Customers love the flexibility and convenience of gift cards, and merchants love customers who buy them.
Unfortunately, gift cards are prime targets for scammers and fraudsters, and gift card fraud can leave merchants vulnerable to damaging chargebacks from the credit cards that were originally used to purchase them.
GIFT CARD REFUND FRAUD
If a customer ever wants to return a product and asks to have it refunded to a gift card, watch out. It could be part of a scheme to extract untraceable funds from a stolen credit card. Here's how it works:
Fraudsters use a stolen card number to make a purchase, then bring it back for a refund and ask for the funds to be put on a gift card. Eventually, the payment card’s true owner will report the unauthorized transaction and request a chargeback. The merchant loses twice the transaction amount plus all the fees and hidden costs associated with a chargeback. Meanwhile, the fraudster has a gift card they can use or sell without issue.
PLEASE NOTE: Merchants can avoid this by always insisting that funds be returned to the same payment card used to make the purchase and always checking ID for any refund as a policy rule.
Sometimes customers may claim that they no longer have the card, but this is often a red flag for potential fraud. Even if it's true, the funds can still be returned to the old card account and the customer can claim them from the issuer.
- We’ve identified where prospects want to use one or more gift cards, are waiting for a gift card “someone” bought them to be able to pay for merchandise or services. They may be a victim of having bought or received a card that was fraudulently obtained, or they may have purchased with a card that will charge back as stolen/fraud. They may say things like “I don’t have a credit card” and they likely won’t provide a card to put on file. The best defense is knowing your customer, be aware of people that won’t provide ID.
To deter this kind of fraud, make sure you are:
- Create a prospect profile
- look for red flags in conversations
- Always checking ID
PHYSICAL GIFT CARD TAMPERING
When you sell physical gift cards in open retail locations, you’re open to a few different kinds of schemes that involve tampering with them.
BUYING GIFT CARDS WITH STOLEN CREDIT CARDS
The most widespread form of gift card fraud is also the simplest.
Fraudsters simply use stolen credit card numbers to buy gift cards online and use or resell them before the merchant gets hit with the inevitable chargeback. This is one of the easiest ways for a fraudster in possession of stolen payment credentials to make a quick profit. CHECK for ID when people are buying gift cards, and whenever possible
One method involves copying one gift card’s barcode onto other cards, so that when shoppers purchase and activate the cloned cards, the fraudster has access to those funds.
- Fraudsters may also copy down the card numbers and activation codes on cards still on the sales rack, using stickers to cover up any scratch-off coverings they removed. As soon as an honest customer purchases and activates one of the cards, the fraudster can start using it.
When merchants aren’t in direct control of the retail environment in which their cards are sold, it’s difficult for them to prevent this kind of exploitation. Smaller merchants may be able to be more restrictive about how and when customers have access to unsold gift cards. Customers should be aware that it’s always safer to buy gift cards online, direct from the merchant, and that any time you buy a gift card from a retail location you should change its PIN as soon as it is activated.
GIFT CARD FRAUDS LEADS TO CHARGEBACKS
Remember, a gift card security problem is a chargeback problem waiting to happen — or more likely, a chargeback problem already happening. The customers whose payment cards get used to fund the gift cards used in these schemes are virtually guaranteed to dispute the charge sooner or later, and even the best chargeback representment strategies won’t do much to help you when true fraud is the reason.
Don’t treat gift card management like an afterthought. Keep your gift cards secure until sold and know your customer, check ID for purchases and refunds and be alert to red flags when customers tell you they don’t have a credit card and use gift cards.