Prepaid Card Fraud: Understanding the Problem, Developing a Solution

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Presented by: Chris Uriarte, Retail Decisions Dan Horne, Providence College Prepaid Card Fraud: Understanding the Problem, Designing a Solution

Transcript of Prepaid Card Fraud: Understanding the Problem, Developing a Solution

Page 1: Prepaid Card Fraud:  Understanding the Problem, Developing a Solution

Presented by: Chris Uriarte, Retail Decisions Dan Horne, Providence College

Prepaid Card Fraud:Understanding the Problem, Designing a Solution

Page 2: Prepaid Card Fraud:  Understanding the Problem, Developing a Solution

Prepaid Card Fraud: Agenda

Understanding the Pre-paid Market

Recent prepaid Trends and Statistics

Understanding Pre-paid Fraud

Recent Pre-paid Fraud Statistics

Best Practices for tackling Pre-paid Fraud

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Prepaid Cards: A Lot has Happened Since 1992!

First studies of the gift certificate market

Recognition of 2 customers: Buyer/giver Recipient/redeemer

Understanding of the altruism in the gift Intimate giving Arguing over cheapening the gift through convenience

Understanding that many situations involve non-altruistic gifts

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Key Attributes

Altruism

Relief of uncertainty

Convenience

Value

Control

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Strong Attitudes

Source: Giftex Recipient Studies

80% of adults get gifts they do not want. - eBay 2008

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Strong Attitudes

Source: Giftex Recipient Studies

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Dual Benefit

Source: Giftex Recipient Studies

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Cards Increase Merchandising Opportunities

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The Times are Changing

The consumer’s bountiful choice environment– Traditional competition (every retailer)– Cross-category competition– Cross-industry competition– New entrants

Clutter– Changing Attitudes

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Cross-Category Competition

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Cross-Industry CompetitionSource: NBPCA/Giftex 2007 Study of Gift Card Buyers

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Appreciate the Freedom Gift Cards Give

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Technology

EGC (web codes)

Mobile

The path to loyalty?

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Drivers of Gift Card Growth

Sales

SecurityRetail/Distribution

Cost/Fees

Appearance

Terms & Conditions

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Overall Story

Growth Early 90’s to 2007

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How Does this Affect Fraud?

The sale of pre-paid gift cards (virtual and plastic) is increasing significantly via major merchant websites: Top 5 item purchased at top major retailer websites

Credit and debit cards are the primary funding and purchase source for gift cards

Result: Fraud related to gift card purchases has jumped significantly in the last 18 months, to the point where gift cards are the #1 most fraudulently purchased item for many major retailers

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Gift Card Fraud Rates: Three Top 10 Retailers

Virtual Gift Cards Plastic Gift Cards Overall Bankcard Fraud Rates

Fraud Rate: % of Transactions

% of Overall $ Value

% of Transactions

% of Overall $ Value

% of Transactions

% of Overall $ Value

Large Retailer “A” (Apparel, Home Goods)

0.80%[1.50%]

1.00%[1.70%]

0.03%[0.60%]

0.03%[0.90%]

0.16% 0.34%

Large Retailer “B”(Mixed Retail)

4.10% 10.6% 2.10% 3.05% 0.41% 1.30%

Large Retailer “C”(Mixed Retail)

1.70%[6.70%]

2.60%[5.5%]

0.70%[2.7%]

2.80%[2.6%]

1.5% 3.2%

• Gift Card Fraud: Defined as the fraudulent purchase of a virtual or plastic gift card

• Retailers displayed above have significant, established gift card programs

• Retailers profiled represent major North American retailers with total combined annual revenues exceeding USD $476 billion (2008)

Key:June – December 2009[January-February 2009]

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The Lifecycle of Gift Card Fraud

Purchase of Gift Card (Plastic of Virtual) via merchant website using a fraudulent payment card

Sale of Gift Card via legitimate channels to legitimate consumers

Monetization of fenced goods or gift card sale

Use of gift cards to purchase fencible goods

Use of Gift Card at merchant website or in-store by legitimate consumer

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Why Gift Card Fraud Is Attractive via the CNP Channel

Gift Card = Cash Legitimate resale markets exists that allow the

fraudster to easily unload stolen gift cards Chargeback delays (1-3 months) on fraudulent

purchase activity make it nearly impossible to turn off cards before they are used

Fraudsters know that, even if gift cards are linked to stolen credit cards, retailers can be hesitant to turn off gift cards at the fear of insulting legitimate consumers

Cross-channel buy/spend makes plastic gift cards easy to obtain and merchandise quick and easy to acquire

Fraud prevention systems operate in silos – merchant web fraud prevention systems/processes typically do not tie into private label or gift card systems

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In The News…

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This is What It’s Come To…

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Source: ShopRite stores, New York City area, December 2009

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Stories From The Field…

Increased evidence of targeted gift card fraud acquisition rings using compromised cards resulting from recent, massive data breaches (TJX, Heartland Systems breach)

– Specific compromises using entire BINs from Citibank and Chase

Funneling of gift card purchases through traditionally “safe” APO/FPO addresses and other addresses where Address Verification Services (AVS) are not supported

Automated “bot” or mass-purchase attacks, as evidenced by strange gift messages during checkout process

– E.g. “Good Day” or “Happy Day” , etc.

Use of “disposable” email domains during gift card purchase EASYLIVEMAIL.NET         ZUNMAIL.COM BIGMAILONLINE.COM COLDMAILONLINE.COM MEGAPED.COM

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So What Does This Mean?

The Good Existing fraud prevention systems and

techniques can be used to help prevent the purchase of gift cards using fraudulent credit cards

Specialized programs and strategies have been developed by fraud prevention analysts to minimize fraudulent gift card purchases

Merchants have successfully worked with fraud prevention vendors, gift card program providers and merchant acquiring banks to reduce losses

The Bad & The Ugly Many merchants do not have robust,

dynamic website fraud prevention systems in place today or don’t understand how to address the problem

These strategies must be extremely dynamic and require a lot of “care and feeding”. Fraudsters are actively targeting anti-gift card fraud prevention strategies

There are no comprehensive end-to-end gift card purchase fraud prevention systems in place today, which track card acquisition and use through all phases of the lifecycle

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Thank you!

Please feel free to contact us with any questions:

Chris UriarteCTO, Retail [email protected]

Dan HorneGlobal Prepay Exchange/Providence College

[email protected]