Preventing Gift Card Fraud
Protecting Your Program From Loss and Liability
Gift cards have become the perfect gift for many
consumers. When not certain what to buy someone for a
birthday, holiday or special occasion, a gift card from
their favorite retailer is a great choice. For
retailers, a gift card purchase ensures the holder will
purchase merchandise from their store, securing a future
sale. You can’t visit a retailer, grocery store or even
a convenience store today that doesn’t have gift cards
When gift cards or stored value cards first caught on in
retail, many retailers were not prepared for the fraud
that quickly took place. As gift cards became more
popular, retailers began to see and report more
incidents of fraud.
Gift card fraud occurs in all types of retailers,
regardless of segment or size. Throughout the years, we
have seen many sophisticated methods of fraud, some
being attributed to organized retail theft, and other
methods that even today seem very rudimentary and simple
are the losses occurring?
To best prevent losses, one must understand how the
losses can occur. With stored value cards, it requires
protecting the card itself as well as how the card can
be used throughout your sales process. Here are some
points to help make certain your company is properly
protecting your stored value cards from potential theft
or use in a fraud.
Protecting the Card
The first point of protection should be the card itself.
Gift card providers are always developing new security
features to better protect the card. Pin numbers
protected by scratch off labels deter the card from
being manually utilized. Encrypted magnetic strips can
prevent card duplication. Unfortunately, our experience
with many retailers both large and small, have seen
protection such as scratch-off labels not utilized in
order to reduce costs. A short-sighted decision that can
easily result in loss.
Deterring Fraud at the Point of
When it comes to frauds involving tenders, the point of
sale is often where it occurs. Understanding how your
point of sale issues, redeems and cashes cards and when
the card is activated in your POS system can help you to
determine various risks at your point of sale.
Knowing when the card is activated at your point of sale
can help determine your level of vulnerability to gift
card fraud. Many retailers allow their cards to activate
once scanned as an item for sale, prior to the
transaction being tendered and complete. This allows the
retailer to become vulnerable to several methods
including "laundering" of a gift card, credit card or
check fraud, or known methods of organized gift card
fraud. Other areas of system vulnerability include the
possible post voiding of a gift card, or shutting down
or unplugging the register in the middle of a
transaction after a gift card is activated. The latter
two are known methods used by employees to steal from a
retailer. Your point of sale system as it pertains to
gift card issuance and redemption will help to protect
your company from gift card frauds.
Card Display and Handling
Where and how you display gift cards can also determine
vulnerability to fraud. If cards are displayed in
unorganized fashions or not properly maintained at the
store, then how easy is it for a “customer” to take
several blank cards and duplicate them for fraud.
Many retailers are “packaging” gift cards with only the
bar code visible so they can activate the card. This
packaging provides better protection against someone
trying to steal, duplicate and return the card. If you
company doesn’t use any packaging to protect your gift
cards then keep your cards in an area where they can be
seen by employees. This will help to deter the theft of
The Inside Factor
As we speak with loss prevention professionals regarding
gift card or stored value card frauds, one might think
the largest amount of theft is from external fraud
attempts. Interestingly enough, their biggest fraudsters
are their own associates.
The use of exception-based reporting applications play a
large role for many retailers in trying to detect
potential fraud or exceptions related to gift card use.
Same day purchase and redemptions or gift cards used in
an employee sale are but a few of the key reports used
to prevent internal theft involving gift cards.
The internal factor related to gif card fraud is not
only a loss prevention concern, but a customer service
concern. How often have you or someone on your team had
to talk to a customer who doesn’t understand why she
can’t use her gift card because it doesn’t have a
Gift Cards programs are most certainly here to stay and
the use of stored value cards will only increase as we
continue toward a mobile environment. Understanding your
gift card program, developing proper safeguards with the
card and your POS System, and auditing your program for
issues will better protect yourself from points of
fraud. Decreasing the opportunities and likelihood of
incidents will then allow you to reap the benefits of a
good gift card program.
Tomorrow's part two will cover how they do
it including known methods of gift card fraud.
David Johnston has served the loss prevention
industry for over 26 years, holding various positions as
a practitioner, consultant and solution provider. His
experience and expertise throughout the years has
focused primarily on data analysis, loss prevention
technologies and the development of strategic
initiatives. Currently the Director of Business
Development with LP Innovations, David is responsible
for bringing LPI’s solutions to new clients and retail
verticals. You can reach him at
connect with him on LinkedIn.