The Internet retail boom has worsened long-standing headaches associated with merchandise returns. Store managers across the country are counting out cash from their registers for goods bought online; tenants are spending more time figuring out ways to process, distribute and liquidate Internet returns; and landlords are re-writing leases to deal with the threat of declining sales and lower percentage rents.

Whether bought online or in cyberspace, merchandise worth billions of dollars ends up back in retailers' hands each year. According to a recent study by Boston Consulting Group and the e-tail trade association Shop.org, about 5% of all goods bought online are returned. The National Retail Federation says the merchandise return rate for brick-and-mortar retailers is about 6%.

Although dot.coms might appear to be part of the problem, a Santa Ana, Calif.-based technology firm is marketing a novel solution. Instead of selling those returned VCRs to a traditional liquidator for pennies on the dollar, why not have Amazon.com or eBay auction them for you? Problems with return fraud? Why not use a database to find out which of your apparent customers are actually crooks? These are among the ideas offered by The Return Exchange, which recently launched a suite of Internet-based services designed to reduce fraud and make processing returned merchandise more efficient.

A new liquidation channel In addition to its relationships with Amazon.com and eBay, The Return Exchange operates its own auction website to help retailers liquidate non-defective, returned or overstocked merchandise that cannot be sold as new or returned to the manufacturer.

"We're not promoting our site - finalauction.com - as heavily as we are the partnerships with eBay and Amazon," explains Mark Hilinski, vice president of sales and marketing. "Those sites already have the eyeballs and the traffic. Right now, we're experimenting with different product lines and how well they sell on different websites. For example, we've found that consumer electronics seem to be selling the best."

The Return Exchange signs varying liquidation arrangements with retailers. Some retailers ask for a percentage of sales, while others choose to unload merchandise in exchange for a lump sum.

Habitual returners The Return Exchange's fraud prevention system is called Verify-1. It enables brick-and-mortar retailers to check the return patterns of consumers, while Internet retailers can use it to verify online purchases.

On the brick-and-mortar side, Verify-1 enables sales clerks run the driver's licenses of people returning goods through a card swiper. (Most of states now place bar codes on licenses.) The returners' profiles are then automatically checked against a national database of merchandise return patterns operated by The Return Exchange.

"The information for the database is collected either through the point-of-sale system or a VeriFone terminal. What we're looking for are the habitual returners, such as the warehouse guys who pocket money from stolen goods," Hilinski explains. "When we swipe the customer's information, the system will ping our database and say, 'This person has made five returns for five products in the last five days.'"

If that frequency is more than the agreed-upon algorithm set by the retailer, Hilinski notes, the transaction will be denied. The store manager then decides how to proceed.

For click-and-mortar strategies, Verify-1 includes a software application that is hyperlinked to an e-tailer's website. When a customer wants to return a product, the system confirms the purchase and in seconds provides the customer with an online authorization code. This gives e-tailers verification of the purchase and better protection against fraud.

Back on the shelf The Return Exchange has also worked out strategic arrangements with reverse logistics providers - companies that specialize in handling returns for multiple retail clients. These service providers operate regional processing centers across the country where returned goods are either sent back to manufacturers, repackaged to be resold in stores, or liquidated. Hilinski notes that only about 20% of returned goods must be liquidated. The rest are in perfectly good shape.

The Return Exchange is one of the first companies to try to use the Internet to deal with merchandise returns. Will others follow? If so, will they make a dent in the problem? Although new technologies have created significant challenges for the shopping center industry, maybe some of the answers will be found in technology itself.