Cybersecurity Europe Thought Leadership

Riskified: Retail Payments – The Growing Threat of Digital Gift Card Fraud   

The popularity of digital gift cards is on the rise throughout Europe, however, Nimrod Dvir, Senior Fraud Intelligence at Riskified warns of the risk this new form of payment can represent for merchants and how to best adapt to it. 

As a member of the Fraud Intelligence team, Dvir investigates fraud patterns across Riskified’s clients. Intelligence gathered is used to contain emerging fraud rings, improve model performance in analysing fraudulent behaviour, and deliver relevant information to Riskified’s stakeholders and its clients.

Nimrod Dvir, Senior Fraud Intelligence at Riskified
Nimrod Dvir, Senior Fraud Intelligence at Riskified

The popularity of digital gift cards as a form of payment during key shopping seasons is on the rise throughout Europe. Recent data has shown an increased demand for online gift cards, rising by 50 per cent in the 2021 festive shopping season, as compared to the previous year —  overall a rise of over 200 per cent from 2019. The total value of digital gift card transactions has more than doubled in December 2021, compared to the year’s monthly average. Due to supply chain issues predicted to last throughout 2022, digital gift cards will continue to feature significantly at peak shopping seasons.

Unfortunately, the festive shopping season is also a time of peak activity for fraudsters and online gift cards, in particular, have been a target for fraudsters globally. As demand for digital gift cards has risen, the total value of fraud jumped by over 40 per cent, partly due to the fact that fraudsters have shifted their focus to higher-value gift cards.

These fraud statistics increase the likelihood of retail chargebacks in January: data from 2020 showed gift card-related chargebacks maturing twice as fast as those for physical goods. Clearly, this confers a significant burden on retailers, as well as damaging consumer confidence.

Retailers must therefore grasp the real and present threat of gift card fraud and use the time between sales spikes to fortify their operations against fraudsters. Fortunately, there are key steps merchants can take to ensure they future proof the sale of their digital goods against fraud and limit the related revenue loss due to chargebacks.

Digital gift card scams: the mechanics behind the fraud

Digital gift cards are simple, quick and easy to purchase. With a click of a button, anyone can buy and send an online gift card to a recipient, who can then redeem the gift card through email, text or another digital format easily, to be used with a favourite retailer.

However, the reason why digital gift cards are also so popular among fraudsters is that their purchases are fulfilled instantly, leaving a very short response time and rendering manual review unsuitable for merchants. In addition, as they are bought and dispatched digitally, scammers do not have to comply with address verification and delivery – usually a pain point in their journey.

Fraudsters exploit the popularity of digital gift cards using different methods. They either capture gift card data, hijacking the cards and reselling them illegally or directly buy gift cards using stolen credit card details and then reselling them.

They take advantage of festive season shoppers by offering below-market prices for hacked gift cards directly to consumers or selling stolen gift cards for low prices on the dark web. While doing so, they also use digital gift card theft to fraudulently acquire the buyer’s personal information and credit card details as part of the fraudulent transaction.

Similarly, fraudsters also target companies, which often seek to purchase digital gift cards in bulk for their employees during the festive season. Fraudsters will offer to sell companies bulk gift cards for a lower price, fooling many employers into believing that these gift cards are legitimate digital merchandise.

The risk to retailers in the UK and across Europe

Gift card fraud has unfortunately been on the rise year-over-year across the past two years, especially during the holiday season In comparing December 2020 to December 2021, figures show an average increase of +23 per cent in Fraudularity Level Volume, and smaller (though significant) increase of +7 per cent in Fraudularity Level Value, which captures the dollar amount lost to fraud.

As for which European countries are most affected, according to Riskified data, the UK comes second, after France. As for the European country that faces the least risk of gift card fraud, that would be Germany.

How can merchants maximise the ‘downtime’ between shopping seasons?

Retail typically experiences cyclical highs and lows between peak shopping seasons throughout the year. Retailers can —  and should —  use these lulls between key shopping peaks to strategically increase security and future-proof against fraud by leveraging this period as part of their full-year growth strategy. Here are several key strategies retailers can implement to cut down on gift card fraud:

  1. Take a full-spectrum approach to chargebacks. Most retailers accept that chargebacks are inevitable after a busy shopping season. However, to mitigate against excessive chargebacks — including those related to gift card fraud specifically —  every retailer should commit to having a solid strategy to mitigate them. They can do so by having a robust fraud prevention strategy in place to prevent fraudulent activities from happening in the first place, anticipating chargeback maturation rate based on data, and planning for how different card networks will incorporate chargebacks into their calculations.
  2. Educate customers. No retailer wants to place a burden on their customers, yet at the same time, awareness of risk is also important. Retailers can educate customers about gift card fraud and the importance of keeping gift card and credit card details safe and secure. Helping customers understand the risks involved and how to mitigate against gift card data breaches will make a difference in preventing poor outcomes.
  3. Leverage data to safeguard logins. One way for fraudsters to easily purchase gift cards is by conducting purchases through loyal customers’ accounts, thus making the purchase appear less conspicuous. To increase accuracy and speed when making high-stakes decisions about whether to allow, challenge or block a login attempt, merchants need access to additional data points such as linked identities, behavioural analytics, and spoofing detections, so account takeover prevention is crucial to prevent access to accounts and merchants should invest in tools that are designed to fortify logins.

Retailers selling digital goods run the risk of losing millions of pounds to fraud annually. Proactively shoring up key areas of security, including identity and verification, can help prevent and lessen fraud and related chargebacks. Taking a multi-faceted approach to mitigating gift card-related fraud during troughs in the shopping season will allow retailers to stay steps ahead of fraudsters, drive higher sales, reduce losses, and offer customers a seamless shopping journey without taking on new risk.

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