If you’ve tried to pay for a gift card in the last year or two with a credit card, there’s a chance you may have been turned away at the register – especially if you were trying to buy a high-value gift card. You may have been told that you could only buy the gift card with cash, or a bank-based debit card with a PIN. Why is this?
Well, merchants have been cracking down on fraudulent gift card purchases in the US due to a new, liability-shifting law that came into effect in late 2015. This law is part of a nationwide push for retailers to adopt EMV chip technology – a specialized, chip-based technology that’s harder for thieves to crack and helps protect consumers.
Essentially, this 2015 law was a method by which retailers could be encouraged to quickly adopt chip-based credit card reader technology. The law shifts liability for fraudulent purchases to whichever institution has not already implemented chip technology.
For example, if fraud was committed at a store that supported EMV chips and the bank that is responsible for the fraudulent card did not have EMV technology implemented on its cards, the bank would be liable.
On the other hand, if fraud occurs with an EMV-enabled card – but the retail establishment at which the fraud occurred did not support EMV, chip-based readers, the retail establishment would be responsible for the liability of the fraud committed.
Now, almost all banks have already incorporated EMV chip technology into their cards – but things have been more difficult for retailers. Upgrading card readers, POS systems, and cash registers can be expensive and difficult, and often, the speed of these upgrades depend on whichever credit card payment processing system is used in the store.
Even nearly two years later, there are many merchants who have not fully implemented EMV reader technology – meaning that they must be very careful when it comes to preventing fraud. And gift card fraud is a principal target.
Understanding The Size Of The Gift Card Market
Any discussion of gift card fraud must necessarily include a mention of the size and scope of the gift card market. Gift cards are an absolutely huge business for retailers. In 2016, the gift card market was valued at $127 billion – larger than ever before.
This market is only slated to continue growing, as e-gift cards, digital gift cards, and other advanced technologies like cell-phone based QR code gift cards make buying, selling, and using gift cards even easier.
Retailers love gift cards because they offer some incredible advantages when purchased by consumers.
First, gift cards can only be spent at a specific retailer – but they’re paid for with cash, meaning that the consumer is essentially trading cash for store credit that can only be spent in a specific retail establishment. The retailer receives the cash immediately, regardless of whether or not the gift card is spent.
Second, gift cards change consumer spending habits. Consumers are much more likely to purchase higher value items or items that aren’t on sale if they are using a gift card. Because the gift card cannot usually be easily converted into “cash” by a consumer, they place less value on it, and often spend the entire balance of a gift card, augmenting their purchase with their own money. This leads to increased profits for retailers.
Finally, gift cards allow businesses to expand their market segments. By offering rewards to loyal customers who purchase gift cards for others – discounts, store credit, or “points” are among some common reward schemes – retailers can increase consumer loyalty to their store by rewarding customers who purchase gift cards for others.
Then, the person who received the gift card is likely to come into your store, allowing you to reach a customer that you may have otherwise missed out on.
Okay, you may say. What does this have to do with credit card fraud and merchant liability?
Well, it’s simple. Gift cards are tremendously valued by retailers because of the above factors, so almost all retailers offer some kind of gift card program – the benefits are simply too large to ignore.
However, these schemes are often taken advantage of by criminals, because gift cards offer a hard-to-trace, simple way to turn stolen credit card information into cash.
Let’s take a look at how this is done.
How Gift Cards Factor Into Credit Card Fraud
Gift cards have often been used by criminals as a method by which “dirty” stolen credit card information can be turned into “clean” gift cards and merchandise.
The criminal simply takes stolen credit card information and then buys gift cards with the funds – usually acting quickly, as this type of fraud is often caught within hours. Then, the criminal either sells the gift cards on the black market, or – more commonly – uses the gift cards to purchase legitimate, high-value items like electronics, and other items with high resale value.
This is one of the most common ways in which thieves can get ahead of law enforcement, retailers, banks, and card issuers. Credit card fraud is common enough that most card issuers and banks have sophisticated algorithms that can detect fraudulent purchases and automatically deactivate the card within hours.
But retailers are often much slower. It may take them several days to realize that a gift card purchase has been made with a fraudulent card, as banks and credit card issuers may not be able to get in touch with them directly.
Because of this fact, thieves have a window of time in which they can use stolen credit cards to get legitimate, high-value gift cards and items.
The fact that these gift cards may remain valid for several days and allows the thief to use a less traceable form of payment is crucial – if the thief continues to use a stolen card, he or she could be easily tracked.
Gift cards, on the other hand, can’t be easily tracked and can be quickly discarded after use, and never used again. All of these factors combined has made gift cards a very popular item among thieves who are committing credit card fraud.
