Online Gift Card Fraud: Schemes and Prevention
Gift cards are on the rise as a consumer category. Unfortunately, They are also a fraudster’s dream, having topped the list of preferred payment methods by scammers since 2018. According to the US Federal Trade Commission, 1 in 4 Americans who report losing money to fraud lost it via some kind of related scam, and the total losses due to gift card fraud keep on climbing every year.
What is gift card fraud?
Gift card fraud is any type of illegitimate activity that involves such cards, whether as a product or a payment method. It can manifest in several ways:
- Unknowingly buying stolen gift cards offered by resellers posing as legitimate merchants.
- Buying an “empty” gift card that has already been activated by fraudsters who obtained the code beforehand. Around 21% of consumers reported experiencing this type of fraud, according to one survey. With physical gift cards, sometimes the packaging has been opened to obtain the activation code and then closed.
- Being tricked into sending a fraudster the details of a gift card, which is then drained.
- Fraudsters obtaining stolen gift cards and using them to buy high-risk products, thus flying under the radar easier.
What are some popular gift card fraud schemes?
Fraudsters have many ways to scam people into paying them with gift cards.
- One popular method is posing as a government official, such as a tax authority or social security agent, or a utility provider like a power company. The victim is then told they have to pay an outstanding debt or a fine, and given the details of which gift card they should purchase to do so.
- Someone posing as tech support from a big-name company like Microsoft or Apple and asking for payment only in gift cards to solve an issue the victim is supposedly having.
- Fraudsters contact people with the promise of a prize or a special deal, and ask for an upfront payment to redeem it – in the form of a gift card.
- Posing as a friend or family member in the midst of an emergency who needs a card stat.
- Some people have even reported falling for such a scam when applying for what seemed like a legitimate job interview.
- The romantic scammer – someone who opens up a profile on a dating site and lures people into giving them money via gift cards.
- The check method – you are given a check for a sum that exceeds expectations and asked to pay back the difference via gift card. Only the check is fake, and you will be out the value of the card.
On the retailer side, gift cards are considered a higher-risk product category, with bad actors purchasing cards with stolen funds that will then result in a chargeback. They are also a riskier payment method than, for example, credit cards, due to the anonymity they enable.
Why do fraudsters like gift cards?
Consumers love gift cards because they are easy to buy and use, can be used to purchase a wide variety of products, and within a broad time frame – from just minutes after purchase to as long as five years after.
Fraudsters, too, love them for their immediacy, convenience, and the fact that they are as good as cash. But to them, gift cards offer the added bonus of enabling them to skip over the stumbling blocks of traditional fraud-prevention methods such as address verification and delivery.
Gift card fraud prevention
The best way to avoid falling victim to gift card fraud is to exercise caution and remember that if something looks too good to be true, it probably is.
- Buy only from well-known and reputable sellers.
- Remember – government officials and service providers will never ask for a payment in gift cards. Neither will Apple or Microsoft.
- When buying physical gift cards, inspect the packaging and protective stickers for any sign of tampering.
- “Check your balance” websites are often fronts set up by scammers to steal the gift card’s content. Be wary of those that ask for the PIN or security code.
- If contacted by a friend or family member with an emergency request, check in with them first before buying and sending a card.
- Most big retailers have a hotline or contact address to report such scams, for example, Amazon, eBay, and iTunes.
- Contact the relevant authorities in your country. In the US, that is the Federal Trade Commission.
What can retailers do to protect themselves from gift card fraud?
As stated before, the digital nature of gift cards enables fraudsters to skip part of the fraud prevention methods used to prevent more traditional fraud. Their potential for instant fulfillment leaves a very short response time, making manual review unsuitable.
Riskified data shows that this accelerated pace is reflected in the chargeback pattern of digital gift cards; retailers can expect a gift card-related chargeback to appear in half the time of a physical goods chargeback, on average. Another point to consider is that gift cards are often affected by seasonality, with both sales and fraud peaking around holidays.
Retailers looking to benefit from this quickly growing segment without adding vulnerabilities to their process should look for a technological solution with strong digital detection capabilities and the capacity to adapt to changing consumer behaviors in real-time.