News, Education and Events Decoding Digital Payments & Fraud

News, Education and Events Decoding Digital Payments & Fraud

Fight e-Gift Card Fraud Before It Starts

Fight e-Gift Card Fraud Before It Starts

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[Editor’s Note: September is E-Gift Card Fraud Month at Card Not Present (sponsored by Kount). Gift cards have become a popular go-to gift all year long and digital versions are growing especially quickly. But, as is the case with just about every kind of online transaction, the more they grow, the more opportunities criminals have to leverage them fraudulently. Check back here throughout the month for updated content aimed at helping merchants understand how to address the special challenges involved in protecting e-gift cards.]

In today’s digital economy, the use of e-gift cards is extremely popular with consumers and businesses alike. Akin to cash, digital gift cards are easy to purchase, store and send. With all their benefits, they are a form of digital currency and just as vulnerable to fraud as any other card-not-present payment type.

The concept of gift cards is not new. Kount believes that more than 600 million e-gift cards and physical gift cards were purchased last holiday season. That number is based on projections that three-quarters of consumers purchased an average of 2-to-3 physical and digital gift cards. This amounts to an industry segment that is expected to expand to $160 billion annually and is still growing rapidly—with the digital versions leading the charge.

It is important that merchants understand why e-gift cards are so attractive to the fraud community. Not only are they easy to purchase, but they often do not reveal the fraudster’s physical location, can be sold on secondary marketplaces for cash and do not require a place to store stolen goods.

As we look to the pending holiday season, it is important for merchants to consider the associated costs of issuing e-gift cards, and how prevention and preparation now can protect a business (or its customers) from falling victim to common fraud tactics.

For merchants, the numerous costs associated with this type of fraud can be both obvious and not so obvious. Obvious costs include:

  • Chargeback fines. If a merchant inadvertently allows a card-not-present transaction through that ends up being fraudulent, its bank will impose fees. Depending on volume, chargebacks can cost between $15-100 per order.
  • Lost merchandise. Merchants have to honor the fraudulently-purchased e-gift cards that innocent consumers have purchased on secondary marketplaces. Otherwise, they risk alienating customers and receiving negative publicity and unfavorable social media reports.
  • Manual reviews. E-gift cards often have higher manual review rates and human agent labor costs are typically the most expensive aspect of fraud mitigation budgets.

Less obvious costs include:

  • Declined and cancelled orders. Decline and cancellation rates are higher for e-gift cards than the actual incidence of fraud, which represents a huge revenue loss.
  • Operating expense. Resolving fraud issues—representments, complaints, audits, etc.—steals time from profitable activities.
  • Higher transaction fees and escrow accounts. High rates of fraud and chargebacks can result in higher processing fees and possibly escrow requirements, which hurt profitability.
  • Brand reputation. If there is fraudulent activity associated with a legitimate customer looking to redeem an e-gift card, the blame is placed on the merchant. The merchant risks negative reviews and feedback that can spread quickly.

As companies look to the upcoming holiday season, it is important that they become proactive in protecting their online transactions, and plan for a surge of attacks on their digital gift cards.

Kount recommends that merchants collaborate with multiple stakeholders in the business and set risk thresholds for e-gift cards, then employ the following to frustrate fraudsters and abusive customers:

    1. Have standardized e-gift card policies that are clear and well documented. Make sure customers clearly understand your refund and chargeback policies.
    2. Partner with a fraud solution that is integrated and comprehensive—taking advantage of the big data network effect.
    3. Make sure your fraud solution can be customized to match your business policies (i.e. set a rule that you can’t use a gift card to buy a gift card, etc.).
    4. Utilize a fraud solution that employs multiple hurdles for fraudsters and utilizes AI and Machine Learning.
    5. Kount also discourages companies from setting a goal of zero percent chargebacks on digital gift cards. With that goal, far too many good customers would be turned away. Instead, set up the following safety nets for when fraud and abuse do strike:
    6. Utilize trackable shipping so that you can recall stolen gift cards before losses and brand damage hit.
    7. Establish relationships with secondary marketplaces—they will often warn merchants when a large batch of digital gift cards come onto the scene or when something seems too good to be true.
    8. Wipe out the balance on stolen cards so you avoid the double losses of getting a chargeback and having the stolen e-gift card redeemed.

Understanding fraudster tactics allows merchants to identify vulnerabilities and protect their business. Learn how New Balance prevents e-gift card fraud by attending the “7 Little Known Ways to Prevent e-Gift Card Fraud” webinar.

Nearly Half of all Holiday Online Orders will Originate on a Mobile Device: Report