisting customers who return a bit too much.
"There's a familiar saying this time of year 'many happy returns' but sadly, in some stores, that just isn't the policy," Schumer said. "We all know the disappointment of buying a friend or family member a gift only to find out they already have one or don't want it. But some of us aren't being extended the right to return any more gifts—and the least the stores can do is tell us why."
That "tell us why" part is the essence of the controversy. Schumer plans on introducing legislation in the Senate next month that will require retailers to prominently disclose their precise return prohibition formula before customers can make purchases.
Mark Hammond, the chairman and CEO of The Return Exchange, said his clients include about one-dozen of the nation's 100 largest retail chains.
Schumer said those chains "have adopted secret store blacklists that were never announced and have unpublished rules, yet nonetheless stop people who make so-called excessive returns from returning extra goods. These unwritten policies could unknowingly prevent shoppers from returning gifts, wreaking havoc on the Christmas gift giving season."
Beyond trying to pass a law forcing the disclosures, Schumer has asked the Federal Trade Commission to investigate "this blacklisting practice."
Hammond and other executives with The Return Exchange say the proposed legislation makes no sense because there is no specific number of returns that are banned. The pattern of a potential return abuser is based on a complicated—and highly-customized—algorithm.
"We don't use numeric rules. We take into account multiple characterics including time, duration, dollar amount and frequency of behavior," he said in an eWEEK.com interview.
Schumer's proposed legislation "doesn't seem to make sense because it's hard to disclose something like that in signage," Hammond said. "You don't describe in detail how a FICO credit score is calculated or every aspect of a check authorization. This is a new technology for a lot of people."
The resistance to the disclosure is therefore based on two issues: the impracticality of explaining a complicated formula to consumers; the need to keep some of the precise calculations secret to thwart those who want to get around the systemÕs traps.
Mark Hilinski, senior vice president of sales and marketing of The Return Exchange, argues that a lot of the controversy makes little sense because such an extremely small number of people will have their returns halted. The Return Exchange's service rejects only one-tenth of one percent of the reviewed returns and, he adds, "75 percent of all customers don't make returns at all."
Schumer's position is that a lot more consumers are being impacted because of the hassle and effort involved.
Schumer said the database calculations do not "account for situations like New York City commuters who might purchase clothing items after work, catch a train home, try them on and match them to other garments and return the rejects the next day. And perhaps most important, these policies actually punish many honest shoppers who give these stores a high volume of repeat business, which is usually the real reason behind a high return rate."
Schumer's office issued a statement saying that "because these systems penalize many honest shoppers and also raise privacy concerns, Schumer has urged the Federal Trade Commission to study what consumer information these companies are gathering, what they are telling consumers about the information they are gathering and whether the companies are disclosing the criteria that consumers would need to meet in order to lose their right to return clothing."
One retail concern is that many stores do not have sales associates or clerks check their internal databases of returns—assuming they even maintain such a system—across the chain. A store manager might be inclined to let certain returns go through but might not if that manager knew of the number of returns that customer performed at the chain's other stores.
The next logical extension—which would have this database share all retail data with all of the chains so that a return abuser could be spotted across multiple chains—is something The Return Exchange has decided to avoid, at least for now.
Every retailer gets their segregated database, Hammond said. "We silo the data for each retailer, just for themselves. The information is never in one database," he said. "And we put around that database the rules and models of how to accept or reject a return that is unique to that retailer."
If his company tried to let any retail client see information gleaned from other retailers about fraudulent behavior, his company would be subject to different and more invasive regulations, including some involving the Fair Credit Reporting Act.
"It would involve a different sales (approach) and a different education," Hammond said. "We felt that we didn't need to do that. The ROI that we are providing is already so large that there is no need to share the data. We still catch the bad guys."
Hilinski refused to discuss pricing for retailers, maintaining that the pricing is too customized to be useful without a retailer's specifics.
But he did say that the pricing is typically done on a per-store/per-month charge basis and the pricing is often based on that chain's return rate. That way, Hilinski said, his company can virtually guarantee a solid ROI because they typically see a return rate reduction of between four and six percent within the first 90 days.
"We can show an ROI in 90 days in almost any retailer in any quarter," Hammond said.
The reasons for those reductions are many, ranging from honest customers seeking fewer returns because they want to avoid the identification hassles, thieves being discouraged from trying and the benefits of a more consistently-administered return policy.
It's more consistently administered because the database makes the decision for the store based on store rules, instead of having a clerk, associate or store manager making the decision.
The customer has the right to appeal that decision and to review what the company thinks their shopping history is. The customer does that by calling The Return Exchange's toll-free number.
This process strongly contributes to what Hilinski refers to as the retail soft-dollar savings associated with Verify-1. By taking the discretion away from the store and putting it on a distant third-party, this "speeds up customer service lines" and "it takes the confrontation out of the store."
If the ultimate answer is "no," the hope is that the retailer would seem to be less to blame than the third-party vendor, which is good news for the paying client retailer.