The Realities of Discount Gift Card Fraud (Don’t be a Victim!)
What the gift card reseller market is, how it attracts fraud, why merchants don’t like it and how consumers can still benefit from it.
What is the Secondary Gift Card Market?
The secondary gift card market is a place for people to sell gift cards they don’t want for less than face value and to buy gift cards they do want at a discount. These gift cards may be traded or sold through brokers known as gift card resellers or transferred directly from one consumer to another–depending on how the reseller operates. When the market works as intended, selling an unused gift card is like selling any other pre-owned product you no longer want. Post the item for sale, get an offer, and complete the transaction. However, because gift cards are essentially another form of currency and a card number can be used without having the physical plastic, there is potential for fraud to occur that doesn’t exist when selling other types of merchandise. Below you’ll find how the secondary gift card market works, challenges associated with the marketplace and what consumers need to know in order to avoid the potential pitfalls.
Here is a list of places you can sell gift cards for cash.
Evolution of the Secondary Gift Card Market
In 2003, Swapagift.com launched the world’s first discounted gift card exchange. At that point, a consumer who wanted cash instead of a gift card would visit the site and submit details about the unwanted gift card, including the merchant name and the dollar value of the card. If the seller found the cash offer acceptable, he or she would confirm the sale and mail the physical plastic to the reseller. Upon receipt of the plastic and confirmation of the promised balance, Swapagift.com would mail a check back to the original owner and post the newly obtained gift card on the website at a slightly higher price. A seller might receive anywhere from 70 to 92 percent of the card’s value and the subsequent buyer of the card would get a discount of up to 25 percent–all depending on the popularity of that particular gift card and the number of cards already in inventory. Soon thereafter, additional gift card resellers entered the space.
- Buy from a gift card reseller that offers a money-back guarantee.
- Check the discount gift card balance immediately.
- Use discount gift card quickly.
- Buy discount gift cards for personal shopping rather than gifting.
As the market matured, the speed at which gift cards were bought and sold increased significantly because resellers figured out that they didn’t need the physical plastic in order to check the balance of the card or resell the value of the unwanted gift card. So rather than simply state the details of a card to be mailed in later, sellers now submit the merchant name, load value, gift card number and personal identification number (PIN), if applicable. Upon acceptance from both parties, the card is transferred and the seller gets paid almost immediately using services such as PayPal. The faster resellers obtain cards, the faster they can resell the cards (or codes) for a profit.
As the speed of these transactions increased, so did the number of players seeing an opportunity to capitalize on the margin between the cash value and the face value. Gift card resellers started putting kiosks in malls and check cashing facilities to trade cash for gift cards on the spot, self-serve “cash for gift card” vending machines were tested out in grocery stores, individuals started selling gift cards on online auction sites such as eBay and Craigslist and some people created side businesses as bulk resellers working directly with gift card resellers. The marketplace has also gone digital with consumers increasingly using mobile apps to buy and sell gift cards in a matter of minutes. Though the gift cards in the secondary market may have originally been given as gifts, once they are sold to resellers, the discounted cards will most likely be used by savvy shoppers to save money on planned personal expenses.
Pitfalls of the Secondary Gift Card Market
Thanks to the secondary gift card market, consumers are no longer stuck with gift cards they don’t want, but the reseller industry is not without its issues. A card that started out as a gift may turn into a commodity that swaps hands multiple times (with each party taking a piece of the margin) before the last buyer uses the card for its intended purpose–to buy services or merchandise. With each change of possession, there is a potential for fraud. In fact, the reseller business itself creates fraud opportunities that didn’t exist before gift cards were invented. As a result, consumers have to follow a few precautions to make the most of the secondary gift card market and many merchants oppose its existence to the point that they actively work to prohibit their cards from being traded.
