The UK retail sector is grappling with a dramatic rise in fraud, posing a major threat to business sustainability and customer trust. In 2023, the sector suffered losses of £11.3 billion as a result of fraud, with over one-third of UK businesses (35%) having been targeted by fraudulent activity or cyberattacks – a whopping 37% increase compared to 2022.
With small and medium-sized businesses making up a large portion of the retail sector – and often lacking the resources needed to protect themselves – they’re increasingly vulnerable. In this article, we’ll look at the growth of retail fraud, its financial implications and the steps businesses can take to reduce the risks.
A fraud overview
Retail fraud covers a wide range of illegal activities, all designed to deceive retailers into parting with money, goods or services. Traditional forms of fraud, like shoplifting and counterfeit returns, have been joined by more complex forms involving digital technologies. As a result, retail fraud isn’t just increasing in frequency but also in sophistication, leaving many businesses – particularly smaller ones – struggling to keep up. SMEs are prime targets for scammers looking for an easy target to exploit, accounting for 598 fraud cases reported in the UK this year.
The most common types of retail fraud in the UK
As fraud becomes more pervasive, retailers are seeing a rise in several specific types of scams. The most popular include:
● Payment fraud
Often executed through online channels, payment fraud involves the use of stolen or fake credit card information to make unauthorised purchases. Criminals use tactics such as phishing and card-not-present fraud to bypass traditional security measures, taking advantage of gaps in a retailer’s online payment system.
● Return fraud
Return fraud remains one of the most persistent threats to retailers, affecting both physical and online stores. After buying items online, fraudsters attempt to return stolen, damaged or counterfeit goods to receive a refund or store credit. In some cases, scammers return empty boxes or switch price tags before making a return.
● Chargeback fraud
Also known as “friendly fraud”, this is when customers dispute legitimate charges, claiming they never received the product. Chargeback fraud is particularly damaging to e-commerce retailers as it not only results in financial losses but can seriously harm the retailer’s reputation.
● Price tag manipulation
This involves switching price tags to purchase high-value items at a lower price. It may not be a particularly high-tech method of fraud but it’s effective nonetheless, particularly in stores that lack solid security protocols.
● Gift card fraud
In this case, fraudsters purchase gift cards using stolen credit cards or use fraudulent methods to deplete the value of legitimate cards.
● Bracketing
Bracketing is a common shopping practice where consumers buy multiple versions of an item – perhaps different sizes or colours – with the intention of keeping only one and returning the rest. Legitimate shoppers often use it to make better comparisons, but it becomes fraudulent when people use fake identities or stolen credit cards to obtain items that they can resell for a profit.
The cost to the retail sector
While all businesses in the retail sector are at risk, fraudulent activity is hitting some retailers harder than others. A report by the Centre for Economic Business and Research (Cebr) revealed the following:
- Retail businesses lost an average of £1.39 million to fraud in the last year.
- Luxury fashion retailers were hit the hardest, losing an average of £2.8 million each.
- Clothing and accessory businesses reported average losses of £2.6 million.
- Health and beauty brands experienced average losses of £1.1 million.
While the direct financial losses from retail fraud can be damaging, the hidden operational and reputational costs can be more significant, undermining consumer trust and having a far longer-term impact.
Operationally, retailers face increased costs related to improving their security measures, such as purchasing advanced fraud detection technologies and hiring additional staff for loss prevention. These investments, while necessary, can strain budgets – once again, problematic for smaller retailers with limited resources. In addition, the time spent investigating fraudulent activities diverts staff from their main business functions, reducing overall productivity and efficiency.
Reputationally, the impact of retail fraud can be even more profound. Consumers are more likely to shop with brands they trust, and reports of fraud can seriously tarnish a retailer’s reputation. A 2024 survey revealed that 26% of UK shoppers feel less secure shopping today compared to a decade ago, with many citing concerns over data breaches and fraudulent transactions. When shoppers perceive a retailer as vulnerable to fraud, they tend to seek alternatives, eroding brand loyalty.
How can businesses avoid fraud?
As worrying as the retail fraud arena may be, there are a number of key strategies that businesses can adopt to reduce their vulnerability.
Implement stronger returns policies
Retailers can use the relatively cheap strategies of requiring proof of purchase for all returns, limiting return windows and inspecting returned items before issuing refunds. E-commerce businesses can additionally boost security by requiring identity verification for return requests, helping reduce the popularity of “bracketing” and other fraudulent return schemes.
Invest in fraud detection technology
There’s no avoiding the fact that retailers need to incorporate fraud detection technology into their operations. AI-powered fraud detection tools can analyse transaction data in real-time, flagging suspicious activity and preventing unauthorised purchases. It may be costly, but the price of this technology is always falling, while the financial impact of fraud is always rising.
Employee training
Well-informed employees are a company’s first line of defence. Staff members should be trained to identify signs of fraud, such as altered receipts or unusual customer behaviour – and equipped with the knowledge to prevent fraudulent returns or unauthorised transactions.
Boost payment security
Payment fraud can be minimised by upgrading to secure, encrypted payment systems. Tokenisation and two-factor authentication (2FA) offer additional layers of protection for credit card transactions, reducing the chances of card-not-present fraud. For online retailers, partnering with secure payment processors that specialise in fraud prevention is another way forward.
Collaborate with industry peers
Retailers can benefit from cooperating with industry peers and joining fraud prevention networks. Sharing information on common fraud tactics and emerging threats keeps businesses up-to-date and better equipped to protect themselves against new fraud schemes.
Heighten customer awareness
Finally, educating customers can help reduce fraud by encouraging them to use secure payment methods, monitor their accounts for suspicious activity and report any fraudulent charges immediately.
What to do if you’re a victim of retail fraud
If you find yourself a victim of retail fraud, you need to take immediate action. Start by reporting the incident to Action Fraud, the designated reporting centre for fraud and cybercrime in England, Wales and Northern Ireland. You can file a report online or by calling 0300 123 2040. In Scotland, reach out to Police Scotland by calling 101.
You also need to inform your bank or payment service provider immediately if you’ve lost money or suspect unauthorised access to your account. Contact them directly using verified contact information from their website, or the back of your card, to initiate recovery procedures while keeping your account protected.
Additionally, notify any relevant organisations involved, such as those whose names were misused in the fraud (like utility companies) or the platform where the fraud occurred (such as social media sites). This will help prevent further victimisation and support broader investigations into fraudulent activities.
A final thought
Even if the amount you’ve lost to fraud is relatively small or you’re able to absorb the cost, it’s important to do something about it. Fraud is largely underreported – the CSEW (Crime Survey of England and Wales) estimates that only 13% of fraud cases are reported to Action Fraud or the police by victims.
That gives scammers an 87% chance that no one is going to come after them if they commit a fraudulent crime – a pretty strong incentive to give it a try. With the numbers increasingly stacked in their favour, we shouldn’t be making life any easier for them.