E-gift card fraud prevention tips and detection solutions
Offering e-gift cards is rarely a bad idea. E-gift cards promote loyalty among new and returning customers. They promise cash upfront for a future purchase. And they present the likelihood that the customer will spend more than their gift card balance.
E-gift cards and online gift cards, in particular, have grown in popularity, as business owners have adopted new ways to turn profits. In the U.S. alone, some researchers suggest that physical gift cards and e-gift card sales will surpass $238 million by 2025.
Meanwhile, 83% of consumers in Kount’s holiday shopping trends survey say they’ll purchase gift cards this holiday season. Over half report that they’ll spend between $101 and $500.
Gift cards are a ripe opportunity for merchants, regardless of season. But businesses need to stay vigilant of e-gift card fraud and the e-gift card fraud detection solutions that can protect loyal customers, merchandise, and revenue.
What is e-gift card fraud?
Commonly, e-gift card fraud (or online gift card fraud) happens when a bad actor purchases e-gift cards using stolen payment information and then uses or 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 e-gift cards and commit e-gift card fraud. And they can use e-gift cards in several common fraud schemes.
Types of e-gift card fraud scams
Secondary marketplace e-gift card fraud
Let’s say a bad actor buys e-gift cards from popular retailers or restaurants using stolen credit card numbers. The bad actor may then resell those e-gift cards. Then, when another consumer buys the e-gift card, the bad actor profits.
Meanwhile, the person whose payment information the bad actor used to buy the e-gift card notices a fraudulent charge on their credit card statement. So they call their credit card company to dispute the charge. The credit card company refunds the customer and issues a chargeback to the business.
Card testing with e-gift cards
Bad actors may also use card-testing schemes, which surged in 2021, to conduct e-gift 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 that stolen payment information to make other — much bigger — purchases. But, 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 e-gift cards in low denominations. So buying a few $5 e-gift cards here and there doesn’t raise suspicion. But these low-value cards make e-gift cards prime conduits for fraud. Not only has the bad actor tested that a card works, but they’ve gained access to e-gift card value.
E-gift card refund fraud
Bad actors can commit e-gift card fraud in many more ways, including in conjunction with refund fraud. For example, they can buy products with stolen payment information and and use social engineering techniques to get refunds in cash or gift cards.
Bad actors may even use phishing scams to steal gift cards from merchants directly. And they can use bots to test e-gift card numbers against combinations of activation codes. The list goes on.
Can e-gift cards be traced?
The ease of buying e-gift cards and the lack of personal data attached to them make their activity difficult to trace. In many cases, consumers don’t have to provide much more than a payment method and email to send an online gift card.
Meanwhile, e-gift card recipients merely need card numbers to redeem cards, especially for in-store purchases. Plus, e-gift card fraud is difficult to trace because bad actors can hide their identities and purchase e-gift cards with stolen payment information.
Bad actors love e-gift cards because they only need a card number to access funds or re-sell them for cash, according to an e-gift card episode of Kount’s “5 in 5” podcast. Digital e-gift cards make it easy for bad actors to commit fraud that’s virtually untraceable.
How e-gift card fraud affects businesses
When it comes to resolving e-gift card fraud, merchants take a significant financial hit. For businesses, e-gift card fraud leads to chargebacks, inventory loss, bad customer experiences, and a tarnished brand reputation.
When consumers discover a bad actor has used their payment information to buy e-gift cards, they may contact their credit card company. The credit card company may then issue a chargeback and related penalties to the merchant. Those penalties are in addition to the overhead costs to resolve the fraud incident.
In particular, 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 e-gift card fraud may hesitate to purchase products or gift cards from that merchant again. This is because 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 e-gift 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 e-gift card fraud.
5 e-gift card fraud prevention tips
“When selling gift cards, it’s important to understand what safeguards to put in place,” Brundage said. “Make sure to eliminate as much fraud as possible at the initial point of purchase, so you don’t have to clean up down the line.”
1. Implement a digital fraud solution
An e-gift card fraud solution goes hand-in-hand with any physical gift card or e-gift card initiative. An effective solution uses AI and machine learning to detect anomalies, flag unusual activity, and establish risk and trust for each purchase.
An e-gift card fraud solution can detect fraud before a business authorizes a transaction. That way, businesses can avoid the chargebacks and consequences of selling a gift card to a fraudster. As businesses plan their gift card marketing strategies, anticipating fraud will be an important step in avoiding expensive surprises.
2. Invest in account takeover protection
Customer accounts are essential for storing loyalty points and e-gift card balances. But consider this scenario: A bad actor purchases stolen credentials to access a customer account. If that account contains an e-gift card balance, the bad actor can easily steal or transfer funds.
An effective account takeover solution can identify risky login activity in real time. For example, if a bad actor is mass-testing account credentials, the solution challenges the activity to protect the account. Businesses may even use an account takeover solution to detect malicious, high-velocity activity from bots and card testing schemes.
3. Boost website security
Businesses that can predict spikes in website traffic and gift card sales can protect themselves by upgrading their site security. For example, they may place controls on the number of gift cards a customer can purchase.
Or they may review or decline transactions that involve gift card purchases of unusually high balances. 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 e-gift card buyers and recipients
A business managing e-gift card sales through an e-commerce platform may configure its accounts to ask for more information about buyers and recipients.
Typically, bad actors get away with e-gift card fraud because they don’t have to provide information like a physical address to purchase. However, 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. E-gift card fraud detection means businesses have to protect the entire customer journey. Preventing a bad actor from creating an account to buy e-gift cards is just as important as recouping losses from chargebacks.
How e-gift card fraud detection solutions work
Businesses can do everything possible to protect physical gift card sales in stores. But if they want to tap into revenue from e-gift card sales, they’ll want to make sure they have an effective digital identity trust and fraud prevention platform on their side.
Kount’s digital identity solutions use global network data, advanced AI, and two types of machine learning to establish identity trust in real time. As a result, businesses can automatically approve good transactions and decline fraudulent purchases, especially those involving e-gift cards.
What’s more, businesses can customize policies and automate decisions to reduce manual reviews. A business that doesn’t use a digital fraud prevention solution might not think much of a few manual reviews. But look at it this way: When the peak of the holiday or busy season rolls around, businesses have to stay efficient to meet customer demand.
That means not manually reviewing every gift card purchase that comes through, even if customers are purchasing e-gift cards in high dollar amounts. Using a digital fraud prevention solution means good customers can buy e-gift cards without friction. And fraud analysts can reduce manual reviews significantly — up to 83%, in some cases.
Finally, businesses using an account takeover solution, like Kount Control, can protect customer accounts and stored e-gift card balances from account takeover attacks. The solution can detect abnormal login activity and high-velocity card testing and credential stuffing attacks.
It even uses machine learning and device intelligence technology to detect malicious activity from unknown devices. The solution blocks or challenges this activity while allowing good customers to access their accounts without friction.
Stopping e-gift card fraud with an automated solution means businesses can dramatically reduce chargebacks. Plus, they can improve their brand’s reputation, protect customer accounts, and prevent revenue and inventory loss.
