Do You Know the Top 7 Gift Card Fraud Scams Affecting Consumers & Merchants?
Gift card fraud is on the rise. This shouldn’t come as a big surprise; reports show the US gift card market is expected to grow from roughly $163 billion in 2019 to over $221 billion by 2024.
The motivation for fraudsters here is simple. Gift cards are effectively the same as cash — they’re easily transferable, hard to track, and once they’re spent, it’s unlikely that a user will be able to recover the funds. All facts that fraudsters are eager to exploit.
So, why is prepaid card fraud such a concern? Does it affect merchants and consumers equally? Most importantly, what can you do to stop it?
Recommended reading
The Current State of Gift Card Fraud
Generally speaking, gift card fraud is any scam or act of fraud revolving around the reception or provision of prepaid gift cards. There are two main forms of gift card fraud: gift card payment fraud and outright gift card theft.
The first thing you need to know is that no legitimate party will ever insist that you pay for any goods or services with a gift card. For example, one fraud tactic that’s become very common in the last decade involves a criminal posing as a governmental official, like an agent of the IRS or the Social Security Administration.
The fraudster claims you owe money, and that your bank account will be frozen for an investigation. They instruct you to buy an Amazon or Apple gift card and pay off the amount owed using the card balance to avoid getting arrested or suffering other consequences.
If anyone ever instructs you to pay with a gift card specifically, they are a scammer. Period. These scams should be reported immediately to the FTC at ReportFraud.ftc.gov. This may seem obvious to some, but it works surprisingly often.
More and more people are being cheated through gift card schemes. Also, the victims are losing more money. In 2018, the median amount victims lost to a gift card scammer was $700. This year, it’s $1,000.
Older people are more susceptible to these scams, according to FTC data. Of Americans aged 50-59, 19% of fraud reports involved gift cards or reloadable cards. For Americans aged 80 and up, that number jumps to 30% of all fraud reports.
How Gift Card Fraud Works
There are multiple ways to commit fraud through gift cards. Some of them are quite sophisticated.
For example, thieves may employ an automated algorithm to roll through a list of potential account numbers and request the balance. If the result of any query returns a positive balance, the fraudster knows the account number is legitimate, and that the account contains funds.
With just those two pieces of data, cybercriminals can purchase as much as the card balance will allow. They do this knowing that the cardholder may not discover the crime for weeks or months. Indeed, it may never be discovered at all.
CBS News reported that 3% of gift card dollars are never redeemed. That amounted to roughly $3 billion in 2019 alone.
As we mentioned, there are many different methods of leveraging gift cards for fraudulent purposes. Some are simply variations on other types of card-not-present fraud, while others are specific to gift cards. A few of the more common schemes involve using:
The Top 7 Gift Card Fraud Scams & How to Respond
The goal of a gift card scammer is to trick you into signing over a gift card balance. The specific tactics they use can vary based on the situation, though. Here are a few of the most common gift card schemes at work right now:
If It's Already Happened…
We now know how you might be targeted, and how best to respond to these scams. What do you do if you’ve already been a victim of prepaid card fraud, though?
Here are a few steps that you should take:
- Call the police and file a report. This may also help you gain assistance from the gift card issuer.
- Contact the gift card retailer to report the fraud. They may ask you to share your receipt and other purchase information for a possible refund.
- Contact the FTC to report the fraud and explain the situation in great detail. Dates, times, phone numbers, and any screenshots of messages are excellent information that can help the FTC prevent future cases.
Another thing you could do to help fight back against any future instances of gift card fraud is to contact your state attorney general to report the case. While the FTC is the main governing body with regard to fraud, individual cases may become parcel to larger class-action lawsuits or other legal proceedings that can prevent the victimization of others.
Gift Card Fraud Affects Merchants, Too
We’ve discussed how criminals can make illegitimate purchases using fraudulent gift cards, and how this hurts consumers. What about businesses, though?
There are other specific threats that apply to brick-and-mortar stores that display and sell prepaid gift cards from other merchants. Take “pre-stolen” card numbers, for example.
