Prepaid, Gift and Virtual Cards Detection To Mitigate Fraud

May 08, 2020

As prepaid, gift, and virtual card fraud is on the rise, merchants must be ready to act.

Prepaid cards and gift cards have become ubiquitous in grocery stores and drugstores throughout the U.S. Prepaid services are one of the fastest-growing sectors within the financial payments industry. 

In April 2019, The Wall Street Journal reported:

“The total amount loaded on general-use prepaid cards in the U.S. grew to $324 billion in 2017 from $208 billion in 2012”.

Mercator Advisory Group, a research and consulting firm, estimates that the market will continue to grow at an annual rate of 10%, ultimately reaching $421 billion by the year 2021.

Prepaid cards and gift cards are cards that are preloaded and have no connection to a bank account. With every purchase made, the amount is debited from the total balance on the card. These cards are popular in that they can be given as gifts but are also useful for those who don’t have access to traditional banking. 

Since merchants are unable to check the credit history of the buyer, prepaid and gift card fraud has created losses in the millions each year. 

Fraud Is On The Rise With Prepaid and Gift Cards 

A common occurrence in the use of prepaid cards is when a customer signs up for a recurring service online. Oftentimes the customer pre-loads the card and signs up for the service. Once the month is complete, the prepaid card no longer has enough funds to continue the following month and therefore can’t be re-billed. 

Although prepaid cards are not covered under the fair credit billing act, merchants can still receive disputes from a prepaid card. Ultimately, the issuing card network determines what rights prepaid card holders have. Merchants can take proactive steps in mitigating payment fraud by looking carefully for patterns in previous prepaid transactions. 

If the merchant discovers that the number of prepaid transactions are resulting in a high dispute rate or considerable fraud loss, they should seriously consider toughening up their “front end fraud filters” anytime a prepaid card is used. 

Digital gift cards are also becoming an increasingly popular target for fraudsters. Although fraud is rampant on both physical and digital gift cards, digital gift cards have much higher incidences. According to Mercator, the industry has suffered an annual loss of $950 million.

How Merchants Can Mitigate Prepaid Card Fraud

In order to mitigate the damaging losses due to prepaid card fraud, merchants need to incorporate a multi-layered approach, along with machine learning.

The Fico® Falcon® Platform, a leading intelligent fraud platform incorporates three artificial intelligence (AI) and machine learning technologies (ML) to strengthen its detection capabilities.

Other techniques utilized include Behavior Sorted Lists (BLIST), Mult-Layer Self-Calibrating (MLSC) analytics, and Collaborative Profiling (CP). 

The aforementioned techniques work together in the following way: although a cardholder’s behavior can be tracked by (BLIST), the (MLSC) will, along with peer-grouping, identify usual or unusual characteristics, in comparison to identical cards by adapting in real time to the behavior of various comparable card holders.

When it comes to Collaborative Profiling, it uses the “global-scale behavior” of those customers to detect possible future transactions (including those that the cardholder has never done in the past), this will considerably reduce false positives.

Stay One Step Ahead Of Fraudsters

The prepaid and gift card market continues to grow exponentially. Merchants must have  extensive fraud mitigation strategies in place when fraud strikes. Regardless of the tool utilized, it is best to take a proactive and not a reactive approach. Prevention is the best strategy.

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending on the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

Yes, EMB works with merchants who are building their credit, as well as those who have poor credit. EMB also approves merchants that have no credit card processing history and businesses that have lost their merchant accounts due to high chargebacks.

Several factors influence a merchant’s risk level. Though only one factor likely will not get a merchant classified as high risk, a combination of these may: business size, location, and industry, credit score, credit card processing history, a industry’s reputation for excessive chargebacks, a prior history of high chargeback ratios, and whether a merchant exclusively sells online.

Virtual terminals are stationed on a merchant’s website, making it easy for customers to make a payment or purchase online. Merchants or a payment processor can easily set up virtual terminals, so online businesses can accept credit and debit card and e-check transactions.

A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

After filling out EMB’s simple online application and submitting any necessary, requested documents, many merchants get approved within 24 and 48 hours.

EMB specializes in working with high-risk merchants. EMB works with many merchants, including but not limited to businesses in these industries: gambling and gaming, adult entertainment, nutraceuticals, vaping and e-cigarettes, electronics, tech support, travel, high-end furniture, weight loss programs, calling cards, e-books and software, and telecommunications.

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