How to Prevent Gift Card Fraud This Holiday Season

Gift cards have become a staple of holiday gifting, offering recipients the freedom to select their favorite products or experiences. According to the National Retail Federation’s 2024 Holiday Consumer Survey, approximately 44% of consumers expect to give a gift card as a present this season, while Capital One Shopping claims that around 64% of U.S. consumers buy gift cards as holiday gifts. However, this rising popularity, as well as their flexibility and ease of use, has also made gift cards a prime target for fraudsters.  

Retailers and restaurants often see a surge in gift card-related fraud during the holidays, leading to potential financial losses, brand reputation damage, and a decline in customer trust. Criminals are constantly evolving their methods, using both physical and digital means to exploit gift card systems. By implementing the best practices outlined in this guide, your business can better protect its gift card program, ensure a positive shopping experience, and mitigate risks during the busiest time of year. 

The Growing Threat of Gift Card Fraud 

According to recent data from the Federal Trade Commission (FTC), Americans lost nearly $217 million to gift card scams last year alone. The problem of gift card fraud has become so prevalent that the Better Business Bureau, the US Attorney’s Office, the Department of Homeland Security’s Homeland Security Investigations office, the Federal Trade Commission, and the Internal Revenue Service have all issued warnings about gift card fraud targeting retailers and consumers this holiday season.  

Fraudsters employ various tactics to exploit both physical and digital gift card systems. Here are some of the most common methods: 

Physical Card Tampering 
 
Criminals target gift card displays in stores, often stealing activation codes or replacing activation stickers. In the most popular scheme, often called “gift card draining,” criminals tamper with gift card packaging to steal card information before it’s sold, return the altered cards to store shelves and regularly monitor the balances to check if the cards have been activated. Once the customer buys and loads money onto the card, the fraudsters drain the funds, leaving the customer with an empty gift card. The customer doesn’t know the card has been compromised until they go to use the card.  

Physical tampering such as gift card draining scams are so prevalent that police departments around the country are warning consumers, while Maryland has even passed a first-of-its-kind law with the “Gift Card Scams Prevention Act of 2024,” which requires retailers to follow a set of anti-fraud requirements before they can sell gift cards in-store. 

Digital Gift Card Fraud 
 
Online fraudsters rely on tactics like phishing scams or stolen payment credentials to purchase digital gift cards. These cards are then redeemed or resold before fraud is detected, leaving businesses to absorb the losses.  

In May of this year, the FBI issued a warning to US retailers about a malicious hacking ring named STORM-0539 that was targeting employees with sophisticated email phishing and SMS phishing ("smishing") attacks in an attempt to create fraudulent gift cards. Once they gained access into the corporate networks of the retailers, the group attempted to steal passwords and SSH keys that would allow them to create unauthorized gift cards. 

Insider Threats 
 
Employees with access to gift card systems may exploit these resources for personal gain, issuing fraudulent refunds or activating unauthorized gift cards. This type of fraud can be particularly damaging due to its internal nature. 

Last month, a cashier for a major retailer in Ohio was reported as having stolen $16,000 through a gift card scheme in her first week on the job. The store’s loss prevention team said the employee manipulated the sale of gift cards with a cash payment and then would use the fraudulent gift cards without actually paying for them.  

The consequences of gift card fraud can be devastating for businesses, including lost revenue, operational disruptions, and diminished customer trust. However, implementing proactive measures can significantly reduce these risks. 

Best Practices for Preventing Gift Card Fraud

1. Secure Your Gift Cards

It’s old school but it works – physical security is your first line of defense to protect against physical card tampering schemes.  

• Store physical gift cards in secure, locked locations with limited access to authorized personnel.  

• Use tamper-evident packaging that conceals any numbers or data necessary to drain the card and ensure activation stickers are properly affixed to prevent tampering. 

• Conduct regular audits of gift card inventory to detect and address discrepancies early. 

Some gift cards, such as chip-enabled numberless cards, are more inherently secure than others. Such cards may be safer to sell without requiring an employee to unlock. Whichever method you choose, just ensure that cards on the floor can’t be tampered with in a way that avoids detection. 

2. Enhance Point-of-Sale (POS) Security

If you can configure your POS system to detect and flag unusual gift card activities, such as multiple high-value purchases or excessive activations within a short time, do so. A tool like Agilence Analytics can pull your POS data and allow LP analysts to identify anomalies and even send proactive alerts to store staff.  

Traditional POS safety measures can also be helpful, like requiring additional customer verification for high-value purchases, such as presenting a valid ID, or implementing transaction limits for gift cards, such as capping the total value per transaction.

