September 20, 2019
eGift Card Fraud – What You Need to Know
eGift card popularity continues to grow. The surge in smartphone and tablet use has made it easy to purchase, store, and send eGift cards from any location, shifting customer spending habits to the convenience of digital purchases.
More than 81% of top internet retailers sell digital gift cards because they bring in new customers and promote loyalty with current customers. They also bring in more revenue since many customers continue to spend beyond the original eGift card amount. Digital-savvy millennials and corporate gifting are helping promote the continued growth.
While eGift cards are as easy as paying with cash and carry a low overhead for retailers, they do hold a vulnerability – eGift cards have the highest fraud attempt rates of all products sold. For retailers, it’s difficult to anticipate the potential fraud that can occur and the financial ramifications.
Digital gift cards are a prime target for fraud because they are so easy to steal and resell. Unlike a physical good that will be shipped, a consumer is not expected to provide detailed identity information to a retailer when purchasing or redeeming an eGift card. In addition, consumers can easily sell, buy, and trade e-gift cards on secondary or reseller marketplaces.
How can eGift card fraud occur? Consider this hypothetical example:
1. Stolen credit cards are used to purchase a large number of gift cards. These gift cards will then be used to purchase a high-dollar item, such as a popular gaming console. But rather than purchasing it just yet, a fake listing is first created on a discount site.
2. A Fake listing is created in a triangulation fraud scheme. A college student, Jake, wants to keep up with his fraternity brothers and in order to do that, needs the next hot gaming console. Since Jake is on a budget, he’s not sure he can swing the full price. A friend recommends he check out a third-party website where one-off products are sold at discounts.
3. An item is bought. Jake finds the exact gaming console he wants at a reduced price. He is excited about his budget find and clicks “buy now.” What the unsuspecting college student doesn’t realize is that if it is too good to be true, it often is. Once the college freshman has purchased the console from the person behind the scheme, this person goes to the brand’s website and purchases the console with the gift cards and the product is shipped directly to Jake. The digitally stored value of the eGift card is transformed into cash and the person behind the scheme isn’t caught because the gift cards were purchased with stolen credit cards and not shipped to a physical address – a seemingly perfect crime.
4. Chargebacks are issued. Because it was a popular item that was listed for sale, this whole process happened too quickly to be stopped at the fraudulent sale of the gift cards. Since stolen credit card credentials are used to purchase them, identities can be hidden. Since eGift cards aren’t shipped to a physical address, it is difficult to pinpoint where the fraud originates. Ultimately, when the gift cards are resold for cash in online marketplaces, perpetrators gain “clean” money. It becomes almost impossible to trace the transaction back to the individual who commits the fraud.
Impacts from eGift Card Fraud
In this web of transaction, who gets tangled in financial complication? The merchant. What all began as a simple way to promote a brand through digital gift card sales translates into multi-layered loss. As a merchant, here is what you may face:
- Chargebacks issued for the original eGift card purchase
- Penalties associated with the chargeback
- Overhead with sorting out the fraud, and tracking the cause
- Loss of merchandise, in this case, a gaming console
- Brand reputation damage. The person at the beginning of the cycle who found charges for gift cards on their credit card statement will naturally blame the brand.
All of this can add up to real losses to your bottom line, and, the bad news… this is just one situation. Imagine fraud rings performing this same trick multiple times. That creates a compounding problem. What began as a simple marketing strategy can lead to a series of consequences that no one wants to face.
As you plan your gift card marketing strategy, anticipating fraud contingencies is an important step in avoiding expensive surprises. A multi-faceted fraud solution must go hand-in-hand with an eGift card initiative. That’s what Kount delivers.
Device risk Assessment: Identifies high risk devices, or high volume activity from a small number of devices
Digital identity signals: Indicate the relationship between email reputation, age, and history, as well as physical identity attributes
Kount’s AI: Combines supervised and unsupervised machine learning to generate a score that indicates risk or unusual activity
Business Policies: Can be built around desired business outcomes, such as special event promotions and tracking shipping details
Check out Kount’s eGift Card Fraud Prevention Solution