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19 Mar, 2020

Why Fraudsters Love Gift Cards & How They Use Them

Everybody loves a gift card and in our increasingly digital world, e-gift cards, or gift cards that are purchased and redeemed online, have made gift cards even more popular among consumers and retailers alike. In 2018, U.S. consumers spent approximately $160 billion on gift cards. During the holiday shopping season, gift cards become even more popular, with studies showing that 54.0 percent of shoppers will give gift cards to people on their list. Gift cards are so popular, that the Persistence Market Research firm predicts that global sales of digital gift cards and vouchers will reach $700 billion by 2024.

Unfortunately, though, the convenience that gift cards offer makes them an easy target for scammers. According to Geoff Blackburn, e-commerce fraud manager for Omnichannel payments and fulfillment provider Radial, scammers attack digital gift cards at a rate of nearly 17 percent. Open-loop cards that are branded by Visa and MasterCard are scammed at close to 21 percent, while gift cards offered by entertainment companies are attacked at 24 percent. E-gift cards offered by jewelry merchants are attacked by fraudsters nearly 28 percent of the time.
Gift cards are ripe for fraud for several reasons: First, gift cards are completely anonymous and untraceable. Gift cards are like digital cash, with no permanently linked account information that could connect the card to a single individual. Second, gift cards can easily be converted into cash, actual merchandise, or a cryptocurrency like bitcoin. Finally, gift cards are not protected by industry standards like credit cards, and can be used to fund felonies as petty as minor larceny and as major as international organized crime.

Below, we’ve outlined all you need to know about digital gift card fraud, and steps you can take to protect your company from being victimized by this growing genre of fraud.

How do scammers exploit gift cards?

Gift cards offer fraudsters endless opportunities for crime. Here are just a few ways gift cards are used for scams:

  • Online gift cards purchased with stolen payment information. In the most prevalent e-gift card scam, fraudsters use stolen credit card information to purchase e-gift cards online, and then resell the cards for cash. If the credit card holder discovers the fraudulent charge, the merchant who originally sold the gift card will need to cover the cost.
  • Requesting a gift card instead of a refund. In this scam, the fraudster will make an online purchase using stolen credit card information. They’ll return the item, and ask for the refund on a gift card. The credit card holder may contest the charge, but there’s no way to recover that gift card.
  • Hacking merchants to steal gift card numbers in bulk. Scammers use phishing, SQL injection, social engineering of employees, and other ways to hack merchants and to rob them of gift card numbers.
  • Hacking consumers’ accounts. Scammers break into consumers’ online shopping accounts or bank accounts, and purchase gift cards with the victims’ money.
  • Hacking credit card rewards. In this scam, fraudsters will hack a victim’s bank account, gain access to their credit card rewards, and then redeem the rewards for gift card numbers which they then use or convert into cash.
  • Revenue service calls. Scammers posing as IRS agents or representatives of another well-known organization call victims and demand payment in the form of gift cards for false charges like tax evasion.
  • Gift card balance monitoring. Scammers use gift card bots to monitor retailers’ databases for available gift card balances, and then transfer large balances to their own accounts.

Is there any way for merchants to protect themselves from gift card scammers?

Unfortunately, when scammers use sophisticated methods to exploit gift cards, their own actions are untraceable and they leave the merchants to pick up the tab. Luckily, there are ways for merchants to protect themselves from being victimized by gift card fraud.

When fighting gift card fraud, time is of the essence. It’s best to prevent gift card fraud before the card is issued. If that’s not possible, every effort should be made to recover the card before it’s used or traded. If the transaction or trade has already been finalized, work on identifying the fraud and cancelling the card to mitigate the financial loss to your company.

Here are a few steps merchants can take to protect themselves from gift card fraud:

  • Track all gift card data. If you offer gift cards, track each card’s data from initial purchase to redemption. This way, any suspicious behavior, like instant activation and redemption, can be flagged for further investigation.
  • Strengthen and broaden internal controls. Scammers often work in groups and run multiple scams at the same time. They often involve a merchant’s employees in their scams. A strong system of internal security can help you prevent and identify employee fraud.
  • Monitor all mentions of your brand on gift card trading sites. If your brand is frequently mentioned on a gift card trading site, you may want to investigate. The seller may be a scammer, or, you may be looking at brand impersonation fraud.
  • Postpone card activation. To reduce the risk of fraudsters activating a card without completing their transaction, first ring up all other items a shopper is purchasing and activate gift cards last.
  • Make data security a priority. Invest in a robust data security system to help your company avoid IT glitches and data breaches.
  • Strengthen gift card security features. Enable your gift cards to have additional security PINs.
  • Limit maximum gift card amounts. This limits financial losses for the customer if their card gets stolen or lost.
  • Keep yourself updated on the latest scams. You can check out the Federal Trade Commission’s Scam Alerts for information on the most recent scams.

If you’re still worried about gift card fraud, we can help! In order to successfully and efficiently combat gift card fraud, much intelligence, historical data and Machine Learning algorithms are needed. FraudFix has been in the fraud detection business since 2008. Contact us to learn how we can help you take the steps listed above to keep your company safe from fraud. We utilize billions of data points to enable us to deliver cost-effective and efficient payment verification services to our merchants, thereby decreasing the risk of fraud and keeping our merchants’ information completely secure.

Your company is always safe with FraudFix.