The gift card scam that keeps on giving

My boomer relatives keep sending me prepaid gift cards without any money on them. These cards, typically adorned with a Visa logo, loaded with money — $50, $100, $500 — and displayed prominently in pharmacies and supermarkets, are meant to be spent anywhere that accepts debit cards. The problem is fraudsters have figured out how to spend them first.

It’s happened to me twice. This year.

In January, I attempted to spend a $100 Visa Vanilla Gift card my uncle in-law from Colorado had sent my family for Christmas.

After infuriatingly trying to use it at three separate places, I learned someone else already had. The gift card had recently been emptied at a Walmart in Ontario, while I, a sucker, had been living my life in New York. I filed a claim with InComm Payments, the private company that sells these cards, and was told that I’d have to send documentation, including a receipt for the gift card. Obviously, since it was a gift, I didn’t have one. Not wanting to upset poor old Uncle Richard and figuring I’d wasted enough time with this, I moved on.

Then it happened again.

Last month, my aunt sent my son another Visa Vanilla Gift card. This time it was for $50 and had been spent at a CVS on Long Island before it was even mailed to me, in a process known as “draining.” It’s a widespread issue that typically goes like this: Fraudsters open up the gift card wrapping, copy the codes, seal them back up, then monitor them online until they’re purchased, at which point they spend the money — either online or through mobile wallets in stores — before you do.

Unbeknownst to me, I’d joined the 1 percent, but not in a good way.

Somewhere from 1%-5% of the $305 billion added to non-reloadable retail and cash gift cards in the US each year is defrauded, according to estimates by Jordan Hirschfield, director of prepaid payments at Javelin Strategy & Research. That’s potentially $3-$15 billion in losses. (This analysis doesn’t include reloadable cards, which are more often a tool for the unbanked rather than a traditional gift card.) Hirschfield said there was a spike in gift card purchases during the early parts of the pandemic as people sent them in lieu of physical gifts, but no one tracks actual numbers on gift card sales or fraud.

The two main companies behind the gift cards, Blackhawk Network (giftcards.com) and InComm Payments (Vanilla Gift Cards, Mastercard Gift Cards), are private. InComm said in a statement that “only an exceedingly small portion of the hundreds of millions of cards we have sold has been affected by fraud.”

The FTC has documented nearly 20,000 instances of gift card fraud, to the tune of nearly $100 million, in the first half of this year, but reporting these transactions is rare. These numbers include both drainage and when gift cards are used as a form of payment in fraud cases. The Conversation has an excellent in-depth piece on how gift card payments factor into scams on older Americans and how a patchwork of state regulations is failing to protect them.

Gift cards are ripe targets for fraud since they’re easy to get and don’t have many safeguards.

Gift cards operate on the same networks or “rails” as credit and debit cards — Visa, MasterCard, Amex — and are adorned with those well-known and trusted logos. But they aren’t sold by those companies, nor do they offer the same protections bank cards do, like paying you back if you’ve been defrauded. Rather companies like InComm pay a fee to companies like Visa to use their payment platform, but otherwise operate quite differently. 

“We understand that fraud is an upsetting and stressful experience for consumers,” InComm said in a statement. “Our highest priority is to support our customers who have been affected and we encourage those who suspect fraud has occurred to contact our customer care team promptly.”

Visa didn’t respond to requests for comment. 

The scam before the scam

Personally, I think gift cards are a scam before you even get defrauded. To buy one of these Visa Vanilla gift cards, there’s a fee that ranges from $3.95 for a $10 card to $6.95 for a $500 card. That means there could be up to a nearly 40% fee for a transaction that could be done for free with cash, Venmo, or Zelle. 

Additionally, there’s the mental labor of having to remember that you have one of these gift cards at all. Even if you do manage to spend them, there are often balances left over on gift cards. That results in billions of lost or forgotten gift card dollars each year, just sitting on balance sheets. 

Like the fees to buy the cards in the first place, this so-called “breakage” is “absolutely built into the business model,” Hirschfield said, calling it a minor but important revenue source, or 1-3% of total gift card sales.

“You're not going to run your business just trying to get breakage, but it will help you recover [losses] and just maintain your product or technology,” he said.

After about five years these sums can be subsumed back by the company. While about half of states have laws that let people cash out unused balances or transfer those sums to the state to act as a custodian, that requires that people register these gift cards under their names — something they rarely do. 

But gift card fees and breakages don’t seem to be bothering others as much as me. According to Javelin’s survey data, when Americans had to choose their favorite present to give or receive, gift cards top the list, far outranking physical gifts and cash.

Javelin’s data seems to support my experience, where I keep getting cash gift cards from older relatives. Boomers were slightly more likely than other generations to give non-reloadable general purpose gift cards. They were however slightly less likely to give retailer-specific cards than people overall. 

Of course, I’m not the only one experiencing problems.

Numerous class-action lawsuits have been filed against InComm and the like, saying the company isn’t doing enough to protect consumers. Meanwhile, InComm, says it’s constantly iterating to do just that.

“Our approach to combating fraud spans the lifecycle of the gift card experience, from the physical security of the card to activation through redemption,” InComm wrote. “This includes robust back-end controls to detect unusual activity, geolocation technologies, secure packaging, and real-time monitoring of potential fraud patterns. We work closely with our retail partners to support security best practices and collaborate with industry associations and federal agencies to share insights.”

The FTC has been working with gift card companies to help stop consumers from being defrauded, and also has campaigns geared at educating consumers and retailers with signage geared at keeping people from buying gift cards for someone else as part of a payment scam. While the FTC is aware of draining scams, it doesn’t seem to be where their efforts are focused.

“We used to see that with prepaid calling cards,” Rosario Méndez, an attorney in the FTC's Bureau of Consumer Protection, told Sherwood regarding draining. In turn, the organization led campaigns to educate consumers on calling card scams. “At the time, we did have a lot of outreach, especially to communities of color, communities that spoke Spanish, that spoke other languages, because what we would see is that people that wanted to talk to family abroad would use these prepaid cards.”

In her 21 years at the agency, she said she’s seen scams constantly evolve. More recently, she notes, top payment methods in scams have switched to crypto payment apps, rather than gift cards. 

As for gift card drainage, solutions include stronger packaging, freezes on large numbers of gift cards purchased at once, as well as better training for retailers and consumers to detect if a gift card has been tampered with. Consumer warnings and placing the cards at the front of stores should also help the situation. But so would regulating gift cards like the bank cards they imitate. 

Hirschfield said the situation is getting better, thanks in part to a flurry of bad press about these gift cards.

“Yes, we don't have proof that you lost $100 but we're just gonna make it right, because it's the right thing to do, and we want people to trust our business,” he said. 

As for me, when I tried to get my $50 back this time, InComm didn’t ask for a receipt (the gift card was a gift, after all). They just shipped me a new, usable card. I also emailed them again about the $100 I was defrauded back in January, explaining that it was obvious why I wouldn’t have a receipt. That card just arrived. The PR person, when asked if this refund was because I concurrently reached out as a reporter, said they don’t comment on individual cases.