Stored-Value Card Fraud—A House of Cards?

Fraud prevention is best addressed by working collaboratively.

Stored-Value Card Fraud—A House of Cards?

Okay, I know that there is stored-value card fraud in the world. I have read most every survey on dishonesty that ever finds its way to the Internet or in ink, so I know that there is always the weird and wonderful. I have lived fraud fighting for most of my adult life in either investigative or management roles, so I get it. As I begin to study the world of stored-value cards, I have concluded that it is crucial to determine what’s real versus what’s “hype.”

Many of my colleagues and friends that I have spent 20+ years as a part of the retail loss prevention “brethren” have strong ideas about stored-value card fraud. Some have suggested that the stored-value card has birthed a new set of organized criminal currency. Lest we forget, the government has also chimed in with the ominous admonition that money laundering has found its way into the stored-value card world.

I am mindful that one of the most useful characteristics of a good loss prevention professional is his or her highly developed sense of intuition: the ability to make decisive moves on little analysis–and be right–is a gift that seems to favor our world more than in mainstream business.

In fact, in the world of stored-value card fraud, there is little to no real intelligence that quantifies the problem. There are however, some business facts that I know from my research:

• The demographics of stored-value card customers vary little between those of the target customer of the organization.
• The economics of stored-value cards make them highly attractive from a margin and return-on-investment perspective to the retailer.
• The concept of lift, defined as the amount of incremental dollars spent by the consumer over the initial value of the stored-value card they use to shop with, ranges from 15 to 200 percent.

It is easy to see that the economic reward of stored-value cards. They are a highly attractive business model that maximizes margin, space, and economics. Why wouldn’t the industry try to expand the stored-value card business? Yet the question remains—are we building a house of cards that could come crashing down around us?

Indications of a Potential Problem

As loss prevention professionals, our jobs are to reap the rewards and risks of the opportunities and challenges that the business places before us. We often don’t have the luxury of design, but we always face the reality of consequence. The same is true for stored-value cards and the related card fraud.

Before suggesting that card fraud is threatening to topple this emerging business, we need to go through some other basics. Loss prevention is faced with the efficiencies of doing more with less.

That said, how much time and effort should we place toward the issue of stored-value card fraud? I am sure that each loss prevention executive will Stored-Value Card Fraud—A House of Cards?find the appropriate return on his or her investment based in part on the uniqueness of the business model.

Some best practices help to stabilize this house when it comes to stored-value card fraud. They are not industry specific, not expensive, and, most of all, they are part of what most LP professionals feel are within the basic package of controls exerted every day at the various touch points where fraud can raise its ugly head.

The bad guys are changing the way that merchandise is disposed. The “e-fence” era is with us to stay. Certain sectors of organized retail crime embrace the logistical beauty of the stored-value card where returned stolen goods can be purchased back at a dollar-for-dollar basis rather than the deeply discounted fences of the past.

External theft is often driven by the types of commodities offered. The same seems to be true in the stored-value card world as well.

Dishonest employees have some interest in using stored-value cards as an instrument of fraud, but I have yet to see any statistics that indicate that it is any better or worse as a percentage of overall employee dishonesty.

Wherever possible, the last sequence in the POS transaction should be placing value on the card and any transaction that is voided or reversed should be done at real time with both POS and stored-value card systems. In addition, the traditional models that authorize non-cash tender (checks and credit cards) should be studied to ensure that you receive a hard (chargeback proof) authorization on gift card sales.

I make these statements not with a great degree of statistical relevance, but with a combination of past experience and informal information gathering. What is clear is that it is our respective responsibility to not only remediate retail fraud, but prevent it as well. Today more than ever, we need to know how to stop fraud in a fashion where resources are expended at a maximum return.

Initial Preventative Steps

I used to teach a course on fraud to internal auditors. I would always ask, “What prevents fraud?” The answer was usually unanimous, “Good accounting controls, separation of duties, and regular audits.”

These statements are the plain truth when it comes to stored-value card fraud as well. However, a laundry list of best practices when it comes to stored-value cards may not be a useful approach, since some may have neither value nor applicability with your products or venue. There are, however, some universal principles almost unique to the stored-value card that are worth honorable mention and are provided to you here.

• Exception reports that highlight the best and worst when it comes to gift card sales, activations or valuations, balance inquiries, and employee purchases. The reports should highlight not only volume, but also timing issues, such as the time between a gift card issuance and redemption and anomalies, such as keyed redemptions.
• Good physical controls on displays, front and forward and heat and light, should be your guidance when presenting stored-value cards. In addition, occasional inventories should be conducted to see if large amounts of cards are missing or requiring replenishment.
• In retailers that attract a higher level of interest due mainly to the desirous nature of the commodity, such as electronics, tools, and apparel, especially from the “ethically challenged and chronically misunderstood,” consider fraud-resistant packaging and designs for the stored-value card. For example, make sure the magnetic bar cannot be swiped without first snapping the display at point of sale. These types of cards and packaging have been useful in deterring large-scale theft and copying of cards that results in the subsequent “dialing for dollars” that occur.
• Separate BIN/account numbers for merchandise return stored-value cards. These cards should be a different format and design from the stored-value cards for sale. By separating the BIN/account information, you can use different language on the card regarding transferability, include a signature panel, require ID on non-receipted returns, and use exception reporting to supply a wealth of analytics on return behaviors and patterns.
• If you are considering an e-commerce venue for gift card sales, review your loss prevention controls as a whole. Remember that you are limited in your ability to recover chargebacks in this venue. One retailer uses a combination of technology that captures the IP address from the sale as well as strong admonitions on their website regarding gift card fraud.
• Research card technologies such as magnetic stripe, which contains the credit card CVC encryption, and decide the best use for the card that fits your POS architecture while providing the most security.
• Communicate, communicate, and, once more, communicate issues to either your stored-value card provider or a data-sharing program to report issues and remediate suspected card fraud. It is generally counterintuitive to the LP professional to share information. But it is critical to get the word out at the beginning of a case. Joint investigations, such as the ones used in the organized retail criminal interdiction teams, have the most return on their investment.

Stored-Value Card Fraud—A House of Cards?

Putting the House on Solid Ground

Technology and good process will eventually overcome card fraud and dishonesty, so we will no doubt conquer the issues of stored-value card as we have most others challenges that we regularly face in this constantly changing and developing business. I would strongly recommend that we find new ways of sharing critical information and working collaboratively to address this challenge smartly.

This article was originally published in 2006 and was updated July 12, 2016.

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