Prepaid Card Chargebacks: A Growing Threat to Your Bottom Line

Consumers load hundreds of billions of dollars onto prepaid cards every year. That’s great news for online retailers. These cards allow for wider card usage, and can even open previously-unbanked individuals to the eCommerce marketplace. What happens when a transaction doesn’t go as planned, though?

Can a customer request a prepaid or gift card chargeback? The answer is yes, even if the purpose and process for doing so are both a little murky.

In this article, we’ll discuss how fraud works on a prepaid card, as well as prepaid card chargebacks are and the types of prepaid cards they pertain to. We’ll also look at how these chargebacks are filed, and how to prevent them.

What are Prepaid Cards?

In order to better understand how complex this issue is, let’s first talk about what we mean when we mention prepaid cards.

Prepaid cards are a great way to encourage return patronage of your business. They are unassuming and practical. When given as a gift, they let customers choose items they really want. It’s no surprise, then, that the global market for transactions involving prepaid cards will reach $3.65 trillion by the end of 2022.

The four most common forms of prepaid cards retailers will come across include:

General Purpose Reloadable Cards

(GPR) cards are open-loop & branded by one of the major card networks. They can be used where that card brand is accepted.

Prepaid Gift Cards

These are open-loop branded cards like a GPR prepaid card. However, these cards are not reloadable.

Prepaid Debit Cards

These are issued as an alternative to checking accounts for those who do not qualify for a banking account.

Payroll Card

These are essentially the same as a prepaid debit card, but are issued specifically for the benefit of unbanked employees.

There are many reasons a consumer would use a prepaid card. Some use them to make purchases online without a bank-issued credit or debit card. Others believe using prepaid cards help them control personal spending.

Prepaid cards are especially useful for those in developing economies who do not have access to banking. With prepaid cards, millions of unbanked consumers can gain access to the online marketplace.

Everything You Need To Know A Beginner’s Guide to Chargebacks

Chargebacks can wreak havoc on your cash flow and profitability. This FREE paperback book is your guide for preventing chargebacks and, when they happen, fighting them more effectively.

Send Me My Free Paperback Book!

Prepaid Cards & Fraud

One very important distinction to note: prepaid cards are common targets for fraud.

They can be anonymous. They're hard to trace, and they’re equivalent to cash, which makes them a great way to launder stolen funds.

Fraudsters often target prepaid cards to drain their balances. Also, those who use or steal cardholder information can use prepaid cards as a tool for cash advance scams, service scams, and even tax return fraud.

Here are just a few examples of fraud that can be committed with prepaid cards:

Advance Fee Scheme

This is an updated version of wire transfer fraud, using email instead of the post office or check carrier. In the email, criminals will extort money from a victim, and attempt to convince the victim to pay an upfront fee in order to receive a prepaid card fully loaded with cash.

Card Reloading

A criminal will call the issuing merchant and claim to be a representative for their payment processor. They use stolen gift card data and declare there is a problem loading the card. The unwitting merchant or staff member will reload the card electronically, allowing the scammer to offload the funds into a dummy account or withdraw them directly from an ATM. In some instances, the merchant may reload the card several times before detecting the fraud.

Card Skimming

A bad actor will preload a gift card or prepaid card with data stolen using a magnetic stripe reader. When a customer purchases and activates a gift card, the fraudster will steal the card number, then use those funds to make purchases or siphon funds from the card.

Card Swapping

A criminal may steal a stack of physical cards, copy or alter the numbers, then return the cards to the store and re-hang them on the rack. When a consumer purchases and loads one of the cards with cash, the fraudster can drain the account before the purchaser even leaves the store.

Tax Return Fraud

Most tax return services offer prepaid cards as a means of doling out tax returns each year. In response, criminals can use stolen identities to fill out tax forms, then select a prepaid card to receive that tax refund. In effect, the fraudster submits another individual’s tax return, then steals the funds.

Card networks offer some protections for consumers against prepaid card fraud. However, there is still little- to no-protection for merchants against prepaid card chargebacks. Let’s dig into this in a bit more detail.

Whether it's debit, credit, or prepaid: the solution for ALL chargebacks is just a click away.

Can Cardholders File Chargebacks on Prepaid Cards?

