Retailers are at risk of ID fraud – better defenses are now imperative

By Jimmy Roussel, CEO, IDScan.net

Retail ID fraud has risen 22.7 percent since December 2024, threatening even the most resilient retail brands, according to risk data processed via ID verifications throughout all of IDScan.net’s retail customers. The threat of ID fraud is ever present, always probing defenses for vulnerabilities, evolving via fraudsters’ continuous enhancements to fake identities. The prevalence of ID fraud attempts means that to protect revenue, reduce shrinkage, and safeguard valuable customers, it is no longer an option for retailers to ignore the anti-fraud solutions available to them.

Types of retail ID fraud

Retailers are facing growing threats from fake and synthetic IDs, leading to chargebacks, fines, and stolen goods. As fraud methods diversify and become more sophisticated, unprepared businesses are left vulnerable. Specifically, return fraud and fake identities carry the most considerable risk, both from financial and reputational standpoints.

Return fraud comes in many shapes and sizes, with the ultimate aim of receiving an item or service without paying for it, or the cash it was worth. An individual committing return fraud usually seeks goods for themselves or acquaintances, however, for highly organized criminal gangs, return fraud is used to fence items. Successfully stopping return fraud brings consistency to revenue, reduces shrinkage, and creates a more consistent, satisfying experience for legitimate customers.

Types of return fraud include:

• Receipt fraud: Creating, altering, or stealing receipts to return merchandise
• Stolen property: Stealing items from a store and returning them
• Wardrobing: Buying an item, using it, and then returning it
• Price switching: Returning a cheaper, used item in place of the original
• Falsely claiming damage: Claiming that an item is damaged or unsatisfactory to secure a refund or replacement
• Buy online pick-up in-store (BOPIS): Claiming to have bought a product online, lost the receipt, and returning it to a store
• Switching fraud: Returning a counterfeit product to the retailer in the hope of being refunded

Another key risk is underage individuals trying to purchase age-restricted goods. While the organised criminality of return fraud seems more threatening on the surface, enabling age-restricted products to be sold to minors can cause equal, if not greater, disruption.

If fake IDs bypass retailers’ defenses, the consequences can be severe. Fines can start at as much as $2000 per incident, increasing each offense, licenses to sell age-restricted products can be revoked, and lawsuits. Should post-purchase incidents occur, they can down even the most established of retailers. The reputational and economic implications of selling to unauthorized individuals cannot be understated and must be avoided at all costs.

Combatting return fraud

The systems used to tackle return fraud center around identity verification. Knowing the customer and their return history is a surefire way of deciphering whether a return is genuine or fraudulent – retailers armed with these insights can deter fraudsters from attempting the return in the first place.

ID verification, conducted at the return desk or checkout, allows retailers to keep track – in compliance with data protection legislation – of the customers making returns. Information can be automatically input into verification systems and then contextualized and ordered to provide important information to the retailer during the return process, allowing for fraud to be managed at the point of return.

These systems can also communicate this information between different stores, reducing weak points in franchises. What’s more, ID-based identity verification can be seamlessly integrated into a retailer’s point of sale, allowing for a frictionless process while adding increased fraud prevention – post-integration, the process is as simple as scanning an ID.

Combatting underage purchasing of age-restricted products

Minors aiming to purchase age-restricted goods can’t be tracked in the same way as return fraud – processing IDs for all underage customers isn’t possible, and can damage customer experience. While physical security specialists may have their systems in place for recognizing individuals, the sheer commonality of fake IDs means individuals can easily own various fraudulent identity forms with different names, ages, and states, making tracking repeat offenders a challenge.

There are also concerns for retailers that a growing presence of fake IDs is exacerbated by the AI-generated fraudulent ID images, now readily available for purchase on the dark web for as little as $5. However, as things stand, AI-generated IDs can be caught at a success rate of 99.6%. That said, AI-generated ID images will continue to improve, and underage customers will always be able to procure the latest in false identities.

Catching these individuals and stopping the serious financial and reputational implications of letting an underage customer purchase age-restricted customers relies on two things: effective staff training and consistent usage of powerful identity verification scanners.

Challenge25, or Think25 in the UK, is businesses’ first defense against underage customers purchasing age-restricted goods. While not foolproof, the process brings about a seamless identity verification process. Well-advertised across stores, customers of a certain age acknowledge the requirement to present an identity, reducing friction at checkout and making the experience smoother and more satisfying.

Provided an employee adheres to the Challenge25 policy, physical identity verification scanners can do the rest. Catch rates via this method are upwards of 95%, meaning only the very best fake ID documents surpass the systems, however, not all verification solutions are created equal – the right provider will have harnessed the latest technologies to assess every detail of an identity, and continue to update their verification solution as new fraudster methods come to light and new identity forms are rolled out.

In practice: Rouses Supermarkets

Serving as an example, Rouses Markets, one of the largest independent grocers and fastest-growing family-owned companies in the United States, identified return fraud as one of the businesses’ largest revenue threats.

Implementing an ID verification process, Rouses saw a 36% reduction in merchandise returns during a five-store pilot rollout over five weeks, while other stores in the area saw an increase in returns during the same period. The retailer also saw 5.7% of initiated returns were rejected by the manager or abandoned by customers.

Addressing the re-balance

It should not be up to the savvy eyes of retail workers and owners to stop fraud, they are specialists in excellent customer experience. By understanding the impact of return fraud and underage purchasing on retail business and the opportunities within verification solutions, significant strides can be taken to protect both revenue and customers. Retailers must act now, and diligently assess the reduction of fraud-related losses relative to solution investment, they’ll be surprised at the results.

About the author

Jimmy Roussel is a tried-and-tested growth expert specializing in accelerating the expansion of technology companies across the US. At IDScan.net, Jimmy plays a vital role in continuing IDScan.net’s best-in-class identity verification solutions, servicing businesses across the US to increase their anti-fraud measures to protect revenue and increase customer safety.

Article Topics

age verification  |  document verification  |  fraud prevention  |  ID verification  |  identity verification  |  IDScan.net  |  retail biometrics