How to avoid eGift card fraud

Rarely is it a bad idea to offer gift cards. They promote loyalty among new and returning customers. They promise cash up front for a future purchase. And they present the likelihood that the customer will spend more than their gift card balance.

eGift cards, in particular, have grown in popularity, as business owners have adopted new ways to turn profits. By 2024, gift card sales (physical gift cards and eGift cards) are predicted to surpass $221 million. So businesses need to stay vigilant of eGift card fraud or risk losing loyal customers, merchandise, and revenue to chargebacks.

What is eGift card fraud? | Effects on businesses | How to stop eGift card fraud | eGift card fraud management

What is eGift card fraud?

Commonly, eGift card fraud happens when a bad actor purchases eGift cards using stolen payment information and resells them. In many cases, they’re trying to find a way to monetize purchases big and small.

“It’s either someone is selling something they can make money on, or they’re on a pathway to finding that,” said Michael Brundage, head of payment strategy at Inspire Brands, in a recent Kount webinar. Essentially, it’s easy for bad actors to monetize eGift cards. And they can use eGift cards in several common fraud schemes.

“When selling gift cards … eliminate as much fraud at the initial point of purchase.”

– Michael Brundage, Inspire Brands

Secondary marketplace eGift card fraud

Let’s say a bad actor steals a consumer’s payment information and buys an eGift card from a popular retailer or restaurant. The bad actor takes the eGift card and resells it online. When another consumer buys the eGift card, the bad actor pockets the consumer’s money and payment information.

Meanwhile, the person whose payment information the bad actor used to buy the eGift card notices a fraudulent charge on their credit card statement. They call their credit card company to dispute the charge. The credit card company refunds the customer and issues a chargeback to the retailer or restaurant.

Card testing with eGift cards

Bad actors may also use credit-card-testing schemes, which were up 200% between 2016 and 2017, to conduct eGift card fraud. With card testing, a bad actor tests stolen payment information on small purchases. If the bad actor can complete the purchase, they’ll use those stolen payment information to make other — much bigger — purchases.

As Brundage put it, fraudsters won’t immediately buy a big-ticket item they can monetize. “Say they want to steal a TV,” he said. “They won’t start at the retailer because they don’t want to be flagged as fraudulent.”

Today, it’s common for consumers to buy eGift cards in low denominations. So buying a few $5 eGift cards here and there doesn’t raise suspicion. But these low-value cards make eGift cards prime conduits for fraud. Not only has the bad actor tested that a card works, but they’ve gained access to eGift card value.

Refund fraud, phishing, and more

Bad actors can commit eGift card fraud in many more ways. They can buy products with stolen payment information and request refunds from merchants in the form of gift cards. Bad actors may even use phishing scams to steal gift cards from merchants directly. And they can use bots to test eGift card numbers against combinations of activation codes. The list goes on.

How eGift card fraud affects businesses

eGift card fraud is difficult to trace because bad actors can hide their identities and purchase eGift cards with stolen payment information. And they don’t have to ship cards to an address. So when it comes to resolving eGift card fraud, merchants take a significant financial hit. Primarily, for businesses, eGift card fraud leads to chargebacks, lost items, bad customer experiences, and a tarnished brand reputation.

When a consumer discovers a bad actor has used their payment information to buy eGift cards, they contact their bank or credit card company. The bank or credit card company then issues a chargeback and related penalties to the merchant. Those penalties are in addition to the overhead costs to resolve the fraud incident.

In particular, credit-card-testing schemes can increase a merchant’s chargeback rate or lead to an increase in TC40 claims. In the case of TC40 claims, credit card processors may not report low-value transactions as chargebacks. But these claims can still impact the merchant’s account.

Regardless of the type of fraud, victims of eGift card fraud may hesitate to purchase products or gift cards from that merchant again. They’re more likely to hold a business responsible for fraud than the bad actor for stealing information in the first place.

Some consumers may redeem eGift cards they bought on fraudulent resale marketplaces. And businesses may be obligated to honor them, even at the cost of whatever products the customer buys. So it pays for merchants and businesses to protect themselves — and their customers — from fraud.

How to stop eGift card fraud: 5 tips for businesses

“When selling gift cards, it’s important to understand what safeguards to put in place,” Brundage said. “Make sure to eliminate as much fraud at the initial point of purchase, so you don’t have to clean up down the line.

1. Implement a fraud prevention solution

An eGift card fraud prevention solution goes hand-in-hand with any physical gift card or eGift card initiative. An effective solution uses AI and machine learning to detect anomalies, flag unusual activity, and establish risk and trust for each purchase. As businesses plan their gift card marketing strategies, anticipating fraud is an important step in avoiding expensive surprises.

2. Invest in account takeover protection

Customer accounts keep eGift card balances safe. Consider this scenario: A bad actor purchases stolen credentials to access a customer account. If that account contains an eGift card balance, the bad actor can easily steal those funds. When discovered, the frustrated customer may abandon the brand. An effective account takeover protection solution can identify risky and safe logins in real time. The solution protects customer information, and it keeps customers coming back for the next purchase.

3. Boost website security

Businesses that can predict spikes in website traffic and gift card sales can protect themselves by upgrading their site security. A business’s busy season isn’t the time to find out its outdated website is extra susceptible to fraud.

4. Ask for more information from buyers and recipients

A business that’s managing eGift card sales through an eCommerce platform may configure their accounts to ask for more information about buyers and recipients. Typically, bad actors get away with eGift card fraud because they don’t have to provide information like a physical address to purchase. Asking for a buyer or recipient’s name, address, or email can help businesses identify potentially fraudulent transactions.

5. Protect the entire customer journey

Businesses don’t just lose when they get hit with a chargeback. Stopping eGift card fraud means businesses have to protect the entire customer journey. Preventing a bad actor from creating an account for the purpose of buying eGift cards is just as important as recouping losses from chargebacks.

eGift card fraud management

Businesses can do everything possible to protect physical gift card sales in stores. But if they want to tap into revenue from eGift card sales, they’ll want to make sure they have an enterprise-class fraud prevention solution like Kount Control. A solution like Kount Control gives businesses everything they need to prevent eGift card fraud and protect their customers.

Kount’s Identity Trust Global NetworkTM uses AI, including supervised and unsupervised machine learning, to establish trust in real time. The Network links billions of trust and risk signals per transaction. As a result, businesses can more accurately identify good customers. Let’s say Kount assigns a low-trust, high-risk score to an incoming transaction. That lower trust level may be because the customer initiates a higher-than-expected number of chargebacks. Kount can use that information to block a potentially fraudulent transaction.

Kount’s advanced AI combined with the flexible Customer Experience Engine helps businesses automate decisions and reduce manual reviews. A business that doesn’t use a fraud prevention solution might not think much of a few manual reviews here and there. But look at it this way: When the peak of the holiday or busy season rolls around, businesses want to stay efficient and meet customer demand.

That means not manually reviewing every gift card purchase that comes through, even if customers are purchasing eGift cards in high dollar amounts. Using a fraud prevention solution means good customers can buy those eGift cards and have frictionless experiences. And fraud analysts can reduce manual reviews — up to 83%, in some cases — and aren’t working overtime to review every transaction.

Stopping fraud means businesses can dramatically reduce chargebacks — up to 99% for some customers. When a business stops paying for chargebacks and related fees, they can use that money to grow and develop new products and services.

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