Discount Gift Card Fraud
The biggest issue in the secondary gift card market is fraud and it can happen in a number of ways. From people thinking they can both sell a gift card and use it without repercussion (they can’t) to merchants cancelling gift cards after they’ve been resold, discount gift card buyers do take on a bit of risk to save money. Some of the top discount gift card schemes that affect the gift card reseller market include the following:
Resell and Redeem Scheme. Since gift cards can be used without the physical plastic both online and via gift card apps, some thieves erroneously believe they can sell a gift code for cash and then quickly use the same code to buy merchandise without penalty. This isn’t the case. Most reputable gift card resellers have fraud protection in place to prevent this type of shenanigan. Though the gift card seller will ultimately be penalized and possibly prosecuted, the person who bought the discount gift card will likely be the one who first discovers the fraud because the purchased gift card will be declined. The most effective way to avoid this type of fraud is to buy gift cards from trusted sites that vet their sellers, have customer service and offer a money-back guarantee.
Stolen Merchandise Returned. Merchants often issue gift cards or merchandise return cards in lieu of cash when a customer returns an item without a sales receipt. If the merchant subsequently discovers that the returned item has been stolen, the company will cancel the refund card. The story ends there unless the thief sells the gift card before the merchant identifies the fraud. At that point, the cancelled card may already be in the hands of a discount gift card owner who bought the gift card in good faith. For this reason, many reputable gift card resellers will not buy merchandise return cards because they know the cards have been issued in exchange for merchandise rather than a traceable payment. Buying cards from resellers that block this type of transaction will help discount gift card buyers from getting caught in a fraudulent snare.
Money Laundering. A thief may steal a credit card and use it to buy a gift card. To create distance between the gift card and the true origin of the criminal activity, the thief then sells the gift card for cash. (The thief may even use the first gift card to buy a different gift card to create even more distance.) Each step taken is part of the “layering” process used to convert dirty money into clean cash–also known as money laundering. Though the gift card involved in the scam will be cancelled as soon as the fraud is uncovered, it may have already been sold to another consumer via a gift card reseller. If the card is cancelled before the consumer uses it, then the consumer will be compensated (if the reseller has a money-back guarantee) and the reseller will be responsible for reporting the fraud and recovering the loss. However, if the consumer uses the card before it gets cancelled, then neither the consumer nor the reseller would be aware that a crime had been committed. The merchant and credit card company involved in the original transaction would be left to sort out the loss.
The Inside Job. Earlier this year, Apple stores discovered an employee had stolen nearly $1 million in Apple gift cards. By re-coding American Express and Visa® gift cards, he purchased Apple gift cards worth $2,000 each and sold them on the street for $200 a piece. The employee has been charged with grand larceny and faces up to 15 years in prison. Outstanding gift cards have obviously been cancelled, but those that were used before the escapade ended caused Apple to lose hundreds of thousands of dollars in merchandise. It’s possible some of those $2,000 gift cards were resold on the secondary gift card market as well. In which case, people who bought the discount gift cards either used them before the cards got cancelled or are holding gift cards that are now useless. No word yet on what, if anything, will happen to the people who bought the stolen gift cards from the employee. Certainly Apple gift cards sold for 10 percent of face value should have seemed suspicious.
The Hack Attack. Many merchants have reward programs that enable customers to rack up points for purchases. Once the points reach a certain threshold, customers can convert the points to gift cards. When a merchant or a customer account gets hacked, one of the ways thieves create havoc is by accessing the customer rewards. The thief, for example, gets into a customer account and converts that customer’s points to digital gift cards which are then sent electronically to an email account. Once received, the thief quickly sells the eGift cards on the secondary market. By the time the hack is detected, the cards may have already been resold to someone else.
Disputed Charges. Another fraud risk occurs when a thief uses a newly issued credit card to buy a gift card. As soon as the gift card is purchased, the thief sells the card for cash, then disputes the charge on the credit card. By the time the dispute is handled with the merchant and the card is cancelled, the gift card may have been purchased and/or redeemed by discount gift card buyer.
Despite the myriad of ways that dishonest people can scam merchants, credit card companies and gift card resellers in the secondary gift card market, the number of times it happens is estimated to be about two percent of the total number of transactions. Reputable companies that offer money-back guarantees work proactively to limit exposure and to close every possible loophole both for their own protection and for a positive customer experience. They also work with law enforcement agencies to report suspicious activity and to reduce merchant fraud where possible.
