EMV’s Unintended Consequence for Gift Cards
Gift card buyers paying with a credit card may face a little friction when they attempt their next gift card purchases. Some retailers that haven’t yet implemented EMV-compliant terminals are only permitting gift card sales to consumers who pay with cash or a PIN-based card, according to National Retail Federation Senior Vice President and General Counsel Mallory Duncan. He says that since the network liability shift, which puts merchants on the hook for fraud if they don’t have EMV-compliant terminals, he has heard anecdotally from members that gift card acquisition fraud is on the rise.
“One of the consequences of the poor rollout of EMV is that more people are buying gift cards with bad credit cards,” Duncan tells Paybefore.
This type of fraud is nothing new. A fraudster uses stolen credit card data to buy gift cards. The difference in a post-EMV world is that merchants that aren’t yet accepting chip cards would be liable for the fraudulent purchase of the gift card. Depending on what type of gift card is purchased, the merchant may be hit twice. For example, if a non-EMV-compliant retailer sells its own store gift cards to fraudsters, it would face losses from the fraudulent purchase and again when the store gift card is redeemed.
As a result, some retailers are imposing temporary restrictions on purchases of gift cards using credit cards until they’re able to roll out EMV-compliant terminals. A recent report in the Wall Street Journal notes that Cincinnati-based Kroger, which is in the midst of upgrading its checkout equipment to accept chip cards, is limiting the number of gift card purchases that are made on a credit card within a 24-hour period. Chris Hjelm, the chain’s chief information officer, told the WSJ that the store is doing different things to mitigate risk but didn’t want to give details that might help fraudsters.
|“This is a temporary issue. Mostly, what [our partners] are doing is working with us directly to monitor and mitigate the situation rather than instituting drastic measures.”
—Teri Llach, Blackhawk Network
A 2015 Nilson report estimates that U.S. payment card issuers lost $3.89 billion in 2014 due to counterfeiting, which accounted for 23.9 percent of all global card fraud losses. But, there’s no breakdown of what counterfeiters purchased with their stolen credit card data. Duncan says counterfeiters are looking to buy products that are fungible, such as gift cards as well as products that sell well on the black market like baby formula and high-dollar electronics.
One of the largest distributors of gift cards Blackhawk Network noted in its latest earnings guidance that 2016 revenue may be affected negatively as retailers temporarily restrict gift card sales in response to the risk of purchases being made with counterfeit credit cards. “[S]ome retailers have taken measures to limit or control the sale of high-value, open-loop cards,” Blackhawk noted in its earnings report. “We are actively working with these partners to help implement fraud monitoring and control procedures for gift card sales.” The Pleasanton, Calif.-based company says most of its partners expect to complete their implementations of EMV-compliant systems from March through September.
“This is a temporary issue,” Teri Llach, Blackhawk Network’s chief marketing officer tells Paybefore. “Mostly, what [our partners] are doing is working with us directly to monitor and mitigate the situation rather than instituting drastic measures.” Blackhawk Network has a 24/7 risk management team available to help its partners with myriad fraud issues, including this one.
Llach also doesn’t want to share specifics that might help criminals work around the fraud-prevention steps retailers are taking. But she is adamant that retailers do not want to make things difficult for legitimate customers. “It is not going to be hard to buy a card,” Llach emphasizes.
Gift card experts are quick to point out that there already are restrictions in place on the sale of “prepaid access,” as defined by FinCEN. For example, retailers and other distributors normally have policies in place to restrict the sale of more than $10,000 in gift cards and other forms of prepaid accesss to one person in a 24-hour period to avoid more stringent customer identification and verification requirements.
Mercator Advisory Group’s Ben Jackson, director of the prepaid advisory service, is skeptical that fraudulent purchases of gift cards are on the rise because some retailers don’t have EMV terminals turned on yet. “Retailers are used to fighting fraud,” Jackson says. “Retailers and banks have to monitor and report suspicious activity. This transition [to EMV] doesn’t absolve anyone from following the law.” He believes more data are required before jumping to the conclusion that counterfeit purchases of gift cards are increasing.
What’s more, retailers often have lower thresholds for gift card purchases than required by law, but experts suggest there is a danger of going too far. Retailers may be putting their own revenue at risk if they turn away legitimate gift card buyers. Gift card loads are at an all-time high and most consumers spend well over the value of a card when they redeem them. CardHub estimates that U.S. gift card sales were up 6 percent from $124 billion in 2014 to $131 billion in 2015. Mercator forecasts that by 2018 loads on open-loop gift cards will total $20.2 billion and loads on closed-loop will reach $105.2 billion.
“Even the few retailers who remove some of the high-value, open-loop cards temporarily don’t want this category to go way,” Llach concludes. “They love it and their consumers love it.”