Place Logo within boundaries of grey box. IMOPORTANT! Remove box and instructions after logo...

Place Logo within boundaries of grey box. IMOPORTANT! Remove box and instructions after logo placement.

Fighting Stored Value Card Fraud

From “Paper to Plastic”


• Paper certificates represented a small part of business

• Easy to copy and counterfeit• Labor intensive to manage• Difficult to determine paper trail• Shortages often went unresolved

Paper Certificates Then…..


Stored Value CardsNow…….

• Most retailers have eliminated paper gift certificates

• More easily controlled• Less Fraud• Less Labor intense• Can be sold thorough different venues

– In store– Third Party Sales– On-line– B2C/B2B


Stored Value CardsNow…….

Profitable model• Stored value card breakage: $43 million of pre-

tax income for F.Y. 2005 – Best Buy • Limited Brands reported a $30.4 million gain

from breakage on its gift card program in its 2005 fiscal fourth quarter


~$100

~$75

~$60

~$45

~$36

2002 2003 2004 2005E 2006E

Source: First Annapolis estimates and research; company surveys

Retail stored value card purchase volume forecast

($ billions)

Some Statistics


Some Statistics

• Sales of “closed loop” stored value cards totaled $47.1 billion in 2004.

• Represented 12% of 2005 holiday sales• By 2008 predictions are that stored

value card sales will reach $97.7 billion.


Some Statistics

• Stored value cards are most popular among 25-34 age group

• 75% of all US Adults have bought or received a stored value card

• US Adults have purchased an Average of 6.5 stored value cards Annually in 2005

• 57% of US Adults spend more than the initial value of the stored value card

• 75% of those US Adults adding their own money to a stored value card, to make a purchase, add up to 25% of the purchase price

• 2005 projected average spend using stored value cards is $248 vs. $183 in 03


Some Statistics

• 93% of all US teens have bought or received a stored value card

• 82% of US children, age 5 -14, have bought or received a stored value card

• Birthdays are cited as the most popular giving occasion

• Winter Holiday Season is the second most popular event


Some Statistics

• Men and women purchase equal amounts of stored value cards, but men received them more (31% Men vs. 28% Women)

• Gift Card Market Segment - Share:– Retailer (Hard line & Soft line) - 70% – Restaurants & Quick Service Restaurants (QSRs) - 12%– Supermarkets & Grocery Stores - 6%– Entertainment-based Businesses - 5%.

• Stored value cards were the 3rd most popular gifting item in 2005 behind video/CD & apparel Gifts for the 2005 Holiday Season


2005 Recap

~$18.5 ~$17.3 ~$17.2

2003 2004 2005 (Estimate

Pre-Holiday)

Holiday Season Stored Value Card Est. Sales

($B)

Source: 2005 NRF – BIG Research Survey


First Generation Stored Value Cards

• Little understanding of how they work• Minimal initial security features included• Little L.P. Education on subject• Mandatory guidelines for credit card security

(PCI, CISP)• No exception reporting • Potential fraud was unknown


First Generation Stored Value Cards

• Many not prepared for the potential fraud changes

• Customers can be negatively impacted

• Low industry exposure, compared to credit card fraud


The Life Cycle

ImplementationTesting

QA SystemCompatibilityWith retailer

P O S platform

RetailerActivates card through

POS platform$$$ put on the card

Personalization

Customer


Stored Value Card Fraud

• Retailers combat fraud & shoplifting everyday– Fact of doing business

• Bank Check• Cash• Credit cards

– Strong internal controls create barriers for fraudsters

– Proactive loss prevention anti-fraud measures

– Exception Reporting that identifies fraudulent activity

• Vendor Fraud

• Shoplifting

• Debit Cards



• Types of Gift Card Fraud

– Associates card swapping at the register

– Cashier copies the human readable account number and strips the scratch off to obtain the PIN number for web purchases

– Smearing of barcode & human readable account number

– Individuals create a “duplicate” label of a UPC Barcode & places “1st” card label over “2nd” card UPC Barcode

• Dials for dollars and then uses cloned card



• Types of Gift Card Fraud

– “Skimming” - Fraudster invests in magnetic stripe hand reader/encoder & makes duplicate credit cards and gift cards

– Duplicate gift & credit cards are produced

• Magnetic stripe encoding machines & computers

– “Skimming – to create duplicate credit & stored value cards

• Fraudsters repeatedly called the merchant’s 800 #’s

– To determine if skimmed stored value cards were active

– Manual & auto-dialers were used to call the 800 #’s


• Types of Gift Card Fraud – Fraudsters obtain active credit card & gift card account numbers from

employees of Retailers• Retail Associates, waiters & waitresses at restaurants are bribed for active credit card

numbers

• Retailers’ Point of Sale (POS) “receipt tapes” are stolen to obtain credit card & gift card numbers

– Fraudsters present “stolen & counterfeit” credit cards to purchase stored value cards

• P.O.S. internal breech allowed for value to be put on stored value card prior to credit card charge authorization

• Remote fraudster accomplice with “skimmed – duplicate” stored value card made purchases at “sister store”, after being “text messaged” that stored value card has value on card by fraudster who is trying to make purchase of stored value card




Skimming Device


Case Study

• $19 K Case• Associate loads one card for $300• Reboots POS• Transfer balance from card to 3- $100 cards• Sells Cards• Uses for exact tender transactions• Charged with grand larceny


Case Study


Loss Prevention Opportunities

• Work with IT or Stored Value Card Vendor on POS System Controls

• Use of Exception Based Reporting– Multiple IVR Inquiries– Employees using Stored Value Cards– Stored Value Cards used to purchase other Stored

Value Cards– Multiple Stored Value Card Purchases by the

same account number



• Bar Code Solution– IT Solution– Link Barcode to Card Number– Database difficult to compromise– Difficult to duplicate barcode



• Establish Policies/ Guidelines– Do not accept checks– Do not accept hand keyed credit cards– Handling of lost or stolen cards (State Laws)– Investigation Process– Eliminate Return Cards being converted to cash

• Placement of Physical Cards at POS– Visible Location



• Periodic review of In-Store stored value Card inventory – Verify that “scratch offs” are still intact

– Check to make sure no “list of stored value card account numbers” are located under POS “counters” or “registers”

• Perform criminal background checks on key associates who have access to cash/credit & stored value cards

• Promote Communication of stored value card fraud issues– Internally

– Externally



• Value Add Cards– Reduce per transaction amount that can

be reloaded– Reduce the number of times a card can

be reloaded



• Communication

– Inform your stored value card vendor of any credit card or gift card fraud trends

– Inform law enforcement agencies

– Work with the trade associations

• N.R.F.


New Venue Challenges

• On-Line purchases– Electronic– Credit Card not Present– Open to Organized Retail Crime

• LP Opportunities – PIN activation– RNG for IP address– Fraud admonitions


Industry Initiatives

• Best Practices - NRF & RILA working with retailers and EBay to stop fraud

– One prominent retailer reported to the NRF that 80% of their cards sold over eBay were fraudulent

– Result – EBay instituted new anti-fraud measures

Maximum of 3 cards sold at a time

Limited the total dollar amount to $500


Conclusion

• The use of stored value cards will continue to increase

• Risks will be ever-present, unless you adopt effective controls

• Effective controls will impact long term program success

• LP efforts need to evolve at the same rate of the business

Place Logo within boundaries of grey box. IMOPORTANT! Remove box and instructions after logo...

Documents

Transcript of Place Logo within boundaries of grey box. IMOPORTANT! Remove box and instructions after logo...