This document discusses prepaid card fraud and provides statistics on fraud rates for virtual and plastic gift cards from three major retailers. It outlines the lifecycle of gift card fraud, from fraudulent purchase using a stolen payment card to monetization. Reasons gift card fraud is attractive to fraudsters are explained, and examples of targeted gift card fraud rings are given. While some merchants have developed strategies to reduce losses, the document argues comprehensive end-to-end systems are still needed to fully address the problem across the entire gift card purchase and usage process.

1. Presented by:
Chris Uriarte, Retail Decisions
Dan Horne, Providence College
Prepaid Card Fraud:
Understanding the Problem,
Designing a Solution

2. Prepaid Card Fraud: Agenda
 Understanding the Pre-paid Market
 Recent prepaid Trends and Statistics
 Understanding Pre-paid Fraud
 Recent Pre-paid Fraud Statistics
 Best Practices for tackling Pre-paid Fraud

3. Prepaid Cards: A Lot has Happened Since 1992!
 First studies of the gift certificate market
 Recognition of 2 customers:
 Buyer/giver
 Recipient/redeemer
 Understanding of the altruism in the gift
 Intimate giving
 Arguing over cheapening the gift through convenience
 Understanding that many situations involve non-altruistic gifts

4. Key Attributes
 Altruism
 Relief of uncertainty
 Convenience
 Value
 Control

5. Strong Attitudes
Source:
Giftex Recipient Studies
80% of adults get gifts they do not want. - eBay 2008

6. Strong Attitudes
Source:
Giftex Recipient Studies

7. Dual Benefit
Source:
Giftex Recipient Studies

8. Cards Increase Merchandising Opportunities

9. The Times are Changing
 The consumer’s bountiful choice environment
– Traditional competition (every retailer)
– Cross-category competition
– Cross-industry competition
– New entrants
 Clutter
– Changing Attitudes

10. Cross-Category Competition

11. Cross-Industry Competition
Source:
NBPCA/Giftex 2007
Study of Gift Card
Buyers

12. Appreciate the Freedom Gift Cards Give

13. Technology
 EGC (web codes)
 Mobile
 The path to loyalty?

14. Drivers of Gift Card Growth
Sales
SecurityRetail/
Distribution
Cost/Fees
Appearance
Terms &
Conditions

15. Overall Story
 Growth
 Early 90’s to 2007

16. How Does this Affect Fraud?
 The sale of pre-paid gift cards (virtual
and plastic) is increasing significantly
via major merchant websites: Top 5
item purchased at top major retailer
websites
 Credit and debit cards are the
primary funding and purchase source
for gift cards
 Result: Fraud related to gift card
purchases has jumped significantly in
the last 18 months, to the point where
gift cards are the #1 most fraudulently
purchased item for many major
retailers

17. Gift Card Fraud Rates: Three Top 10 Retailers
Virtual Gift Cards Plastic Gift Cards Overall Bankcard Fraud
Rates
Fraud Rate: % of
Transactions
% of Overall $
Value
% of
Transactions
% of Overall $
Value
% of
Transactions
% of Overall $
Value
Large Retailer “A”
(Apparel, Home Goods)
0.80%
[1.50%]
1.00%
[1.70%]
0.03%
[0.60%]
0.03%
[0.90%]
0.16% 0.34%
Large Retailer “B”
(Mixed Retail)
4.10% 10.6% 2.10% 3.05% 0.41% 1.30%
Large Retailer “C”
(Mixed Retail)
1.70%
[6.70%]
2.60%
[5.5%]
0.70%
[2.7%]
2.80%
[2.6%]
1.5% 3.2%
• Gift Card Fraud: Defined as the fraudulent purchase of a virtual or plastic gift card
• Retailers displayed above have significant, established gift card programs
• Retailers profiled represent major North American retailers with total combined annual
revenues exceeding USD $476 billion (2008)
Key:
June – December 2009
[January-February 2009]

18. The Lifecycle of Gift Card Fraud
Purchase of Gift Card
(Plastic of Virtual) via
merchant website using a
fraudulent payment card
Sale of Gift Card via
legitimate channels to
legitimate consumers
Monetization of fenced
goods or gift card sale
Use of gift cards to
purchase fencible goods
Use of Gift Card at
merchant website or in-store
by legitimate consumer

19. Why Gift Card Fraud Is Attractive via the CNP
Channel
 Gift Card = Cash
 Legitimate resale markets exists that allow the
fraudster to easily unload stolen gift cards
 Chargeback delays (1-3 months) on fraudulent
purchase activity make it nearly impossible to turn
off cards before they are used
 Fraudsters know that, even if gift cards are linked
to stolen credit cards, retailers can be hesitant to
turn off gift cards at the fear of insulting legitimate
consumers
 Cross-channel buy/spend makes plastic gift cards
easy to obtain and merchandise quick and easy
to acquire
 Fraud prevention systems operate in silos –
merchant web fraud prevention
systems/processes typically do not tie into private
label or gift card systems

20. In The News…

21. This is What It’s Come To…
21
Source: ShopRite stores, New York City area, December 2009

22. Stories From The Field…
 Increased evidence of targeted gift card fraud acquisition rings using
compromised cards resulting from recent, massive data breaches (TJX,
Heartland Systems breach)
– Specific compromises using entire BINs from Citibank and Chase
 Funneling of gift card purchases through traditionally “safe” APO/FPO
addresses and other addresses where Address Verification Services
(AVS) are not supported
 Automated “bot” or mass-purchase attacks, as evidenced by strange gift
messages during checkout process
– E.g. “Good Day” or “Happy Day” , etc.
 Use of “disposable” email domains during gift card purchase
 EASYLIVEMAIL.NET
 ZUNMAIL.COM
 BIGMAILONLINE.COM
 COLDMAILONLINE.COM
 MEGAPED.COM

23. So What Does This Mean?
The Good
 Existing fraud prevention systems and
techniques can be used to help
prevent the purchase of gift cards
using fraudulent credit cards
 Specialized programs and strategies
have been developed by fraud
prevention analysts to minimize
fraudulent gift card purchases
 Merchants have successfully worked
with fraud prevention vendors, gift
card program providers and merchant
acquiring banks to reduce losses
The Bad & The Ugly
 Many merchants do not have robust,
dynamic website fraud prevention
systems in place today or don’t
understand how to address the
problem
 These strategies must be extremely
dynamic and require a lot of “care and
feeding”. Fraudsters are actively
targeting anti-gift card fraud
prevention strategies
 There are no comprehensive end-to-
end gift card purchase fraud
prevention systems in place today,
which track card acquisition and use
through all phases of the lifecycle

24. Thank you!
Please feel free to contact us with any
questions:
Chris Uriarte
CTO, Retail Decisions
curiarte@red-usa.com
Dan Horne
Global Prepay Exchange/Providence College
dhorne@providence.edu