Gift Cards: A Perfect Gift or a Fraudster’s Perfect Tool?

Gift cards are everywhere - birthdays, holidays, or even as a quick thank-you gesture. They’re the most versatile, convenient, and universally appreciated thing, right?


Check this: The global gift card market was valued at USD 818.42 billion in 2022, and is projected to reach USD 1,897.46 billion by 2030, growing at a CAGR of 10.46% (Source)


The key drivers? Rising adoption of digital gift cards and increased corporate gifting initiatives.


However, here’s the other side: gift cards have become one of the go-to tools for fraudsters.


In 2023, card draining and other gift card-related fraud made up $217 million of the record $10 billion in money lost from scams nationwide, according to the latest data released by the Federal Trade Commission. (Source)


What once used to be a token of appreciation is not a threat in the financial ecosystem, exploited by fraudsters to launder money, scam people, and conduct illicit activities.


The question arises: how can financial institutions protect legitimate transactions while preventing fraudulent activities?


Why Are Gift Cards a Fraudster’s Favorite?


Though gift cards look harmless, they’re a perfect tool for fraudsters. Here’s why:


1. Anonymity


Unlike traditional payment methods, gift cards offer a certain level of anonymity that makes them very attractive to criminals. No names. No bank accounts. Just untraceable funds.


2. Liquidity


Gift cards can be easily sold in the secondary market at a discounted price or used to make some untraceable purchases.


3. Weak security measures


Gift card system lacks security that you can find in other financial transactions, and this is what fraudsters exploit.


4. Works both online and offline


Heard of the ‘pay with a gift card’ scam? Well, be it tech support, fake lotteries, or more, gift cards can be quickly swiped and work online too. 


How Gift Card Fraud Works?


Gift card fraud can take place in various ways including theft, account takeover, cloning, and more. In simple terms,


  • The scammer contacts the victim, posing as a legitimate entity

  • Then, they claim to have an urgent issue that requires an immediate payment.

  • The scammer instructs the victim to buy gift cards from some popular retailers.

  • Once the victim purchases the gift card, they ask for the gift card number and PIN.

  • Scammers then quickly transfer the money or sell the stolen gift cards, making it practically untraceable.


Smooth, right?


Now that you know how it works, let’s understand its cost.


How Gift Card Fraud Impacts Financial Institutions


Gift card fraud doesn’t just hurt customers - it poses significant risks to financial institutions, too:


1. Reputational Damage: Rise in fraudulent activities can severely affect the customer’s trust, most importantly when financial institutions fail to detect and mitigate such scams.


2. Compliance Risks: Gift cards are sometimes used in money laundering schemes, which leaves financial institutions exposed to regulatory scrutiny.


3. Operational Strain: These gift card scams require a lot of investigation and reimbursing victims’ time, money, and resources, which affects the overall operations.


However, using the right technology can help financial institutions understand the unique challenges and mitigate the risks involved.


How Financial Institutions Can Combat Gift Card Fraud?


Combatting gift card fraud effectively requires more than just manual oversight. 


With robust fincrime tools like Velocity’s fraud prevention software, financial institutions can combat fraud easily.


The advanced tool uses AI and ML to analyze the transaction patterns in real time, detect anomalies, and flag high-risk transactions. This helps financial institutions quickly identify suspicious activities and mitigate fraud-related threats, safeguard the organization, and stay compliant with regulations.


Safeguard Your Financial Institution from Gift Card Fraud with Velocity


Velocity’s fraud prevention software can help financial institutions tackle emerging gift card fraud threats. By leveraging AI and ML, the tool helps to:


  • Detect unusual gift card purchases in real-time

  • Flag suspicious patterns or high-risk transactions

  • Prevent fraudulent activities before they escalate

  • Ensure compliance with global AML regulations


Get ready to protect customers, strengthen their trust, and safeguard the reputation of the financial institution. 

To learn more about how Velocity can help, book a demo!

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