Fraud expert answers 5 essential questions about e-gift card fraud
Studies have repeatedly shown that customers typically spend more than their gift card’s value. Gift cards also help businesses remain competitive. Large retailers are known for their gift card offerings. And any business is smart to offer their own.
But for all the benefits of gift cards, there can be some major downsides that retailers aren’t prepared for. The biggest of these issues is fraud, especially for e-gift cards.
“Anybody who sells gift cards online is likely to have a fraud problem,” says Brady Harrison, Senior Data Analyst for Kount. “And it’s a big burden because merchants want to offer gift cards, but they don’t want to deal with fraud.”
E-gift card fraud detection tips and safeguards can help protect your business, but that’s not all you need to know. So we asked Harrison five essential questions about e-gift card fraud to learn more about who it affects most and how to fight it.
1. What’s the one thing you wish businesses knew about e-gift card fraud?
“Fraudsters are not that interested in the gift cards themselves. Gift cards are a transfer of value. Bad actors see them as an easy way to convert stolen credentials or stolen credit cards into cash. This is due to a few reasons.
First, e-gift cards have a high revenue-conversion rate. For example, if you steal a $100 TV, you might only be able to sell it for $60, but if you steal a $100 gift card, you can usually sell it close to face value, potentially up to $90. Speed also attracts fraudsters. The turnaround for purchase alone is immediate. The turnaround for the resale is just as fast if not faster.
The limited data environment is appealing too. You often don’t have to input things like a shipping address or sometimes even a full billing address to buy an e-gift card. So fraudsters don’t have to deal with the logistics of shipping physical, stolen goods.
So to recap: I’d want businesses to know that bad actors are primarily interested in e-gift cards because they’re really easy to purchase and resell compared to other goods. This, of course, makes e-gift cards huge targets for fraud.”
2. How can merchants improve their e-gift card fraud strategies?
“It’s really cheap and simple to conduct e-gift card fraud. It’s only a matter of time before bad actors find a business without adequate or robust security in place. And when they do, they will hit that business very, very hard. So having at least some sort of defense in place is absolutely essential.
The good thing is a lot of merchants are aware of the high risk associated with e-gift cards. And generally, they have stronger but, sometimes, overly draconian policies related to gift cards. That’s a problem because it can prevent good customers from purchasing gift cards.
It also costs a lot operationally. Since gift cards are so high risk, we often see businesses reviewing every single gift card purchase. Sure, they may have stopped $10,000 worth of fraud, but it took 3,000 manual reviews to do it, and now they’re $2,000 in the hole. Reviewing every purchase isn’t worth it or sustainable for a big business because of the number of orders they’re dealing with.
Machine learning can balance that robust fraud stance. We can use it to say, ‘Let’s review all gift cards but only those with an Omniscore less than a specific number.’ You’re going to get a very similar result with less operational overhead and customer friction.
Merchants can also improve their strategies by protecting their entire e-gift card journey. Yes, they may have hardened the checkout page, but they often fail to put proper security around things like the gift card balance checker.
Without a policy for the number of attempts on a card balance checker, fraudsters can easily test and crack thousands of gift card numbers. High-velocity detection tools can combat this activity.”
3. What are the best ways to combat digital gift card fraud?
“Merchants can combat e-gift card fraud in two ways: They can handle it in-house or delegate it to a third-party card provider.
In-house is good because you get to control the customer experience and keep 100% of the funds. But then you take on the liability. And you have to deal with the headache of it in your payment workflow and the logistics of it within your organization.
There’s a lot of time, energy, and labor that goes into handling e-gift cards in-house. And that’s mainly why some businesses opt for a third-party provider.
Third-party card providers generally serve as the merchant of record for gift cards. This can be great because the liability is on the card provider. But the drawback is that the third-party provider keeps a portion of funds for every card sold. On top of that, merchants sometimes pay the card provider to manage their gift card services.
Third-party providers can also create friction. Customers must often go through a second website channel to purchase a gift card. And if there’s a problem, your customer service team may need to contact somebody outside of your organization to fix it. That also adds friction and a potentially poor customer experience.
An in-house approach is the best approach, especially if you’re using a digital fraud solution. An AI-driven fraud prevention solution can provide the benefits of selling gift cards without the headache. It’s somewhat of a third way. Through this solution, merchants also get more control over their security because they can set their own e-gift card policies.
Additionally, an e-gift card fraud prevention solution provides merchants with greater customer insights. Instead of just seeing that customer once a year when they buy a gift card, an e-gift card solution provides data insights into their other digital interactions.”
4. Who is most at risk for e-gift card fraud?
“Businesses that sell gift cards through their own channels and aren’t taking the risks seriously are the most susceptible to fraud. Anyone selling gift cards online is in for a world of horror if they don’t have a fraud strategy.
Without any controls, you’re exposing your business to a lot of financial risks. So if you’re ready to implement gift cards but not quite ready for a fraud solution, you’re probably going to get taken to the cleaners. Or it’s going to be an operational nightmare.
If you don’t have a fraud strategy, there’s not a lot stopping someone from buying $10,000 or hundreds of thousands of dollars in gift cards. And, though shocking, it’s not uncommon for us to see those numbers. Additionally, if you’re conducting manual fraud reviews for every purchase, just buying gift cards can cause a terrible customer experience.
People generally purchase e-gift cards for instant fulfillment. For example, they may put off buying a birthday present and buy an e-gift card at the last minute. If you delay that order with a manual review, the customer will likely dispute the purchase, and you’ll get a request for a refund or a chargeback.
Businesses that offer third-party gift cards or high-dollar gift card amounts are also susceptible to this type of fraud. Grocery stores commonly offer digital gift cards for third-party retailers. And stores that offer big-ticket items like electronics, furniture, or even four-wheelers, for instance, or gift cards over $100 should be particularly careful.”
5. What future trend in e-gift card fraud prevention should businesses follow?
“Adaptability will be the big future trend to follow in e-gift card fraud prevention. Adaptability means adjusting card policies or fraud strategies with the seasons and according to consumer behavior. What might work nine or 10 months out of the year might not work as your customer behavior changes during certain times.
For instance, you might review every gift card sale over $100 for 11 months out of the year. But in December, you might see a significant increase in e-gift card purchases over $100. So your approach to gift cards needs to reflect your average customer behavior during that time frame.
Here’s another example: Let’s say that you’re visiting your in-laws in a different state over the holidays. You forgot to get a gift, so you buy a $500 gift card online. Now suddenly, you have a device address that’s different from your billing address. And maybe you’re using a new email because you just started a new job. And it’s a high-dollar gift card.
All these things are really high risk. And normally, that’s a bad transaction 11 months of the year. Well, one month a year, you need to be able to provide that gift card. So your fraud strategy needs to reflect that.
Layering in some machine learning into that policy or approach can help you be more flexible when people are making non-standard purchases. That’s really the benefit of machine learning. You don’t have these hyper-rigid policies or risk approaches. In hand, this benefits your overall brand credibility and bottom line.”