Fight Fraud With Data

The old axiom claims that the customer is always right, but when retailers are faced with dishonest members of society, this unwritten rule has the potential to skim dollars off the top of retail sales. In fact, retailers lose an average of 2% of their sales annually due to loss of cash and merchandise through fraudulent activity conducted by people both inside and outside the company. That might not seem like much, but for a multibillion-dollar retailer, that is a good chunk of lost change.

Greg Switzer, director of loss prevention at Staples Business Depot (the Canadian division of Staples, Inc.), believes some retailers are susceptible to customer fraud due to "no questions asked" return policies. "If you keep increasing your tolerance for unsubstantiated returns, you are increasing your risk for fraud losses," Switzer said. Retailers can maintain flexible return policies, while still guarding themselves against thieves, by installing loss prevention software to detect suspicious sales/return patterns from thousands of transactions. Once Staples Business Depot went live with its FraudWatch loss prevention software from Triversity (Toronto) in April 1999, it began to analyze its data and was able to reduce internal and external loss as well as cut cashier errors in half.

ASP Eliminates Software Maintenance
Staples collects each of its 187 stores' daily sales information at its headquarters in Markham, ON. From there the retailer sends this information electronically to Triversity, which acts as an ASP (application service provider), and maintains the ever-growing database of information for Staples. "Throughout Staples Business Depot, we exceed 3 million transactions per month. Of those, there are about 28,000 per month that are of interest to us from a loss prevention point of view," Switzer said. Since Staples works with FraudWatch via the ASP model, the retailer does not have to maintain the software in-house. It pays a monthly fee to Triversity based on the number of user locations, and accesses the software through a secure Internet connection. This allows not only Staples' loss prevention department to have access to the software and the well-organized sales database, but other departments such as finance, customer service, and information systems can also run reports and conduct searches. The ASP model also eliminated development and upgrading costs of the software. It left the responsibility of maintaining the software to Triversity, allowing Staples to concentrate on the profitable side of its business.

Face Fraud Head On
When it began working with FraudWatch, Staples chose to concentrate on problems that totaled over $20,000 in loss. These cases were determined by sales activity patterns over a period of 3 to 12 months. Transactions that contain the same or similar customer name, phone number, and address, along with credit/debit card number or cashier name are grouped and brought to the retailer's attention. One of the first instances that FraudWatch helped Staples solve was a case of margin robbing. This occurs when a customer returns items bought from a wholesaler or manufacturer as items purchased from a retailer. "In the past it would have been a difficult scenario to pick up on because there are multiple locations involved, and their returns are supported by bills of sale," Switzer said.

After more than two years of analyzing its sales data, Staples has eliminated most large dollar losses, and can focus on patterns totaling $1,500. The software is also used to identify internal training problems. "We have seen a 50% reduction in POS (point of sale) and cashier-related errors and violations since using FraudWatch," Switzer said. "Not only that, but by the end of the first three months, the money we saved by reducing fraud exceeded the annual cost of running the program."