Americans spent $46 billion on gift cards throughout 2016, according to market research firm Packaged Facts. While gift givers and receivers value the convenience and flexibility of gift cards, they have also been targeted by fraudsters over recent years. Gift card fraud is far less pervasive and damaging than credit card fraud, but it can present headaches for both consumers and retailers. It is important for those buying and selling gift cards to understand the risk of fraud and take precautions to protect their investments this holiday season and beyond.
Common types of gift card fraud
Most fraudsters use one of two methods to commit gift card fraud: hacking into accounts associated with gift cards or stealing gift cards or gift card numbers from a retailer.
- Hacking into accounts associated with gift cards: As online registration for gift card balance tracking and reloading becomes more common among retailers, it has also opened opportunities for hackers to exploit weaknesses in the system. In 2015, Starbucks experienced a hack of its mobile app that allowed fraudsters to drain bank accounts attached to the gift card auto-load feature. Conversely, fraudsters are also using gift cards to drain value in other hacked accounts, like credit card rewards. In these cases, hackers gain access to a consumer’s credit card rewards or points and redeem them for gift cards, which they can then convert into cash via online services or physical kiosks that offer over 50 percent of gift card face value.
- Theft of gift cards: Another method of gift card fraud is physical theft. Particularly during the holidays, retailers might position stacks of gift cards throughout the store for convenient shopping. Thieves will often steal a stack of these cards in order to write down the identifying information (card number, PIN, security code) or unlock the information using a magnetic strip reader. Once the information is exposed, they will return the cards to the store and then use software that allows them to keep track of card activation and balance in order to drain the card value before the consumer can use it.
Gift card fraud prevention tips for consumers
This holiday season and beyond, consumers can avoid gift card fraud by adopting the following best practices.
- Only purchase gift cards from trusted, reputable retailers both in person and online. Ideally, try to buy them directly from the store where they’ll be redeemed. Cards purchased from reseller or auction sites may be stolen or counterfeit.
- Do not disclose personally identifying information when buying a gift card. Unlike a credit card, this information is not required, so requests for bank account number, Social Security number, date of birth or similar personal data are red flags to be avoided.
- When purchasing a card, examine it for physical signs of tampering. Details like an exposed PIN may indicate that the card has been redeemed. Return any card that looks questionable and ask for another that is unblemished.
- Have the cashier scan the card at the time of purchase to ensure the card is valid and has the correct balance
- Take advantage of available online registration and activation services. Having online access to monitor the card allows consumers to detect issues or drained balances sooner.
- Keep the receipt as proof of purchase until the card balance has been depleted. If the gift card is lost, some retailers may re-issue the card at full value with proof of purchase.
Gift card fraud prevention tips for retailers
Retailers can also reduce the risk of gift card fraud by implementing the following policies and procedures.
- Improve in-store security by only placing blank gift cards at the register. Consider keeping them behind the counter or behind lock and key.
- Require a PIN for the use of gift cards, instead of just the number on the front of the card.
- Maintain gift card PINs in a separate database from gift card numbers.
- If an online registration portal is available, limit account balance look-ups within a certain time period.
As the popularity of gift cards continues to rise during the holidays, so does the potential for their fraudulent use. Remaining vigilant against signs of tampering and securing physical and online access to cards can help consumers and retailers avoid the financial and reputational damage associated with gift card fraud.
RKL’s team of fraud consultants are available to help businesses assess prevention protocol and implement best practices to ward against a wide range of fraud threats. Contact one of our local offices today to get started.
Contributed by Jeremy L. Witmer, CPA, CVA, CFE, Senior Consultant in RKL’s Business Consulting Services Group. He provides forensic accounting, litigation support and business valuation services to companies and organizations across a number of industries. Jeremy’s expertise includes reconstruction of financial records, employee theft investigation, damage calculations for litigation purposes, and valuation of stock for gifting, buyouts and marital settlement.
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