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Preventing Gift Card Fraud

Preventing Gift Card Fraud

Protecting Your Program From Loss and Liability

Gift cards have become the perfect gift for many consumers over the past couple of years. When not certain what to buy someone for birthday, holidays or any special occasion, a gift card from their favorite retailer is a great choice. For retailers, a gift card purchase ensures the holder will eventually purchase merchandise from their store, securing future sales. Gift Cards have quickly become a growing sales opportunity for retailers of all sizes.

One area that retailers may have not been properly prepared for was the fraud associated with gift cards. With gift cards becoming more popular, retailers are seeing and reporting more incidents of gift card fraud.

Gift Card fraud has occurred in all types of retailers, big and small. Grocery and retail. These frauds can occur in any retailer offering gift cards and stored value solutions. The retailers it will affect the least are those who built strong programs to protect their gift cards.


How are the losses occurring?

As retailers were quick to bring gift cards to market, many were in fact slow to develop protection for the gift cards themselves, their point of sale systems related to gift cards, and to develop adequate reporting to help detect potential abuse.

There are several methods thieves, both internally and externally, are utilizing to commit gift card fraud. Some methods are designed to actually obtain a stolen or fraudulent gift card, others methods like credit card and check fraud are used to obtain the gift card as the "merchandise". The cards can then be sold at on-line auction sites or on the street (or schools). Actual incidents have shown that regardless of the method, thousands of dollars can be stolen easily through gift card fraud.

Protecting the Card

The first point of protection should be the card itself. Gift card providers are always developing new security features to better protect the card. Pin numbers protected by scratch off labels deter the card from being manually utilized. Encrypted magnetic strips can prevent card duplication. Unfortunately, retailers, including larger ones, have been short sighted, and rather than spend money on card protection have reduced the costs of their gift card program by eliminating certain security features only to lose profits through gift card fraud.

Deterring Fraud at the Point of Sale

When it comes to frauds involving tenders, the point of sale is often where it occurs. Understanding how your point of sale issues, redeems and cashes cards and when the card is activated in your POS system can help you to determine various risks at your point of sale.

Card Activation

Knowing when the card is activated at your point of sale can help determine your level of vulnerability to gift card fraud. Many retailers allow their cards to activate once scanned as an item for sale, prior to the transaction being tendered and complete. This allows the retailer to become vulnerable to several methods including "laundering" of a gift card, credit card or check fraud, or known methods of organized gift card fraud. Other areas of system vulnerability include the possible post voiding of a gift card, or shutting down the register in the middle of a transaction after a gift card is activated. The latter two are known methods used by employees to steal from a retailer. Your point of sale system as it pertains to gift card issuance and redemption will help to protect your company from gift card frauds.

Card Display and Handling

Where and how you display gift cards can also determine vulnerability to fraud.  If cards are displayed in unorganized fashions or not properly maintained at the store, then how easy is it for a customer to take several blank cards and duplicate them for fraud.

Keeping gift cards in an area where they can be seen by employees will help to deter the theft of blank cards. Noticing missing sections of your gift card display is another indicator of concern.

The Inside Factor

Many retailers are finding out that their biggest gift card fraudsters are their employees.

Employees switching customer's gift cards with zero balance cards and using the customer card to purchase merchandise or sell is one of the known methods. Not until a customer goes to make a purchase with a zero balance card will you find out. Make certain used gift cards are discarded properly and keep track of blank cards.

Gift Cards programs are seeing dramatic increases in today's retail environment.  Understanding your gift card program, developing proper safeguards with the card and your POS System, and auditing your program for issues will better protect yourself from points of fraud. Decreasing the opportunities and likelihood of incidents will then allow you to reap the benefits of a good gift card program.

 

How Do They It?

The following are known methods of gift card fraud:

The Switch: An employee receives a gift card as payment from a customer.  The card after purchase still has a balance. The employee switches the card with a zero balance card lying by the register. The customer leaves with a zero balance card, and the employee takes the customer's original card with remaining balance. Next time your customer comes back they will not be happy to learn they have a card with No Balance! (While the employee uses the active card).

Laundering: An employee rings the purchase of a gift card on register #1 for $100. They complete the purchase, but do not put any money in the register (no customer is present). They go to register #2 and purchase two (2) $50 gift cards, using the gift card of $100 as tender. They then go back to register #1 and Post Void the original sale. They now have two (2) $50 "clean" gift cards that they paid nothing for. (Can't post void a gift card sale? What happens in your system if they cancel the sale or suspend the original transaction instead? If your gift card activates before tender, you may want to check out the ways you can negate a transaction but still activate a gift card!)

Register Shut Down: An employee rings up a gift card and activates it at the point of purchase. Before tendering the transaction they unplug or conduct a hard shut down of the register. Did the gift card activate? Did the transaction get recorded? Some retailers have lost thousands because of this method before realizing what had occurred. This again is dependent upon when you activate gift cards in your sales process.

Stealing the Numbers: Like credit cards, some organized thieves will get their hands on the gift card numbers (collusion with employees) and replicate gift card "mag" stripes, thereby making a duplicate of the gift card. Using it or selling it quickly, the card gets into play and the first to use it is normally the thief. Other known incidents include "customers" stealing blank cards off display, taking them out of the store, cloning the cards and then returning the original cards to the store. The "customer" then uses an IVR or Web system to continuously monitor the balance on the cloned card until a balance exists (someone legitimately purchased the cloned card off display). They (the fraudulent customer) can then use the card immediately after a balance exists.

Take the number off the card: Hopefully happening less and less with the enhancements made to gift cards, but there are cards out there with printed numbers on the card. Primarily used for purchases over the Internet, catalog or in case one must manually key the card at point of sale, the same uses can be completed fraudulently. An employee can write down the numbers (or provide someone with the numbers) and then continual balance inquiries can be conducted (via telephone or web) until it is learned that the card has been activated with a balance. At that time, the card can be used via the Internet, catalog or manually keyed into a point of sale by the employee.  The number can also be sold to others in the "underworld" to use via the same means.

Fraudulent Acquisition of Gift Cards: For many, purchasing gift cards via stolen credit cards or bad checks may be considered gift card fraud; however they are actually acts of credit card and check fraud. Multiple purchases of gift cards in short periods of time using the same credit card or purchasing high dollar valued cards with checks or credit cards should be looked at cautiously.  Create restrictions or limits of dollar amounts on a gift card to protect against using fraudulent monies to purchase cards. Enhancement of your reporting to quickly detect multiple purchases using similar tenders should also be considered.

Gift cards have become a widely used and accepted form of tender across the entire retail industry. With more and more revenue being generated through stored value cards, it is very important to protect your revenue and profitabilty.

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