Understanding Gift Card Fraud: A Growing Challenge for Merchants

Gift cards have become an increasingly popular payment method for both consumers and businesses. However, their convenience and ease of use have also made them a prime target for fraudsters. 

Gift card fraud is a form of financial crime that exploits vulnerabilities in payment systems, allowing criminals to launder money, commit fraud, and bypass traditional financial controls. This article explores how gift card fraud works, the tactics used by criminals, and the measures that financial institutions, merchants, and issuers can take to mitigate this growing threat.

How Gift Card Fraud Works

Fraudsters have developed a range of sophisticated techniques to exploit gift cards. Some of the most common tactics include:

• Carding Attacks: Criminals use stolen credit card details to purchase gift cards online. Automated bots test thousands of card numbers in quick succession, identifying which ones are valid for fraudulent transactions.
• Account Takeover (ATO): Fraudsters gain access to a consumer’s online account and purchase gift cards using stored payment details.
• Physical Tampering: Fraudsters steal gift cards from retail stores, record the card numbers, and replace them on shelves. Once a customer activates the card, the fraudster quickly redeems the balance before the rightful owner can use it.
• Social Engineering Scams: Criminals pose as legitimate entities (such as customer service agents or government officials) and trick victims into purchasing gift cards as a form of payment for fake debts or services.
• Resale and Laundering: Fraudsters convert stolen credit card data into untraceable funds by purchasing and reselling gift cards, making it difficult to track illicit transactions.

Fraud Prevention Measures

Acquirer Measures

• Enhanced Authorisation Monitoring: AI-based systems can detect unusual transaction patterns and identify potential fraud in real-time.
• Bot Attack Detection: Payment processors should implement authorisation rules to flag and prevent automated bot attacks attempting to validate stolen card details.

Payment Card Issuer Measures

• Randomised Account Ranges: Issuing PANs within ramdomly set ranges (start and end of range) reduces the effectiveness of sequential number testing by fraudsters.
• Decline Rules for PAN Authorisation Attempts: Multiple failed attempts using sequential card numbers can indicate bot-driven PAN testing and should trigger alerts. Excessive declines with Invalid Account Number reason code are also a strong indicator.
• Restricting Online Payment Loads: Limiting online gift card purchases to domestic payment schemes can reduce cross-border fraud risks.
• Rolling Payment Load Limits: Implementing a four-day rolling cap (Velocity Checking) on gift card purchases can help prevent high-volume fraud.

Merchant Measures

• Bot Detection on Payment Pages: Online merchants should implement CAPTCHA, fingerprinting, and AI-based fraud detection tools to identify and block automated bot abuse.

Gift Card Issuer Measures

• Know Your Customer (KYC) Policies: Applying varying levels of identity verification based on the gift card’s maximum stored value can deter fraudsters.
• Load Restrictions: Setting a limit on the number of payment cards allowed to fund a single gift card reduces fraudulent activity. Restrict acceptance for gift card purchases to domestically issued PANs 

Conclusion

Gift card fraud is a major financial risk that requires multi-layered and concurrent remedial approaches. By implementing fraud prevention strategies across  all stakeholders – acquirers, issuers, merchants, and consumers – businesses can significantly reduce their exposure to these threats. Awareness and proactive security measures are essential in keeping fraudsters at bay and ensuring that gift cards remain a convenient and secure payment option for legitimate users.

AJC’s Role in Mitigating Financial Fraud

At A Jolly Consulting (AJC), we specialise in providing comprehensive financial crime consulting services to help organisations prevent and mitigate fraud. Our expertise spans fraud risk management, regulatory compliance, and the implementation of robust controls to detect and deter fraudulent activity. By leveraging industry-leading practices, advanced analytics, and tailored risk assessments, we help businesses strengthen their defences against evolving financial fraud threats, ensuring resilience in an increasingly complex regulatory and risk landscape.

Please contact us on 020 7101 4861 email us info@ajollyconsulting.co.uk if you think we can help.

Image accreditation: Mohamed Nohassi (Oct 2024) from Unsplash.com+. Last accessed on 21st March 2025. Available here.