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Product returns not always welcome

Sun., Dec. 12, 2004

During this holiday shopping season, some retailers are deploying new technology designed to crack down on one of the industry’s biggest frustrations — customers who abuse return and exchange policies.

Retailers such as Guess Inc., Staples Inc., Sports Authority Inc., and Limited Brands Inc. are among those using software called Verify-1, a product of Irvine, Calif.-based Return Exchange. The closely held company helps retailers decide whether to deny returns or exchanges using a program that monitors a shopper’s track record of bringing items back.

Such tactics are raising the ire of shoppers and privacy-rights groups who say the new technology is often an unnecessary and intrusive violation of consumer rights.

Retailers say they are on the lookout for various forms of fraud, including “serial wardrobers” who buy an outfit, wear it once or twice and return it; shoplifters who return stolen merchandise; employees who steal items and return them for cash; price switchers, who change price tags on items, then return one item for the higher amount; and shoppers who use fake or old receipts when making a return.

Return Exchange’s Verify-1 system works like this: When a customer wants to return an item, the sales clerk asks for his or her driver’s license or other form of state-issued identification, and swipes it into a machine much like those used to make credit card or ATM purchases. The shopper’s name, address and birthdate is logged into a database. The program records details about the transaction, such as the store number, the amount of the return, the date, time and item description.

All that information is stored on the Return Exchange’s server in Santa Ana, Calif. Most transactions end there. But if a customer’s “return behavior” seems out of the ordinary, the transaction is rejected and the consumer is given a receipt that instructs him or her to call the company’s toll-free number for a copy of a report detailing their return activity. Shoppers can also request that Return Exchange investigate the rejected return. The program keeps tallies of the type of transactions, the total amount of the returns and the number of exchanges.

The company says the data are available only to Return Exchange, the customer and executives at the retailer. Other personal information, such as a shopper’s physical characteristics, is not recorded.

Return Exchange was co-founded by executives who previously worked at companies that tried to prevent credit-card and check fraud. Verify-1 first went on the market in March 1999, and its latest version is the result of a $20 million development project that culled the efforts of software engineers, statisticians and Arthur Andersen consultants. Since its inception, company executives say Return Exchange has grown to an estimated $10 million a year business — with its software used in at least one store in every mall in America.

“It’s the last big hole retailers need to fill,” says company senior vice president of sales and marketing Mark Hilinski.

The use of Verify-1 is just the latest move by retailers intent on curtailing return fraud, says University of Florida criminology professor Richard C. Hollinger. According to the 2003 National Retail Security Survey, compiled by Hollinger, the retail industry lost about $16 billion to fraudulent behavior.

Until now, retailers have focused on tracking fraud at the time of purchase. New technology monitors unusual activities like price overrides — the purchase costs $75 but the customer is charged $25, for example. Camera surveillance also pinpoints questionable behavior. Verify-1 tracks customers, however, only when they return or exchange items.

According to retail consulting firm KingRogers International, in 2003, the return rate for specialty retailers was 10.6 percent of total sales, higher than the industry average of 8.58 percent. About 9 percent of all returns are estimated to be fraudulent.

The program has come under fire from consumers. Beth Givens, director of the nonprofit Privacy Rights Clearinghouse, says she thinks Return Exchange generally has a “robust” privacy policy. Still, she’s encouraging the company to be more transparent about how it pinpoints fraudulent behavior. (No group or individual has seriously challenged the right to return purchases under this program.) “By not sharing the rules of the game, the companies are playing a game of gotcha and I don’t think that’s fair,” she says.

Concern that honest customers might be hurt by the technology was an issue for Joseph Toth, senior vice president of Los Angeles-based specialty apparel retailer Guess. Since Aug. 30, the Return Exchange has been monitoring — but not enforcing — returns at 16 of its stores in an effort to glean information about its return rate. Toth won’t see the data until the pilot program is finished at the end of the year, but he says Guess hasn’t received any official complaints when customers were asked to swipe their driver’s license.

“There have been some conversations at the register, but no incident where someone went nuts and said ‘I won’t give my driver’s license,’ ” he says. However, about 10 customers didn’t go through with the return once they were informed of the policy, Toth says, evidence that Verify-1 may work as a deterrent.

Using the technology means store employees, many of whom are in their late teens and early 20s, are not deciding whether to permit returns. “There is no arguing with this,” he says. Toth says Guess will decide early next year if it will use the software full time.


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