INDUSTRY NEWS

Perspective on the Cost of Fraud in Retail

by Robert L. DiLonardo

DiLonardo is a well-known authority on the electronic article surveillance business, the cost justification of security products and services, and retail accounting. He is the principal of Retail Consulting Partners, LLC (retailconsultingllc.com), a firm that provides strategic and tactical guidance in retail security equipment procurement. DiLonardo can be reached at 727-709-6961 or by email at rdilonar@tampabay.rr.com.

Security issues surrounding e-commerce and m-commerce (mobile) have earned quite a bit of attention from the press during the past year and rightly so. LexisNexis recently published its sixth annual study that values the actual cost of fraud borne by US retailers. Entitled “The True Cost of Fraud 2014” (lexisnexis.com), the study’s objectives are to present key findings and specific guidance to retailers for mitigating these costs.

Researchers from Javelin Strategy and Research surveyed 1,142 risk and fraud decision makers and influencers from retailers of all sizes, markets, channels, and payment methods. Respondents included executives from a very wide range of retail classifications, including automotive, housewares, computers, hardware, restaurants, drug/health, gasoline stations, textiles, sporting goods, general merchandise stores, non-store retailers, and miscellaneous.

The research covers so-called “consumer-facing” retail fraud methods listed below, but does not include information on fraudulent activity or theft by employees. ■ Fraudulent and/or unauthorized transactions ■ Fraudulent requests for a refund/return ■ Bounced checks ■ Lost or stolen merchandise, as well as redistribution costs associated with redelivering purchased items (including carrier fraud)

The Cost of Fraud

Merchants lost an average of 0.68 percent of sales to consumer-facing fraud, which is 33 percent more than the previous year’s rate of 0.51 percent. The increase in losses is the result of a higher volume of fraudulent transactions this year.

The study subdivides the fraud losses by segment. While the average of all merchants lost 0.68 percent of sales, m-commerce merchants lost 1.36 percent, international merchants lost 1.21 percent, and large e-commerce merchants lost 0.85 percent of sales.

Merchants also incurred more ancillary costs in addition to fraud losses. Each dollar of fraud cost them $3.08, compared to $2.79 last year, according to the LexisNexis® Fraud Multiplier™. Ancillary costs include charge backs for merchandise, the fees and interest to financial institutions and payment processors, as well as any replacement, redistribution, or restocking fees incurred by a merchant. The rise in costs is associated with an increase in m-commerce fraud, as more retailers begin to accept mobile payments.

Fraud Prevention Batting Average

Since we are in the business of loss prevention, I was fascinated by the data showing the number of prevented fraudulent transactions per month as compared to the number of successful fraudulent transactions per month.

The bad news is that the number of successful fraudulent transactions has risen over the past four years, jumping from an average of 91 per month last year to 133 per month this year—an increase of over 46 percent.

The good news is that the number of prevented fraudulent transactions has also increased over the four-year time period, jumping from an average of 94 per month last year to 165 this year—an increase of over 75 percent. So if we compare the number of prevented fraud transactions to the number of successful fraud transactions, we find that the fraud prevention batting average is rising. Last year merchants prevented 94 per month, and the crooks were successful 91 times per month —a ratio of 1.03 (anything over 1.0 is considered “good”). This year merchants prevented 165 per month, but lost 133—a ratio of 1.24. Thus, the tide seems to be turning in favor of the good guys.

The report suggests that the best way to get a handle on fraud and its related costs is tracking incidents by channel and payment method. Every payment method and channel shows a unique risk profile and may require different steps for mitigation. Tracking helps merchants assess the need for investment in fraud prevention solutions.

Recommendations

The report suggests that the best way to get a handle on fraud and its related costs is tracking incidents by channel and payment method. Every payment method and channel shows a unique risk profile and may require different steps for mitigation. Tracking helps merchants assess the need for investment in fraud prevention solutions. The available solutions may need to be tailored to the type of channel and payment method.

The analysts also recommend that m-commerce merchants and those considering accepting payments from this channel should

continued from page 74 implement fraud prevention solutions that specifically address the unique threats. Mobile is a growing fraud channel that carries the same fraud liabilities as other “card not present” transactions, except contactless NFC payments. As m-commerce expands beyond the digital-goods realm, the costs associated with this fraud type increase. Solutions such as device fingerprinting and geolocation are among the options best suited for mobile transactions.