Merchants Without EMV Readers Are Now Liable For This Fraud
This is the primary reason that retailers without EMV readers are now requiring gift card purchases to be made with cash or PIN-based debit cards. Without an EMV reader, a merchant is liable for chargebacks made on fraudulent purchases – and this can cost small retailers, quite a bit of money.
The numbers behind credit card fraud are staggering, so it’s no wonder that merchants are taking every step necessary to prevent fraud. It’s estimated that credit card fraud cost US companies up to $7.86 billion in 2015, costing card issuers $4.91 billion and merchants $2.95 billion.
The 2015 liability shift means that, as time goes on, retailers without EMV readers are going to be responsible for the vast majority of fraud that occurs at their stores, so these retailers must take appropriate steps to lower their liability and ensure that they don’t suffer from increases in gift card fraud.
Not all retailers are being quite as strict, however. Some retailers are simply limiting the number of gift cards that can be purchased with a credit card, or putting a maximum dollar value on gift cards that can be purchased on credit.
This allows customers who usually purchase gift cards with credit cards to continue their buying habits, while still making it harder for scammers to purchase large amounts of high-value gift cards in bulk.
It’s also important to note that this shift in liability doesn’t extend to “card-not-present” fraud. Online purchases are not made with either a magnetic stripe or an EMV chip, and so they’re exempt from this new law, as EMV chips are designed to protect consumers only during physical, card-present purchases.
Are Everyday Consumers Impacted By This Shift In Liability?
The short answer is no. Beyond the effects that the liability shift may have in the purchase of gift cards, consumers remain largely unaffected.
In the past, most liability was assumed by the credit card companies, and this is still the case if a consumer is using an EMV-enabled card in an EMV-enabled card reader.
This liability shift doesn’t affect consumers directly, because almost all major credit card companies like VISA, MasterCard, American Express, and Discover have “zero-liability policies” that protect consumers from fraud.
In the case of a fraudulent charge at a non-EMV enabled store, the consumer will not be liable at all. Instead, the card-issuing company will charge the retailer for the cost of the fraudulent transaction – this is how the liability is shifted.
Instead of a credit card issuer being responsible for paying the cost of fraud, the retailer pays the credit card issuer. Regardless, the consumer isn’t involved in this process, and is not responsible for fraudulent charges.
The Impact Of Gift Cards On “Reward-Chasers”
Overall, this new regulation doesn’t have too much of an impact on most day-to-day shoppers. As more and more retailers shift to EMV readers, it’s likely you will not have any problems buying gift cards with your credit card.
However, there is one particular segment of consumers that these recent changes have had a tremendous impact on. Reward-chasers.
Reward-chasers are heavy credit-card users who often use credit cards for every purchase. A common way these consumers maximize their credit card usage without purchasing unnecessary items is by purchasing gift cards for their own personal use.
For example, if a credit card issues bonus points or rewards when a consumer hits a certain spending limit per month, a consumer seeking to maximize their credit card rewards can simply purchase gift cards, whether to a clothing store they like, a grocery store, an electronics store, or any other retailer at which they often shop.
By doing this, they manage to maximize their rewards without spending money on unnecessary items, and stretch their dollars as far as possible.
The slow transition to EMV readers has massively affected these consumers, as they cannot use their credit cards to purchase gift cards at all retailers, especially smaller grocery store chains and small businesses that are taking a long time to adopt EMV chip technology.
However, as time has gone on, the impact has been lessened. EMV technology has now been implemented in over half of all retailers.
Most large retailers and grocery stores now allow for chip-based transactions, so those who wish to purchase gift cards with credit cards now have many more options – though they still may have issues purchasing gift cards at smaller retailers.
Got Gift Cards You Don’t Want? Sell Them To Ej Gift Cards!
Whether you’re a “Reward-Chaser” with a bunch of gift cards you don’t need, or just an average consumer who has collected a lot of gift cards, you may be looking for a way to turn your gift cards into cash.
Even though gift cards are great for consumers, they’re not always what you want. Sometimes, cash is just more convenient, especially if you’ve gotten a gift card to a store at which you don’t often shop.
So if you’re looking for a way to turn your unwanted gift cards into cash, turn to EJ Gift Cards!
We’re a leading direct buyer of unwanted gift cards, and we accept hundreds of different cards, from retailers both large and small.
Our intuitive, simple process gives you an instant, competitive quote, and renders payment through PayPal upon receipt of your gift card information, or upon receipt of gift card tracking information and validity, should you have to send your physical card to us.
And if you have any questions, our customer support team is happy to help you understand our process and our policies.
So don’t let your unused gift cards sit around gathering dust. Turn them into cash with EJ Gift Cards.