3. Train Employees

To prepare employees, hold regular training sessions that highlight the red flags to watch for, such as unusually high-value transactions or attempts to purchase multiple gift cards in a single visit. Role-playing scenarios and sharing real-world examples of fraud attempts can be helpful.  

Educate employees on the signs of gift card fraud, including altered cards, suspicious customer behavior, or unusual purchase requests, and empower them to report suspicious activity without fear of repercussions. The better your employees understand these risks and stay alert, the better equipped they’ll be to protect your business and customers.

4. Encourage Customer Vigilance

Your customers also play a role in preventing gift card fraud. By educating them on precautionary measures, you can work together to prevent fraud. Educate customers to treat gift cards like cash and avoid sharing gift card codes. Encourage them to purchase cards from legitimate sources, while publicizing reminders to inspect cards for signs of tampering, like exposed PINs or damaged packaging. Display warnings about common gift card scams in-store, on receipts, and on your website.

Simple tips, such as safeguarding the card’s PIN and avoiding resale platforms, can go a long way in reducing risk. To raise awareness, consider using emails, posters in stores, or social media posts to share fraud prevention tips. Offer resources, such as hotline numbers or FAQ pages, to help customers identify and respond to potential fraud. Ask customers to report unauthorized activity immediately, so your team can act quickly to minimize damage.

5. Monitor Online Transactions

Transaction monitoring is crucial for detecting irregularities. Unusual patterns, such as large purchase volumes or repeatedly redeemed cards, could signal potential issues. By tracking sales and redemptions, your team can quickly intervene if fraud is suspected. 

Advanced analytics tools such as Agilence Analytics make monitoring more efficient by automatically flagging suspicious behavior. These systems can highlight patterns that might go unnoticed by human oversight alone and send proactive alerts. Acting quickly on these alerts reduces fraud risks and protects your bottom line during the busy holiday rush.   

Also, be sure to follow cybersecurity best practices, such as: 

• Employing fraud detection tools like CAPTCHA or bot-blocking software to safeguard online gift card purchases from automated attacks 

• Setting strict transaction limits for digital gift card purchases, including limits on total value and the number of cards purchased in a single session 

• Using email verification or two-factor authentication to confirm the identity of buyers for online transactions 

6. Audit and Analyze Transactions

Even with the best precautions, some instances of gift card fraud may slip through the cracks. That’s why continuously auditing and analyzing transaction data is critical to identifying and mitigating fraud early. By leveraging Agilence Analytics, you can turn raw data into actionable insights, empowering your team to take proactive steps against fraud. 

Agilence Analytics provides advanced monitoring capabilities that help uncover suspicious patterns and anomalies, such as: 

• Payment Methods: Identify trends involving specific payment methods frequently associated with fraudulent gift card purchases, enabling you to flag high-risk transactions. 

• Geographic Trends: Detect unusual geographic patterns, such as clusters of redemptions in unexpected or unapproved regions, which may indicate organized fraud. 

• Excessive Usage: Highlight instances of excessive gift card usage tied to particular customers, stores, or employees that could signal fraudulent activity. 

By harnessing these insights, your team can quickly identify and investigate red flags, minimizing losses and preventing fraud from escalating. In addition to detecting fraud, Agilence Analytics can help improve overall operational efficiency by streamlining your transaction monitoring processes and providing a clearer view of vulnerabilities within your systems. 

Regularly reviewing your transactional data with tools like Agilence Analytics ensures that your business stays one step ahead of fraudsters while protecting both your revenue and your customers’ trust.

7. Report Fraud to Authorities 

When gift card fraud occurs, report it to the appropriate authorities. While some instances of gift card fraud may be minor, law enforcement nationwide are currently fighting large transnational ORC rings carrying out sophisticated gift card schemes against retailers. Begin by notifying local law enforcement to establish an official record and initiate investigations and report incidents to the FTC at ReportFraud.ftc.gov, which tracks trends and coordinates broader fraud prevention efforts. For fraud involving third-party gift cards sold in your store, inform the gift card provider to ensure they are aware and can take necessary actions. Additionally, state consumer protection agencies may be valuable resources for addressing fraud. 

To streamline this process, Agilence Case Management enables your team to log, track, and share detailed incident reports efficiently. Whether fraud involves your store’s gift cards or third-party cards sold in your locations, having a centralized system ensures all relevant data is documented and accessible for investigations, helping protect your business and supporting industry-wide efforts to combat fraud.