Gift cards. They’re a gift-giving dream for that hard-to-please friend or relative. They’re an easy sale for merchants. In an ideal world, gift cards have little-to-no downside. However, the reality is that gift cards are also an increasingly popular method for fraud against consumers and merchants alike. On and offline, gift card fraud is a growing issue that can lead both consumers and businesses to lose a great deal of money. Today we’re talking all about how to spot gift card fraud and how to protect yourself.

How Gift Card Fraud Works

Gift card fraud can take on several different forms. Coming out of the holiday season, there are a few trends that emerge on the fraud front. Both in-person and online, gift cards are a key target for fraudsters.

Physical Gift Card Fraud

Physical gift card fraud was a headline-grabbing issue throughout the recent holiday season. There are a number of scams that have grown in popularity amongst fraudsters within the last year, including:

• Scratch-off Scam: Fraudsters copy down the gift card number, scratch off the cover on the back for the pin, then replace it with another cover. This is the most basic scam but is still widely used.
• Return Scam: Individuals steal items from merchants then later return the items for store credit on a gift card. They then resell the gift card for cash at less than face value.

While the losses from physical gift card fraud seem relatively minor, they can add up quickly. 57% of retailers reported fraudulent gift cards or store credit in one or more locations in 2017, which accounts for billons in annual losses across the country.

E-Gift Card Fraud

Electronic gift cards or e-gift cards are great for online-based and physical merchants alike. They are generally pretty automated, meaning that you aren’t buying, printing, or mailing any physical product but instead sending an electronic code and pin that represents the amount purchase.

While e-gift cards are great for their convenience, a breach on this front can be extremely costly. The e-gift card industry is currently estimated to be about $10 billion annually. The e-gift card fraud industry is estimated to be around $1 billion annually. In other words, this problem is only going to continue to grow.

E-gift cards appeal to fraudsters because the damage is potentially unlimited. If  business is breached, thieves can gain access to hundreds of cards all at once in ways they cannot with physical cards. If this happens, the merchant is the biggest loser since they end up honoring gift cards that should never have been in circulation. Merchants lose out inventory, never collect the money, and could even end up processing refunds and chargebacks for purchases of questionable origin.

How to Protect Yourself

One easy step to preventing physical gift card fraud is to keep gift cards close at hand. Have a display at the POS terminal where consumers can easily purchase them while keeping them protected. Some merchants are combatting physical gift card theft by changing the packaging as well. If the card is sealed in such a way that the pin cannot be accessed without obvious damage, the odds of it being scammed are lower.

Another key step to protecting yourself? Partnering with a payment processor with the best security available. The tighter your payments and processing security is, the less vulnerable you are to data theft. Which is why Pineapple works to provide our partners with the best and most secure options to keep you, your business, and your consumers safe from fraud. Contact us today to find out more about our secure processing!