It’s important to note that resellers don’t know where each gift card comes from so their acquisition policies may decline a gift card purchase that is legitimate. As a result, even some of the best resellers will occasionally get negative online feedback from customers who aren’t able to sell their gift cards for cash. Reputable resellers will err on the side of not taking a card in order to limit fraud risk for all parties involved.
Here’s a list of other gift card scams to avoid.
Merchant Resistance to the Secondary Market
Though most people that buy discount gift cards intend to shop with the cards (not give them as gifts) and people that shop with gift cards are statistically proven to be profitable customers (several sources estimate they overspend the value of their gift cards by at least 20 percent), many merchants despise the secondary gift card market and actively work to keep their gift cards from being traded by resellers. Why such strong feelings? Their criticisms range from not wanting to compete against their own gift card for sales to having increased fraud exposure via the unscrupulous practices detailed above. Below are more details on the reasons why some merchants don’t like the secondary gift card market.
Competing Against Their Own Card. Although it’s widely accepted that people who buy discount gift cards are doing so to save money on their own shopping needs, some merchants still believe the availability of discount gift cards dilutes the value of their full-value gift cards. In other words, if a consumer can buy a $50 gift card for $45 on the secondary market, why would the consumer ever pay full value at the store?
Customers will pay full value for gift cards because discount gift cards carry an increased fraud risk that people generally won’t accept if they plan to give the gift card to a friend or family member. Secondly, pre-owned gift cards are seldom in gift-ready condition. Often times the value of the card is a random dollar amount (e.g. $87.20), the PIN is scratched off, there may be a sticker across the front of the card, and the plastic is scuffed up like it has been in someone’s wallet for months. If the discount gift card is delivered digitally, then it is also unlikely to be sent in a format that can be passed on to someone else as a gift. In my opinion, discount gift cards are purchased for personal shopping where as full-value gift cards are purchased for giving. Merchants shouldn’t be concerned about the competition.
Increased Customer Service Issues. A gift card manager for a top merchant explained to me that one of the reasons he doesn’t like the secondary market is that his customer service representatives have to deal with problems that arise when the process doesn’t work. If a discount gift card has a zero balance, is determined to be fraudulent, is in a format the merchant cash register doesn’t except and so forth, the customer is most likely going to discover the problem at the point of sale. The cashier will be the person who has to deal with the unhappy customer, perhaps even spend time re-running the card and trying to help the customer understand what went wrong. If a second form of payment isn’t available or offered, the store may also lose the sale.
Fraud Opportunities. If the secondary gift card market didn’t exist, then thieves wouldn’t be able to use gift cards to launder money and merchants wouldn’t be caught in the middle of the layering process. In the fraud schemes described above, for example, the thief who buys a gift card with a stolen credit card would have to use the gift card to buy merchandise rather than sell it for cash. While that doesn’t eliminate the fraud completely, it does make that particular scam less enticing and less profitable. The thief who returns merchandise in order to get a gift card would simply have to buy something else with the gift card. Again, the initial theft isn’t stopped, but the practice of returning merchandise in order to eventually get cash wouldn’t be an option.
Lost Customer Perks. A gift card that is linked to a customer account and subsequently sold to someone else may accidentally get flagged by the merchant as a stolen gift card when the new owner attempts to add the discount card to his or her account. The problem is accentuated when the merchant penalizes the buyer of the discount gift card by reducing previously earned rewards.
A few years back, some people who bought discount Starbucks gift cards suddenly discovered that their cards didn’t work and that their Starbucks Stars (including coveted Gold Stars) had been removed from their accounts. When they called the company to complain, the company said that the gift cards added to their accounts had already been linked to other accounts assumed the cards had been stolen. To my knowledge, the company refused to reinstate the lost stars.
Requiring customers to register their gift cards in this way is one way companies can block their cards from landing on the secondary gift card market. While many resellers may still buy gift cards that can be registered to merchant accounts (e.g. iTunes, Amazon), the most reputable ones have processes in place to ensure the gift cards haven’t already been registered to other customers.