It doesn’t take a genius to understand that we will be continually chasing the criminal element involved in retail payment transaction fraud, and all other retail frauds for that matter. What matters is our relentless pursuit of countermeasures that keep us steps ahead, instead of behind.

To read more about the challenges associated with mobile payments, see “Mobile Payments—The New Retail Revolution and Its Impact on LP” on page 43 in this issue.

The Fight for $15: What Does It Mean for our Workforce?

By Jacque Brittain, LPC

“Hard working men and women deserve the opportunity to earn a wage that they can live on. They should be able to put food on the table, have a roof over their heads, and provide for a family without having to work three jobs and seventy-plus hours a week to make it happen. They should be able to support themselves, their families, and their neighborhoods. They should be treated with dignity and respect. They shouldn’t be forced to rely on public assistance to provide for basic necessities like food, rent, transportation, and healthcare for their children.”

There are very few people with any level of human compassion that could or would disagree with statements like these, which are commonly used as rallying remarks tied to the “Fight for $15” campaign. But what’s the best way to get there? How do we distinguish between providing the opportunity to earn a living wage and mandating that every position provides that wage? What expectations are then attached? Should a young person assuming their first job working at a quick casual restaurant be entitled to a starting wage that could support a family? Should an adult working that very same job assume that they should then earn a wage that can support a family? Where’s the balance? There are many difficult questions and far fewer answers.

According to National Retail Federation statistics, retail is the nation’s largest private-sector employer, supporting one in four US jobs—42 million working Americans that add trillions of dollars to the nation’s economy. Quick-casual restaurants are a $200 billion a year industry that employs approximately 4.5 million, according to the Bureau of Labor Statistics. Many of those that hold these positions begin at an entry level as they learn the business and develop the skills and experience to contribute to the success of the organization. Training and development opportunities and performance-based incentives typically provide the means for advancement and higher wages. Yet many of those that continue to hold entry-level positions can struggle to make ends meet. Many of those that remain at these entry level wages must find other ways to complement their income.

Launched November 2012, the Fight for $15 movement was founded in an attempt to raise the minimum wage to $15 an hour. With the current federal minimum wage standing at $7.25 per hour, this would more than double that wage rate. The movement began with a walkout of quick-casual restaurant workers in New York and has gained momentum ever since. In early December 2014, workers staged one-day demonstrations in over 190 cities, creating what has been called “the largest labor protests in the nation in years.”

The Cost of Doing Business

Outside of the cost of goods, payroll remains one of the highest expenses for most retail and related businesses, often accounting for 20 to 35 percent of gross income, according to many typical business models. These numbers can rise substantially in service-related industries where payroll may account for up to and exceeding 50 percent of gross income. In addition to salaries, these numbers can be increased by the costs of benefits, payroll taxes, unemployment taxes, and other related expenses that will have a direct impact on the overall cost of doing business. These costs must be carefully managed in order to remain profitable, attract workers, manage business operations, and maintain competitive wages that allow for annual and

performance raises and other associated programs and incentives.

How would an initiative that calls for an increase that more than doubles the minimum wage impact the operation of these businesses? Other than the potentially devastating impact of the increased costs, how will this affect the overall management of payroll dollars? Especially for those businesses that operate primarily with employees that earn wages on the lower end of the pay scale, such as quick-casual businesses and similar operations, this type of increase could ultimately threaten the viability of many operations. Most businesses simply can’t—or won’t—absorb all of these costs. Fundamental principles of economics tell us that costs won’t simply be absorbed by the business owner, as some have suggested. These expenses would be largely addressed in other ways.

“Businesses would first look for ways to reduce their payroll expenses, and for many this would mean significant staff eliminations,” claimed a high-level representative for a quick-casual restaurant. “Companies will also explore new ways to increase automation and reduce payroll. Additional responsibilities will

Outside of the cost of goods, payroll remains one of the highest expenses for most retail and related businesses, often accounting for 20 to 35 percent of gross income, according to many typical business models. These numbers can rise substantially in service-related industries where payroll may account for up to and exceeding 50 percent of gross income.

have to be linked to certain staff positions as a result. Benefits could be further impacted. Raises could be highly moderated and substantially cut back. Significant changes will come as companies look for ways to reduce costs and remain profitable, and many of those changes will directly impact the workforce.

