vesta digital gift card fraud risk
Security & Fraud

Should Retailers Just Say ‘No’ To Digital Gift Cards?

Gift cards seem like a win-win payment option for retailers. But as traditional gift cards are slowly being phased out for digital replacements, that story is quickly changing. Tom Byrnes, Chief Marketing Officer for Vesta, let PYMNTS in on the hidden dangers behind digital gift cards and why retailers may need to think twice about a once favorite payment offering.

It’s no wonder why retailers love gift cards – they are known to drive foot traffic, increase revenue, boost their customer base and complement retention efforts.

But as consumers continue to move toward a digital option for their gift card needs, could a retailer’s dream turn into an actual nightmare?

THE DARK SIDE OF DIGITAL GIFT CARDS

Consumer preferences are changing – and quickly.

According to data from InComm, nearly 76 percent of consumers said they were likely to purchase a digital gift card during last year’s holiday season.

It’s no surprise that among millennials the digital variety of gift cards is even more popular – approximately 90 percent said they were more interested in purchasing digital gift cards now than they were a couple years ago, especially when it comes to storing and using the gift cards on their mobile devices.

Innovative retailers have responded by developing new channels such as e-gifting programs, app-based cards and online “malls” offering a multitude of options.

Unfortunately for merchants, even as digital gift cards are creating new opportunities they also carry a much higher fraud risk.

As Vesta Chief Marketing Officer Tom Byrnes explained, the requirement for instant delivery that digital gift cards carry, along with the challenges that come with card-not-present transactions made online, make them a magnet for fraudsters looking to quickly monetize stolen card data.

“That makes digital gift cards a prime target because they are essentially a form of cash that can be spent immediately, easily re-sold on gift card swap websites or sent to fraudsters globally to be re-sold,” Byrnes added.

This type of “fast fraud,” Byrnes noted, is pretty hard for existing fraud detection systems to actually keep up with.

Online and mobile security systems just aren’t prepared to fight fraud at the speed at which cybercriminals are stealing digital goods.

Not only do retailers have to worry about increased fraud when accepting digital gift cards, there’s also a higher rate of false declines taking place, which can quickly turn good customers away or shut down their programs altogether, Byrnes said.

Digital gift card sales may also introduce a spike in chargebacks.

Byrnes explained that without the right fraud prevention solution in place, retailers could put themselves at a higher risk of violating the 1 percent chargeback rule, threatening their ability to accept payments for all products.

THE DIGITAL GIFT OF AVOIDING FRAUD

Digital gift card sales can leave retailers between a rock and a hard place.

Many merchants feel like they only have two choices: accept digital gift cards and increase fraud risk OR simply avoid digital gift cards, but risk disappointing the growing number of shoppers who expect them to be a viable purchasing option.

As consumers continue to demand a more mobile shopping experience, retailers may have no choice but to support stored-value products like digital gift cards to remain competitive.

Byrnes said there actually is a way for retailers to have it all.

Whether retailers choose to develop their own in-house solution or look to a provider for a full-service solution, Byrnes noted the importance of identifying experts in high-risk digital transactions with experience in digital gift cards specifically.

However, going the in-house route is known to be costly and more resource intensive. Vesta’s research with Javelin shows that digital goods merchants will employ nearly five times the fraud personnel as physical good merchants. Therefore, many retailers are turning to third-party providers to support payment and fraud management instead.

“Turning to a third-party vendor with deep expertise in the digital goods space allows retailers to benefit from and access a much higher volume of specialized transaction data and advanced risk strategies,” Byrnes pointed out.

Tapping into consortium data for example – a collection of transaction data shared amongst a group of similar merchants – has the potential to decrease risk and increase acceptance and conversion of good transactions for retailers.

According to Byrnes, choosing a solution that guarantees payments is the best way for retailers to eliminate the risk of chargebacks and protect against excessive chargebacks and the 1 percent rule.

It’s clear that the adoption of digital gift cards – as well as the enablement of digital shopping experiences overall – is on the rise.

With that, Byrnes said that merchants must assess the increased risk and shopping friction accordingly, while also being aware of the growing threat of the fast fraud associated with the consumer demand for digital goods.

“Merchants must end the cycle of tacking on disparate fraud tools as new challenges arise and move towards a holistic approach that not only streamlines payments but also transforms them into a revenue-generating opportunity for the business,” Byrnes added.

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