Typically, prepaid gift card displays aren’t heavily guarded because the cards themselves are useless until activated. A thief can smuggle a few out, copy down the numbers, then re-hang them in the store.
By regularly checking the online balance for those card numbers, the fraudster will see when one is activated, then drain the account through online purchases. The buyer assumes the card was not loaded properly, and either requests a refund or files a chargeback.
UPC scams are another common practice related to gift card fraud.
Like the scheme outlined above, this involves the theft of several blank cards. In this case, however, the fraudster actually buys a card, then copies the UPC barcode of that card onto stickers. The stickers are placed over the real UPCs of the stolen cards, which then go back to the store. Whenever any of those cards are activated, the fraudulent code is scanned, and the balance goes straight into the fraudster’s “legitimate” account.
Merchant Risks Associated With Digital Gift Cards
What about digital or electronic gift cards, though? Since there’s no physical card, fraudsters can’t conduct UPC scams or “pre-steal” the cards. Right?
The truth is that digital gift cards offer perks for scammers, too. The fact that the “cards” are intangible means they can be converted to cash even more quickly.
The risk is greater still if a merchant’s database of available card numbers is breached. In that situation, fraudsters could gain access to many more than they could have taken if the cards in question were physical cards.
In some cases, the fraudster could steal thousands of gift cards in a single incident. The merchant may be stuck honoring thousands of gift cards that were never purchased.
How Merchants Can Avoid Gift Card Fraud
The holiday season is prime time for all types of fraud, including gift and prepaid card fraud. However, trying to mitigate the risk of gift card fraud puts merchants in a tough spot. Manually reviewing transactions for indicators of potential gift card fraud takes time, and that’s one thing retailers won’t have amid hectic holiday sales. Fraudsters know this and use it to their advantage.
Some merchants have found moderate success with making adjustments to sales policies and practices. This might include:
Getting Help with Prepaid Card Fraud Prevention
Merchants can take steps to actively identify and stop fraud. That said, it eally can be a full-time job.
Fraud prevention diverts time and resources from more profitable pursuits, like growing the business. Many retailers have discovered that they can save significant amounts of time, stress, and revenue by turning fraud prevention efforts over to third-party solution providers.
At Chargebacks911®, we can help you do much more to prevent fraud (and the accompanying chargebacks). We’re experts at recovering revenue lost to all types of fraudulent activity. To learn more, contact us today.
FAQs
How are gift cards used for fraud?
In general terms, anyone requesting to be paid for a good or service with a gift card or prepaid credit card is probably a scammer.
Here’s an example of how a gift card scam is pulled off: You get a phone call from someone who says they’re from a government agency, like the Social Security Administration. They say your bank account will be frozen for an investigation and tell you to buy gift cards to avoid getting arrested. They target gift cards because they’re equivalent to cash, and are easily transferable but hard to track.
How does gift card fraud work?
There are multiple ways to commit fraud through gift cards. Some of them are quite sophisticated; for example, thieves may employ an automated algorithm to roll through a list of potential account numbers and request the balance. If the result of any query returns a positive balance, the fraudster knows that the account number is legitimate, and the account contains funds.
A few of the more common schemes include using stolen payment data, account takeover, targeting loyalty points and rewards, and using phony balance checks.
Can you get your money back if you get gift card scammed?
If you contact the retailer who issued the card, there is a possibility that you might receive a refunded balance or a store credit for the missing amount. Don’t count on it, though. Gift card issuers are not necessarily on the hook for scams perpetrated outside of their regular business uses.
Gift cards equate to cash and don’t feature the same protections as credit and debit cards. Any funds that are loaded onto a card and then removed are essentially gone. It will be very difficult to trace the lost funds or retrieve them.
What to do if you have been gift card scammed?
First, you should call the police and file a police report about the situation. Give them copies of all documentation you have in relation to the crime. With the police report in hand, contact the business or retailer that the gift card came from to inform them of the fraudulent card, and see if they are able to provide any assistance.
Next, contact the FTC to file a consumer fraud report. You may save someone else from being victimized by the same type of scam.