“And what about employees that have worked hard to earn increases based on service and performance? It’s highly unlikely—virtually impossible—to expect that they would receive proportional increases. In fact, it could likely have a negative impact by lowering performance increases and other opportunities as companies react to the situation. How will our employees respond when non-skilled, entry-level workers are coming in with little or no experience making the same wage?” the representative asked.

Another quick-casual restaurant executive stated, “Some smaller operations simply won’t be able to absorb the costs and will have to shutter their businesses. Larger operations will redefine the business model, eliminate jobs, and pass on many of the costs to the consumer. It’s not as simple as just giving everyone a raise. There would be consequences, and those consequences would be shared.”

Muddying the Waters

Looking at many of the websites and articles that promote the “Fight for $15” campaign, you’ll find that the push isn’t simply to raise wages for the employees that work in these establishments or to simply improve the quality of life for hard-working individuals. In fact, if you look at most of these campaigns closely, a secondary motive stands out very clearly. The actual campaign slogan used by the official Fight for $15 reads, “The Fight for $15 campaign is seeking a $15-per-hour

living wage and the right to form a union without retaliation.”

Union movements are deeply entrenched in the Fight for $15 campaign. There is a strong push by several labor organizations to attach union representation to these efforts and to use the campaign to compel workers to form labor unions in restaurants and other retail establishments. For instance, many of the recent protests were backed largely by the Service Employees International Union (SEIU).

“The Fight for $15 movement is growing as more Americans living on the brink decide to stick together to fight for better pay and an economy that works for all of us, not just the wealthy few,” said Mary Kay Henry, president of the SEIU in a recent interview. According to The New York Times, the SEIU has supplied more than $10 million to help finance the organizing operations.

This is a strong message and a powerful reminder that a power-in-numbers approach to workforce issues still carries tremendous value and relevance. Unions remain an active and influential force in the business world, commanding our continued attention and respect. Historically, they have provided a strong resource and a powerful voice for the American worker. But is this what the employees are looking for? Are these workers looking to improve their wages and quality of life, or are they looking to create a union? Is that what the workforce wants, or is this a situation where there are other motives or interests muddying the waters?

While it’s very easy to see how these movements can be tied together, we are really addressing two very different issues. As a result, multiple agendas can cloud the message, question motives, raise additional concerns, and ultimately impede both progress and outcomes.

LP Magazine did reach out to the Fight for $15 campaign and the SEIU for comment and additional clarification, but have not received any response regarding our requests at this time.

From a loss prevention perspective our primarily responsibility is to ensure that appropriate steps are taken to ensure the safety and security of our employees, customers, and facilities if and when incidents occur at our locations. This is best accomplished by taking proactive measures through planning, training, awareness, and strategic action.

Safety and Security Concerns

Does every man and woman deserve the opportunity to earn a wage that they can live on? Is there a difference between having that opportunity and requiring that every potential employment prospect provide that opportunity? Should the minimum wage be increased to $15 an hour? How do we define “fair pay?” Will such increases have harmful and lasting impacts on many business operations? Will this lead to loss of jobs and employee unrest? Is the introduction of additional labor unions part of the answer?

When it comes to matters of this nature, passion and emotion are often tied to our responses. When coupled with large groups, public space, and conflicting opinions, this clearly has the potential to lead to safety and security concerns in locations where demonstrations are held.

While many demonstrations are peaceful, some situations have escalated with protesters taking a more aggressive approach to share their message. “There have been incidents of vandalism, violence, and intimidation,” revealed a representative from a national food chain. “Protesters will enter our locations and take over the restaurant. There have been times when we’ve had to lock the doors to protect our customers and our staff.”

Ironically, many of these incidents are allegedly carried out by individuals who aren’t employees and have no direct connection to the businesses being targeted. According to one high-level representative for a quick-casual restaurant, “When we look at most of the protests that have taken place in our restaurants, the overwhelming majority of those participating aren’t actual employees, but rather union demonstrators and others with no ties to the company. Several white fourteen-passenger vans will show up at our sites with protesters quickly moving in to disrupt our business, berate our customers, and taunt our employees. Conversations quickly shift from employee rights to union organizing. Employees have even been followed to their homes and aggressively pressured to sign union cards,” he stated.

So what steps are taking place to protect the customers, the employees, and the locations? In response to these potential