Gift card scams are on the rise. The use of predatory tactics to make unsuspecting consumers transfer money, typically through the purchase of a gift card, created consumer losses of nearly $245 million over the last three years in the United States, according to the Federal Trade Commission (FTC). This number will increase without policymaker action, leaving large demographic swaths, particularly those older than 60, increasingly vulnerable.
Gift cards act like debit cards: they hold a certain amount of prepaid money. They can be reloadable and redeemable anywhere (such as Visa or Mastercard gift cards), or only redeemed with a specific store or service (such as eBay or Google Play).
There are various types of gift card scams, all of which have become increasingly sophisticated. One familiar scam entails calls or emails to individuals posing as government agencies, tech support, utility companies, and even friends and family members. These messages typically convey a sense of urgency—it’s the IRS telling you to pay a tax (even though it’s not tax season) or else they will fine you a large sum of money. The scammer tells you to pay this fine by purchasing a gift card, and sending the card number to a specific address, or reading the number over the phone.
But, gift card scams extend beyond deceptive phone calls. Some criminals even tamper with cards sold in-person at retailers by attaching fraudulent bar codes. When consumers attempt to load money onto the card, the funds are instead sent directly to a cybercriminal’s card. Scammers can also use bots to infiltrate a retailer’s online system to check for cards with balances and steal funds right off a card, or simply purchase digital cards with stolen credit card information.
Although gift cards provide retailers with an influx of cash, a system breach can mean a retailer will be accepting cards that were never legitimately purchased. Moreover, stores will incur losses if scammers succeed at making fraudulent transactions. If a consumer notices a card purchase was charged to their account that they never made, they can report it to a bank and have the store refund them.
Policymakers should consider more proactive measures to prevent gift card scams. Although gift cards provide necessary cash flow to stores, they pose a threat to unassuming citizens, legitimate cardholders, and retailers alike. While the FTC and other consumer protection agencies frequently provide updates on this issue and offer tip sheets, victims of scammers are unlikely to find that information until after the fraud has occurred when they seek to report it. Policymakers need to shift from a reactive to a proactive stance when it comes to gift card scammers. Here are three ways they can do it:
- Create point-of-sale pop-ups
Warnings posted at physical retailers remind customers that no legitimate agency, telemarketer, or store representative would ask for payment in the form of a gift card. These warnings come in the form of stickers and infographics posted near cashiers and on store racks. While this FTC campaign is valuable in informing consumers making in-store purchases, it does not cover online purchases, which have skyrocketed in popularity since the start of lockdowns across the globe. The FTC should work with the private sector to create a series of best practices and suggested notices for online retailer use. These notices should occur before the point-of-sale for online gift card purchases. This public-private collaboration should test to see what messaging is most effective in warning consumers about gift card scams and the ways this type of fraud can manifest. Equipping consumers with information is essential to preventing these scams.
- Update card security and design
Ideally, gift cards should be easy to purchase, easy to use, and easy to transfer to the recipient. Still, updating security mechanisms and improving card design can help prevent fraud. Multi-factor authentication (MFA) ensures the user of a gift card is its rightful owner, and randomly generated online PINs and CAPTCHAs deter online bots from purchasing, registering, or using gift cards.
Design-wise, warnings printed directly on the cards or their packaging can alert consumers to the risk of fraud. Proper packaging can also protect card data, shielding PINs and magnetic stripes from tampering. Here too the FTC can work with the private sector to establish and disseminate best practices.
- Pursue additional legal and technological solutions
Gift card fraud is a serious issue in the United States. A quarter of all people who report money loss to the FTC specifically mention issues with gift cards. With the U.S. market for gift cards reaching $278 billion, it will continue to be a rich target for scammers. To address the evolving threats, policymakers need to move beyond public information campaigns and pursue new legal and technological solutions. To kickstart this process, the FTC and the Department of Justice (DOJ) should organize a joint public workshop to discuss these options, including assessing whether updated legislation is needed and preparing lawmakers accordingly.
Making these policy commitments now would protect consumers against a growing threat that is costly to consumers, businesses, and takes up valuable government resources. Proactive policies are needed to mitigate these issues and support innocent populations. While emphasis exists on equipping consumers with information to protect themselves, government officials should also seek out additional measures to complement existing prevention tactics.
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