
The Role of Phony Returns in Gift Card Fraud - kawera
http://krebsonsecurity.com/2015/12/the-role-of-phony-returns-in-gift-card-fraud/
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gesman
This is perfect case of merchant-approved business model with well-calculated
losses to fraud as a cost of doing business.

If merchant would want - they'd close this loophole within 5 minutes. Yet they
choose not to.

"Lisa admits she remains conflicted over whether she would buy another steeply
discounted card to help feed her dogs"

Don't worry Lisa, merchants themselves are perfectly OK with you buying
steeply discounted gift card.

After all their margin is way higher that measly 30% off you're getting your
gift cards for. They'll quietly raise prices to compensate if needed.

Feed your doggies well while you can!

~~~
biot
I question whether the merchant is fine with everyone buying steeply
discounted gift cards. That $165 card was a result of someone stealing $165
worth of product and returning it. Lisa then goes and buys the card for $120
and purchases $165 worth of product. Now Petco is out $330 of revenue (or
whatever percentage as cost of goods), having received nothing in return.
Doubtless they factor this in as a cost of business and raise the prices
accordingly but it seems doubtful that they have a mischievous plan to
dominate the competition via quietly condoning shoplifting+returns and then
cornering the discount gift card market.

~~~
gesman
The problem here is not a gift card, the problem here is shoplifting.

Naturally Petco does not want to repel gift card customers just because they
cannot catch shoplifters. Once shoplifter succeeded - he can sell stuff on
eBay, on Craigslist, via gift cards or just directly on the street.

Gift card is just a convenience vehicle that Petco agreed upon to keep opened
regardless of where merchandise came from.

In fact many stores do ask my ID and address/phones numbers before accepting
returns. It's hard to make millions with this type of theft (not fraud) model.
After 3-rd return without receipt - pretty much every store will kick person's
butt out of the store or call security/police.

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ghshephard
In terms of Card Scamming - I've often thought that one additional layer of
security is for the Bank to take a picture of their customers, and then simply
embed it on the smart chip. The vendor could then verify it was the correct
picture originally embedded using a hash sent during the transaction .

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bemmu
One of the hardest hit areas in the recent Candy Japan credit card fraud
debacle was gift card sales.

It's a great fraud target, as you can buy a gift card with a stolen credit
card, then possibly even sell it for real money while getting to test your
stolen cards.

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jzwinck
The levels of fraud must not be that terrible compared with the profits made
from legitimate gift card sales. Otherwise retailers would fix obvious stuff
like this:

> The only items he was trying to buy were several $200 gift cards. When the
> first card he swiped was declined, the man fished two more cards out of his
> wallet.

Obvious solution is to ask for photo ID when selling gift cards. It needs to
match the credit cards and the customer's face.

As for giving out gift cards for stolen merchandise, it should be possible to
add a unique bar code on every high-value item and scan it on purchase and
return. Then stores will know if they received money for the item when someone
tries to return it. This also fixes the problem of people returning items
bought at another store.

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intopieces
While I certainly don't condone fraud, I find it difficult to feel sorry for
the corporations. Starbucks took in $1.3B in gift card sales in the holiday
quarter of 2013(0). This is basically a loan to the company without interest,
with which they can basically do what they want, including investing them.

The only real concern, for the shopper, is whether the prices of the goods
they want to purchase will increase because of the frauds. Not likely, given
the competition for items such as pet food.

(0) [http://www.seattletimes.com/business/starbucks-prepaid-
cards...](http://www.seattletimes.com/business/starbucks-prepaid-cards-hit-a-
record-13b-in-holiday-quarter/)

~~~
sithadmin
>This is basically a loan to the company without interest, with which they can
basically do what they want, including investing them.

It's not really that simple (under US accounting practices, anyway). When a
gift card is purchased, the value of the card increments a liability on the
company's books; Gift card revenues are recognized on redemption of the card
for goods, not when the card is purchased. From an accounting perspective,
this is somewhat messy, particularly when consumers leave a balance on a card
with no intention of spending it.

~~~
rahimnathwani
So it's exactly as simple. Loans also appear as a liability on the balance
sheet. The only accounting complication relates to breakage (balances that
will never be redeemed), which is free money for the company, so I'm sure no
one cries over the accounting work involved.

~~~
ghshephard
The challenge in places like California, is they don't legally recognize
"breakage" or "Dormancy Fees" \- so that any company that sells a gift card
will have to carry that liability on their books forever, regardless of
whether the customer will ever use the card.

[http://www.dca.ca.gov/publications/legal_guides/s-11.shtml](http://www.dca.ca.gov/publications/legal_guides/s-11.shtml)

~~~
rahimnathwani
"so that any company that sells a gift card will have to carry that liability
on their books forever"

There are at least two separate issues here:

1) Gift cards issued in California cannot usually have an expiry date or
dormancy fees, so can be redeemed at any time after issuance, even 1000 years
in the future.

2) IFRS 15 requires issuers to estimate breakage (usually based on historical
redemption patterns). Once the issuer deems the chance of redemption to be
remote, they can immediately recognise the amount as revenue, i.e. DR
liabilities and CR revenue.

These issues do not conflict.

Estimate your breakage balance every quarter _. If it 's gone up since last
time, recognise some additional revenue. If it's gone down, then reverse some
revenue. These affect your financial reporting, but doesn't affect your
dealings with customers.

_You'd calculate breakage in a similar way to that in which lenders calculate
provisions for bad debts. You would do it at a portfolio level (perhaps
breaking unredeemed gift cards into buckets based on value, date of issuance,
and last activity date).

