m a k e   ' e m   s m i l e   : )
Tuesday 9.04.2012

Prepaid Cards and the Many Faces of Fraud

Like all products and services that involve money, there will be those that attempt to fraud the product or service for their own illegal gain. Prepaid cards are no different and since the inception of prepaid cards we have seen many different types of attempt to fraud these cards.   The fraud takes on many different faces and involves the prepaid card at many different levels including the following:

  • Fraud from the Prepaid Card Purchaser
  • Fraud from the Cardholder
  • Fraud at the Retailer Selling the Prepaid Cards
  • Fraud at the Merchant Accepting the Card
  • Fraud with Prepaid Cards to Manipulate Merchant Accounts
  • More Fraud to Come with New Faces

Fraud From the Prepaid Card Purchaser

Like credit cards and debit cards there is fraud created from stolen credit and debit card numbers. These fraudsters need ways to take stolen card numbers and purchase items that they can turn into cash quickly and without being traced. Prepaid cards became an immediate target for these fraudsters and the cards could be purchased with a stolen credit card and the prepaid card could be transferred for value to a third party or used to make other purchases.

Prepaid cards also became a target for money laundering to transfer money from an illegal business to an individual in another country or just to a prepaid card for personal or business use.

The prepaid card industry has responded and in today’s world there are many laws around anti-money laundering and card limits and in addition many prepaid cards require registering and verifying the card holder’s name, address and social security number. In addition, companies have developed sophisticated fraud detection systems and processes around the purchase of a prepaid card either with a credit card or debit card. Cash loading onto cards is monitored and watched very carefully for suspicious activity. Large data bases have also been created to track and identify potential parties that have a history of fraud. New processes to prevent fraud are always in development and being added to the purchase processes.

Fraud from the Cardholder

Cardholder’s have found many different ways to use a prepaid card for fraud. First there is always the use of the prepaid card to hide their identity when they are purchasing items that may be illegal or they are simply trying to hide their identity on the purchase. Cardholders have also used the cards for recurring payment services knowing that there is not enough money on the card to pay for future months recurring amounts to keep the service live. Cardholders have convinced retail clerks to force through a transaction that their card has an insufficient balance to cover. This forces the prepaid card into a negative balance and then creates charge-back issues for card issuers and the merchant. A classic case was a rapper who created such a scene at an airline that they got the airline employee to call a fraudulent bank service number and force through over $5,000 in flights. Needless to say, that fraud created a negative balance and the authorities were waiting for them on their return flight. Cardholders also like to use prepaid cards for illegal purposes such as gambling and other illegal services. These merchants are joining in the fraud by creating merchant accounts that hide the real service that the merchant is selling. These are just a few examples of how cardholders create fraud on prepaid cards.

Fraud at the Retailer Selling the Cards

Retailers selling prepaid cards have also seen fraud from the sales of the prepaid cards. Retailers have seen tampering with the packaging of the prepaid cards by switching cards in the package to copying numbers for cards in the package. Retail packaging has gotten much more sophisticated and prevents much of the fraud that was occurring early in the programs. Retailer’s biggest concerns come from internal fraud where a cashier is working with a friend to perpetuate the fraud. This can be as simple as using the prior customer’s credit card to complete an additional transaction purchasing the card to more sophisticated fraud schemes. Retailers have dealt with fraud on many of their products and therefore were quick to create fraud processes to catch and prevent this type store fraud on prepaid cards.

Fraud From the Merchant Accepting the Card

Merchants accepting prepaid cards have found ways to force through transactions that are in excess of the prepaid card balance. These merchants force their retail transaction through and ultimately put the prepaid card into a negative balance. This loss is either charged back to the merchant as a result of not properly authorizing the transaction or in some cases gets absorbed as a loss by the card issuer and prepaid program manager. There are also merchants that obtain merchant accounts that look like they are selling one product or service that is perfectly legal and what they are actually selling is an illegal service like gambling. These companies like to market to prepaid card customers and others. Another fraud that prepaid cards see as well as credit and debit cards is the merchant charge-back from a customer claiming they have not received the product or service. This type of fraud is not unique to prepaid cards. Most of the fraud at the merchant level does come through improperly forcing transactions through to a prepaid card with an insufficient balance to cover the purchase.  Prepaid card issuers and program managers continue to be addressing these issues and improving cardholder access to their card balance to prevent these issues.

Fraud with Prepaid Cards to manipulate Merchant Accounts

Fraudulent merchants have found another way to use prepaid cards in manipulating their merchant account transaction volumes. All merchant accounts are monitored for charge-back activity from customers. If the number of charge-backs looks excessively high to the number of sales transactions, then the merchant account is investigated and possibly shut down. Fraudulent merchants have found that using a group of prepaid cards to create a large number of good $1.00 transactions can help keep their merchant account from triggering this investigation or shut-down. Both domestic and overseas merchants have also found methods of using prepaid cards to initial set up customers and get them to agree to personal bank information for ACH or credit or debit card information to charge the customer for a renewal or other fee that the cardholder did not know they agreed to. The processors, banks and associations have pursued these types of fraud and are now monitoring for this type of fraud and others.

More Fraud to Come with New Faces

The one fact we do know about fraud is that the fraudsters will continue to try to come up with new ways to fraud prepaid cards or to use prepaid cards in perpetrating a fraud. The Associations, Banks, Processors and the Program Managers will continue to look for fraud and to create sophisticated processes to catch the fraud and to prosecute the fraudsters.

~~ Doug Blasiman, Former CFO of Giftcards.com


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