It was a dark and stormy night…
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But that didn’t bother Trevor. He was at Walmart with a cart full of items he planned to pay for with the gift card his dear grammy had given him for his birthday. To Trevor’s embarrassment, the gift card was declined due to having a 0 dollar balance. Confused, Trevor put his items back and went out into the night…
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This scene repeated itself to the tune of 160.9 million dollars in reported gift card losses in the US, in 2023 alone. Yes, major jump scare.
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Let’s talk about how consumers are losing their money, the effect it has on merchants, and what can be done to prevent these losses.

How Gift Card Scams Work

Gift card scams can range from simple petty theft all the way to international money laundering schemes like the one that resulted in a billion dollars of fraud at Walmart alone. Here are some common gift card scams:

A vector for stolen credit cards‍

For credit card thieves looking to cash in on stolen cards, gift cards are a popular vector. Fraudsters steal credit card numbers and use those stolen credentials to buy gift cards. From there, they sell the gift cards at a discount (check out this article to understand how). Because gift cards are anonymous, it’s impossible for merchants to know if the person using the gift card is the rightful owner.

Good old fashioned intimidation

Imagine being on the other end of a phone call with the FBI. They are claiming there has been fraud linked to your social security number. They need you to buy a gift card to help them catch the bad guys. It’s a scary moment, and the fraudster pretending to be the FBI understand this very well. They create a sense of urgency to compel victims to purchase gift cards, and share the barcode and activation code. It’s a rinse and repeat of the age-old Fake President scam, and it still works today.

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If the gift card is a cash gift card (also known as an open-loop gift card) like Visa and Mastercard each offer, the fraudster now has instant access to cash. If the gift card is a merchant-branded gift card, or closed-loop, the fraudster will often use it to buy more gift cards - making the funds nearly impossible to trace.

Card Draining Scam

This has become a favorite of fraudsters in the last few years. Fraudsters obtain the barcode from a gift card, once the card is loaded with funds, the fraudster immediately drains the card. Since gift card recipients don’t usually use gift cards right away, it can be weeks or months before anyone notices the funds are gone. This video by ProPublica explains in more detail. This scam has inspired groundbreaking gift card legislation in the US. They suck the life, and funds, out of your otherwise joyous spending spree.

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How Scams Affect Merchants

Damage to Brand Reputation

‍When a gifter spends money on a gift card that a recipient isn’t able to redeem, both parties feel cheated. Merchant brand reputation can suffer as a result, shoppers feel like they were sold something that doesn’t work.

Increased Costs, Lower ROI  

Merchants offer gift cards as a way to introduce new users to their brand, and keep loyal customers coming back. When value is drained from gift cards before it can be spent, the merchant loses out on future revenue the recipient may have generated, as well as the cost of issuing the gift card, and reimbursing the gifter for the amount of the gift card purchase.

Increased Regulation

New legislation has been introduced in response to these gift card scams. In 2024, Maryland passed the Gift Card Scams Prevention Act, requiring merchants who offer online gift cards to register with the state. The act also stipulates that physical and digital gift cards must display warnings about gift card scams while physical open loop gift cards (like Visa, Mastercard and Amex cash gift cards) must be sold in tamper proof packaging or be numberless and include a chip.

What can merchants do?

With gift card fraud numbers in the hundreds of millions each year, the outlook for gift card sales might feel pretty bleak. Here are some ways merchants can help protect themselves, and their consumers, from gift card fraud.

Increase Security Over your Gift Cards

‍ Card Draining, the scam which lead to the Gift Card Scams Prevention Act, largely relies on shoplifting physical gift cards from stores. By moving your gift cards behind a counter, you can reduce the shoplifting which leads to stolen funds.

Beef Up Your Packaging

Thieves need access to the digits on the gift card in order to gain access to loaded funds. By using packaging which obscures gift card numbers, or makes it evident when a card has been tampered with, you can help consumers avoid purchasing compromised cards. Checkout this article on gift card packaging dos and don’t for more information.

Go Digital, Closed Loop

Looking for safer ways to bring in new customers and increase the value of your existing customers? Consider adding closed loop digital balances. When customers load funds into your branded digital balance, those funds can only be spent with your brand and balance can not be sold on third party sites. This greatly reduces the fraud vectors available to bad actors. Still want to support gifting? Branded digital balances like those offered by Ansa can be gifted to other users on your platform. Balances can be spent online or in store, giving your customer the full range of options they expect for your brand.

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While Trevor may have fallen victim to fraudsters, these levers help ensure customers have all treats and no tricks.

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