Electronic digital gift cards, or e-gift cards, are the fastest growing segment of the gift card industry growing at a rate of 29 percent annually. By the end of 2016, e-gift cards racked up more than $10 billion in sales. That’s a whole lot of money being transferred through digital wallets like Apple Pay, Android Pay and WeChat (Just ask Walmart about WeChat’s value).
e-Gift cards provide a lot more ease than its physical counterparts, so it is no surprise that its receiving significant market growth. Consumers can purchase, store, and send these e-gift cards from their mobile device. However, that same convenience has also developed an ideal landscape for fraudulent activity. After all, the more seamless an activity becomes, the less likely merchants can detect an e-gift card to be fraudulent (And it’s just a very, very terrible feeling to experience. Why do fraudsters have to ruin such a great thing?).
Unlike other types of criminal activity, e-gift card scams are easier to commit and law enforcement officials rarely get involved because transaction amounts are generally nominal. Thieves behind this are able to act quickly, covertly, and largely go unprosecuted.
The side effects of e-gift card fraud are a gruesome reality for merchants. An estimated $950 million was lost to e-gift card fraud in the year 2016, according to market size and fraud rates reported by CEB/Tower Group and ACI Worldwide.
Prevalence of E-Gift Card Fraud
With e-gift card fraud becoming more prevalent, you would think more merchants would be aware and actively mitigating this serious issue, right? Payments processor ACI Worldwide reported that across hundreds of millions of transactions, electronic gift cards have the highest fraud attempt rates of all products sold. According to ACI Worldwide, between Black Friday and Christmas in the year 2015, 9.5 percent of all online fraud attempts were on e-gift cards.
What’s even more jarring is that these numbers address instances of true fraud effectively prevented by a merchant’s fraud prevention solutions. In other words, instances where an electronic gift card was attempted to be purchased by a stolen credit card. Unfortunately, that isn’t the only way fraudsters are wreaking havoc on merchants who offer e-gift cards on their website.
Like the everyday chameleon, fraudsters are finding new ways to disguise their activities in front of a merchant’s eyes. One common method is to use valid forms of payments to purchase the e-gift card, and then resell it on secondary markets as quickly as possible. That gives them a chance to chargeback the transaction made with the issuing merchant, claiming that their e-gift card is being drained by another party. So, in a dark twist, the fraudster in question was actually the customer whom you interacted with in the first place!
Online marketplaces allow consumers to sell everything from technology to yard equipment in a relatively secure environment. Not surprisingly, consumers often take to these sites to sell unwanted gift cards and fraudsters aren’t far behind. There are two ways these marketplaces typically function when it comes to reselling gift cards:
- The marketplace, or reseller, buys the gift cards directly from consumers and resells them.
- Online classifieds and auction sites allow the seller himself to set their own price and carry out the sale.
Many e-gift cards and physical gift cards available on these sites are priced around 10 percent less than the value of the card itself. While this depends on the popularity of the brand, all gift cards will be offered at some discount. If a fraudster wants to resell a gift card in a short time limit, they simply need to drop the asking price a few more percentages lower than the competition.
Merchant Responsibility and Liability
Standard protocol for merchants who receive a chargeback, or report of confirmed fraud on a gift card, was to eliminate the remaining balance on the card. However, the entrance of the secondary market throws a wrench into things. The secondary market website, whatever it may be, becomes the merchant of record. Only the merchant of record is required to repay the consumer for frozen gift card purchases. Yet many consumers believe it’s still the merchant’s duty to honor the funds on a gift card.
It’s important for merchants to focus on preventing and avoiding e-gift card fraud from ever happening. Download our free Understanding and Avoiding E-Gift Card Fraud white paper to learn how retailers should approach this growing problematic trend.