Fraud Busters

Retailers cut POS payment fraud and catch crooks in real time

Identity theft is a key component of payment fraud. According to the Federal Trade Commission's Consumer Sentinel Identity Theft Data Clearinghouse, fraud on the Internet using identity theft has grown by 70 percent to 74 percent per year for the last two years. It totaled over 1,000 cases per day online as of last January. In addition, the Clearinghouse estimates that half of all identify theft cases are never reported to law enforcement.

Adding in identity theft within stores makes the problem that much larger. At some retailers, losses by employee and payment fraud exceed the retailer's annual net profits. Clearly, the ROI from fraud prevention goes straight to the bottom line.

There are several classes of payment fraud. The four dominant ones are credit card, card-not-present (at Web sites and call centers), check and returns. If a retailer has the real-time, high-bandwidth infrastructure and staff responsible for LP actions in stores, getting closer to real-time resolution is very possible. The retailer can literally start catching crooks while they are still in the stores.

Research and Remedies

According to the results of the 2003 RIS News/Gartner "Retail Technology Study," 17 percent of retail chains have implemented real-time fraud alerts and/or card-not-present fraud-control measures already. Over twice that many plan to implement such initiatives within the next two years. (See sidebar: "Cutting Fraud in Real Time.")

In terms of fraud remedies, the first and biggest remedy is proper training of staff to enforce strict compliance with the procedures of the big credit card/debit associations for store-based and card-not-present transactions. The new Verified by VISA and SecureCard by MasterCard initiatives now reduce retailers' risk at card-not-present transactions, but unfortunately, neither reduces losses from employee fraud and check fraud, both of which are rising nationally.

The next step for retailers is to score the risk of check and credit transactions and automatically monitor transaction flows for high-risk or suspicious activities such as multiple purchases on the same card number. For returns, retailers need to ensure potential credits are offset by specific prior purchases.

Even using all these steps won't stop all losses for retailers. Professional fraudsters keep getting better at beating the basic risk-scoring mechanisms with fraud activities now trending toward identity theft and new ways to get more profile data on consumers. In response, anti-fraud services are now building data on individual consumers' spend patterns for use in comparing transactions to identify unusual activity in near real time.

Fingerprint Verification

Biometric techniques such as fingerprinting are now being used by retailers, but mostly to identify store associates, not consumers. However, in this post-9/11 world, fingerprinting of consumers is starting to occur. One of the leaders in this arena is Rosauers, a 21-store supermarket chain in the Northwest with a long tradition of cashing payroll checks for consumers.

In spite of good manual identification procedures, check counterfeiting and related fraud had mounted to an average of two bad checks per week per store across the chain. That's when Mick Mickalson, director of security and a former federal agent, decided to test biometric identification for consumers cashing payroll checks.

After a pilot test and partial rollout, bad checks have dropped almost immediately on a per-store basis from two per week to four per year. "We still occasionally get a counterfeit even with fingerprint and check photo," says Mickalson.

Educating Consumers

Mickalson decided to have a slow and careful launch of biometrics, with plenty of consmer education and advance notice. A couple of months after signage introduced the program, Rosauers began registering check-cashing customers. Registration was done over a period of two months to avoid long lines and customer inconvenience. "Customers like it because now they don't feel they are being investigated with questions each time they cash a check," Mickalson explains. "It's very customer friendly and adds speed and dignity for customers without a bank account."

To register in a store, a customer goes to customer service where a store associate images both index fingers with a BioPay device, takes a digital picture of the customer and scans the customer's payroll check. This is combined with the usual data from the customer's driver's license. The whole process takes a couple minutes.

The next time the customer cashes a check, he or she images just one finger. The customer's face and payroll check then show up on the screen facing the customer service associate, along with a color message in green, yellow or red, based on history.

"We have started catching crooks," says Mickalson. "If we get an 'insufficient funds' or 'counterfeit,' we call BioPay. If it's a crook, BioPay accesses the national fingerprint database for an ID and sends the evidence to police. Police love it; no further investigation. They just go get the bad guy."

"The total cost was about $7,000 per store," says Mickalson, "and the payback time has been a few weeks. We are now considering expanding use of biometrics to regular customers paying by check at POS."

Intelligent ROI

Some companies design their own custom fraud prevention tools. They use a business intelligence/OLAP decision support tool to write rules, filters and exceptions. As POS and related data flow through it, the tool combs it for variances from acceptable parameters and alerts the right person in near real time, generally via e-mail. When the store manager or LP manager gets an alert that the associate in lane one is running repeated sales on the same card number or associate "X" just took an unauthorized discount in lane two, action can be taken immediately.

When $2.7-billion Burlington Coat Factory implemented such a system — the NaviStor system from Retail Experts — it achieved an ROI in less than four months. The system also created compliance histories for all associates and audits, which included loss prevention detail for each store. "Communication of our problems with the field has dramatically improved," says John Putrino, vice president of loss prevention. "Our impact on shortage was immediate and significant."