When Blockbuster released the first plastic gift card in 1994, they surely had no idea what kind of trend they were starting: In 2016, the gift card industry in the US alone was worth $127 Billion, and by 2025, the market is expected to reach $160 billion. For retailers, the benefits of selling gift cards extend well beyond the initial revenue. The purchase ensures a future shopping trip, and when redeeming gift cards, customers spend an average of 20% more than the value of the card. Considering the widespread popularity of gift cards (93% of US consumers receive or give a gift card every year!) offering these products seems like a no-brainer.

But the same flexibility that makes gift cards such an appealing present also makes them a favorite target for fraudsters. Cash in hand is the ideal endgame for most fraudsters, but purchasing power on a card is a pretty close second. Furthermore, online peer-to-peer (P2P) marketplaces for reselling gift cards make it incredibly easy for fraudsters to quickly turn a profit from the stolen goods.

Indeed, merchants operating in the online gift card market face a wide range of challenges when it comes to preventing fraud. First of all, the behavior of both legitimate shoppers and fraudsters varies depending on the type of gift card purchased, making it difficult to vet these orders for fraud. Closed-loop (brand specific) gift cards, for instance, are significantly safer than open-loop cards, which are redeemable anywhere that accepts major credit cards.

Secondly, the market’s expansion is fueled largely by the 200% annual growth rate in digital gift card sales. The fraudsters who target digital gift cards are generally more tech savvy, making fraud detection and prevention increasingly challenging.

Finally, the combination of relatively high fraud rates and hard to detect fraud attempts leads gift card sellers to rely on high-friction validation measures. Manual fraud  review, for instance, is labor intensive and slow, and can negatively impact customers’ shopping experience. Automated rules-based systems, which are a possible alternative to manual review, often result in false declines (and in wrong approvals).

Since shoppers expect quick delivery (especially with digital cards), and because product differentiation across sellers is minimal, delays and friction can send annoyed customers to the competition. In short, adapting to the ever-changing fraud landscape while providing a good customer experience is a challenge many gift card sellers struggle with.

We compiled the following report based on our extensive experience working with dozens of online gift card merchants. This report elucidates gift card CNP fraud trends as they manifest for retailers offering brand-specific cards, gift card-only merchants, and online P2P gift card marketplaces. Readers will also get actionable tips for approving more good orders and avoiding false positive declines.