Rather than fight the merchants, some gift card resellers are trying to partner with them to buy gift cards in bulk at a discount and offer those cards to buyers at a slightly higher price. Not every merchant is agreeable to the arrangement, but those that are should see an increase in foot traffic from motivated shoppers.
I only buy discount gift cards with intent to make a purchase. I don’t buy them thinking I might one day make a purchase or with a plan to give the cards away. If I have an expense coming up such as Christmas shopping or back-to-school shopping, I’ll look for the best discounts I can get at the stores in my area–and I’ll go where the deal takes me. For example, if I need to buy jeans for my boys but can get the same brand at both JCPenney and Kohl’s, I’ll buy a discount gift card to the store that offers the most savings. Once I buy the discount cards, however, I’m fully committed to the store.
I understand why merchants don’t like the secondary gift card market, but I wonder if accepting it and partnering with resellers would create a better environment for all–particularly since merchants aren’t the ones who provide the discount. The person who sells the gift card is the one who accepts less than face value for a card.
How to Protect Yourself When Buying Discount Gift Cards
Given that gift cards can be used to purchase a wide range of items within a store, you could argue that we don’t really need the ability to get cash for gift cards. But even the most carefully selected gift card can sometimes be inconvenient to use. For example, your teenage daughter might receive a gift card to a clothing store that isn’t her style or you might get a gift card to a restaurant that isn’t located nearby. Maybe you received a $20 gift card to a department store that is local but using it will require you to spend at least another $30 to pay for the high-priced merchandise available–and that’s not something you want to do. Rather than let a gift card go to waste, selling it is your only option because most merchants won’t return gift cards. So how can you buy and sell gift cards on the secondary market without running into the problems described above? Below are tips on how to protect yourself when buying a discount gift card:
Buy from a Reputable Reseller. Though it may be tempting to purchase discount gift cards from individuals and the discounts offered may even be surprisingly high (remember that Apple employee?!), resale sites that have customer service and offer a money-back guarantee will be able to help you and provide reimbursement if there is a problem with the card purchased. Since they guarantee their sales, these companies are also more likely to have a security team in place to detect and deter fraud schemes from affecting their customers.
Check Balances Immediately. Check the balance of the gift cards you buy immediately to be sure the value received matches the purchase receipt. If there is any discrepancy, report the problem right away.
Use Discount Gift Cards Quickly. Although some resellers offer a money-back guarantee, the secure time-period doesn’t last forever. Plus some gift card fraud make take a few days to materialize or be detected. The faster the discount gift cards are used the less likely you are to be stuck with a gift card that doesn’t work.
Buy Discount Gift Cards for Personal Use. When I buy discount gift cards, I know that fraud is a small but realistic possibility. I’m willing to accept that risk in order to save money on a purchase. But I wouldn’t suggest passing that risk to a friend or family member. If there is a problem with the gift card, he or she may not be comfortable letting you know and the money spent could go to waste.
Despite the problems listed above, I have never had a problem using a discount gift card. I’ve purchased discount plastic gift cards in advance of big shopping trips and I’ve purchased discount egift cards on a whim while standing in checkout lines. I don’t use discount gift cards for every purchase I make, but if I can get double-digit savings in a hurry, then I’m willing to spend a couple minutes looking at what’s available. As a mom on a budget, I need to take advantage of discounts wherever I can get them–and unwanted gift cards create the perfect opportunity.
Over time, I expect trusted gift card resellers will reduce the amount of fraud currently attributed to the secondary gift card market if not eliminate it entirely on their respective sites. But mostly, what I’d like to see is merchants working together with resellers to both reduce the pitfalls and to create ways for consumers to safely cash out the gift cards they don’t want. What do you think? Is it possible to make both merchants and resellers happy? Let me know in the comments below or reach out to me on Twitter (@GCGirlfriend).
Happy Gift Carding!
~Shelley Hunter, Gift Card Girlfriend