Prepaid Card Chargeback: A prepaid card chargeback is a payment reversal that occurs following a prepaid card transaction. This can refer to branded gift cards, but usually applies to cards issued by a bank with a preloaded balance.

Unlike credit and debit cards, cardholders are not always legally entitled to a chargeback with a prepaid card. That’s not to say prepaid card chargebacks don’t happen, though; they definitely do.

Conventional debit and credit cards have solid rules and consumer rights. These are laid out in legislation like the Fair Credit Billing Act, and in rules published by the card networks.

With prepaid cards, there’s no legal mandate that cardholders have a right to a chargeback. In other words, banks are not required by the government to offer chargebacks for prepaid cardholders. The rules regarding prepaid card chargebacks are determined by the party who issued that card, and the relevant card network (Visa, Mastercard, etc.).

Having said that, if a cardholder wants to file a prepaid card chargeback, the card network may allow them to do that. There are a few ways they can go about this, according to each card network.

How Do Prepaid Card Chargebacks Work?

When it comes to chargebacks, ‘anonymous transactions’ (i.e. prepaid cards) are not covered by the Fair Credit and Billing Act. Therefore, they are not subject to chargeback rules.

Visa prepaid cards are covered under Visa’s Zero Liability program. However, the cardholder has to report the card as lost or stolen first before disputing a charge. Some transactions described as “anonymous prepaid card transactions” are not included. Visa directs cardholders to take their disputes to the prepaid card issuer.

For Mastercard-branded prepaid cards, the card must be officially registered with them in advance of the transaction. The card network then instructs cardholders to contact the card issuer for any prepaid card chargebacks.

By accepting the prepaid card, the merchant implies agreement to the same terms that limit the customer. If the card network’s terms give customers the right to file a chargeback, the merchant must comply.

Preventing Prepaid Card Chargebacks

Prepaid card chargebacks can put merchants in a tough spot.

It’s very difficult to track prepaid cards. This means that purchases made with one can lack accurate cardholder information, an origin-point for shipping and tracking, and other pertinent details which might aid a merchant in identifying fraud. It also means the merchant has limited data when challenging a prepaid card chargeback. In these cases, merchants are essentially flying blind.

50 Insider Tips for Preventing More Chargebacks

In this exclusive guide, we outline the 50 most effective tools and strategies to reduce the overall number of chargebacks you receive.

Get the FREE guide

It’s possible to fight prepaid card chargebacks through representment. It’s extremely difficult, though, and there’s little chance of success. That’s why the safest bet is to prevent prepaid card chargebacks whenever possible.

Making a few adjustments to merchant operations, for instance, could drastically reduce the seller’s prepaid card chargeback rate. Some best practices include:

Limiting Bulk Prepaid Card Sales: This won’t directly prevent chargebacks or fraud. But, it may help reduce the likelihood of abuse by imposing reasonable limitations on purchases.
Implementing Daily Purchasing Limits: Fraudsters will typically try to use the entire balance of a stolen card in one shot. They want to conduct a scam, then disappear quickly. Imposing daily spending limits may help prevent this.
Tracking Prepaid Card Data: Merchants who track cards from purchase through redemption are more likely to spot suspicious behavior, such as several new card balances going to one account.
Monitoring Marketplace Sites: Merchants should watch for their brand appearing on gift card trading sites, social media markets like Facebook Marketplace, and reseller sites such as eBay. Fraudsters could be reselling stolen prepaid cards.
Imposing Card Dollar Value Limits: It’s easier to convert one $500 prepaid card to cash than a stack of $20 cards. There are lower margins per card. So, limiting value amounts may make your cards less attractive to fraudsters.
Securing Data: In the brick-and-mortar environment, save gift card activations to the end of transactions. Teach employees to double check all cards prior to activation for any sign of tampering.

Ask the Experts About Prepaid Chargebacks

If you’re already experiencing a lot of chargebacks each month, odds are you know you need help. When it comes to new and emerging threats like prepaid card fraud and chargebacks, it pays to be prepared.

Chargebacks911 offers the industry’s only proven tools and strategies to tackle prepaid card chargebacks. No matter the source—credit, debit, or prepaid card chargeback—our combination of proprietary tools and human expertise can deliver the best results. period.

Prepaid Card Chargeback