The Growing Threat of Prepaid Card Fraud

Key Takeaways:

Prepaid Card Fraud: Prepaid card fraud can involve stolen prepaid card information, prepaid cards purchased with stolen payment credentials, or prepaid cards used to move or withdraw fraudulently obtained funds. Because some prepaid products contain less cardholder-identifying information than traditional cards, merchants may have fewer signals available for fraud screening.

Merchant Protections: Prepaid cards can appear in card-reloading fraud, advance-fee scams, tax fraud, repair scams, swapped-card schemes, and card skimming. Merchants that sell or accept prepaid cards should recognize that fraud may originate either with the prepaid card itself or with the payment method used to purchase it.

Dispute Rules Vary: Prepaid-card disputes can be governed by federal protections, card-network rules, and issuer policies. Visa and Mastercard provide protections for eligible prepaid products, while the specific rules that apply can depend on the card program and transaction.

Analyze Prepaid Risk: Merchants should segment chargeback data by card type, prepaid-card format, brand, issuer, customer, distributor, and purchasing pattern. This analysis can show whether prepaid-card transactions are materially contributing to fraud and where additional screening may be useful.

Table of Contents

1. What Is a Prepaid Card?
2. What Is Prepaid Card Fraud?
3. What Are the Most Common Scams Conducted Using Prepaid Cards?
4. Are Prepaid Cards Subject to Disputes and Chargebacks?
5. How Can Merchants Prevent Prepaid Card Fraud
6. Emerging Trends in Prepaid Cards

There's been steady and significant growth in the use of prepaid debit cards over the last decade, and industry forecasts expect that growth to continue. Prepaid cards are often used in place of cash or checks, providing funds in a more convenient form. Unlike these older methods of payment, prepaid cards can be used to make e-commerce purchases without first transferring the funds to a bank account.

Merchants, especially those in e-commerce, may benefit from the growth in prepaid cards. Unfortunately, these cards come with one big downside: fraud. What do merchants need to know to combat the threat of prepaid card fraud?

Prepaid cards branded by Visa, Mastercard, or other card networks can be used with any merchant that accepts that network's cards. Some prepaid cards are used in place of gift cards, allowing the recipient to shop anywhere they like rather than being limited to a single store. Others are used in place of one-time cash or check payments. In 2020, many Americans received their economic stimulus checks in the form of prepaid cards.

For some, a reloadable prepaid card can serve as a replacement for a checking account. Paychecks can be deposited onto the card rather than into a bank account, removing the downsides of minimum balances and overdraft fees.

The prepaid card market remains large and is expected to continue growing as consumers and organizations use prepaid products for general-purpose spending, payroll, government disbursements, travel, and other applications. Market-size estimates vary depending on which prepaid products and transaction types are included, but industry forecasts generally anticipate continued growth through the end of the decade.

Prepaid cards can be attractive to fraudsters because some products provide less identifying information than traditional payment accounts. Criminals may purchase cards with stolen payment credentials or use prepaid products to move fraudulently obtained funds. However, many prepaid programs are subject to customer-identification, recordkeeping, and anti-money-laundering requirements designed to make illicit activity easier to detect and investigate.

Of particular interest to fraudsters is the fact that reloadable cards can be used at ATMs, making it possible to convert stolen digital payment credentials into cold hard cash with relative ease.

Prepaid card programs can also be targeted through attacks on issuers, program managers, processors, and other service providers. A successful compromise may expose card data or other information that criminals can use to conduct unauthorized transactions, making third-party security an important part of prepaid-card risk management.

What this means is that prepaid card fraud can show up in many different forms. The card itself may have been purchased with stolen funds, or the card, while originally purchased legitimately, may have been stolen or copied by a fraudster. These can result in different dispute scenarios down the line, and it can be difficult for merchants to determine how to identify and prevent these fraud attempts.

The amount of cardholder information associated with a prepaid card can vary considerably. Some prepaid products provide merchants with fewer identity signals than traditional payment accounts, which can make certain fraud-screening methods less effective. This makes transaction history, device data, purchasing patterns, velocity, and other behavioral signals particularly useful when evaluating prepaid-card transactions.

Here are a few common types of fraud and scams that often involve prepaid cards:

• Card reloading fraud: Fraudsters get gift cards that they didn't pay for and call the company that loads them. They claim to be from the payment processor and trick a representative from the company to keep loading the card so they can use an ATM to offload free money. 
• Advance fee scams: You've probably heard of these before. Someone gets an email telling them there's a lot of money coming their way if they just pay a little fee up front to handle taxes or customs or some other issue. Traditionally these scams have been conducted using wire transfers, but these days many fraudsters ask the victim to buy a prepaid card and use that, making the purchase harder to trace.
• Tax fraud: Many states and the federal government allow refunds to go to prepaid cards. Some fraudsters complete tax forms using information from stolen identities and then load the cards with their ill-gotten refund.
• Repair scams: An individual receives a call from someone claiming to be from a major technology company who asks for remote access to their computer. They then suggest that the computer is full of malware or that their identity has been stolen, and attempt to get the person to buy a prepaid card or to give them access to their bank accounts to check their security. The fraudsters get the information and extract the cash. 
• Swapped cards: A fraudster surreptitiously opens the packaging of a reloadable prepaid card in the store and swaps it with an identical card they've purchased themselves and cloned. When a customer buys the swapped card and adds funds to it, the fraudster steps in and uses those funds, via the cloned card, to make purchases or ATM withdrawals.
• Skimmed cards: A fraudster skims the card information from the magnetic stripe of a prepaid card in the store. When a customer purchases and activates the card, the fraudster uses the skimmed card information to make online purchases.

Prepaid cards vary considerably in how they are issued, registered, and managed. Many general-purpose prepaid cards have an identifiable issuing financial institution and operate over networks such as Visa or Mastercard. Fraud-prevention signals and protections can therefore differ across prepaid programs.

Exactly which protections apply can depend on the type of prepaid product and, in some cases, whether the cardholder's identity has been verified. These distinctions can affect whether a disputed prepaid-card transaction becomes a chargeback and which rules apply when the merchant responds.

Card networks such as Visa and Mastercard also provide protections for eligible prepaid products:

• Visa's Zero Liability Policy covers unauthorized transactions on most Visa prepaid cards. However, certain transactions are excluded, including anonymous prepaid card transactions, certain commercial card transactions, and transactions not processed by Visa. Other transaction disputes may be handled under the applicable issuer and Visa dispute processes.
  
  
• Mastercard's protections also vary among prepaid products. Registered Mastercard Everyday Prepaid Cards include Zero Liability Protection, while registered Travel Prepaid Cards may include it depending on the specific program. Disputes outside those protections are subject to the rules and procedures applicable to the card and transaction.

Chargebacks may also hit merchants who sell prepaid cards when fraudsters use stolen payment credentials to purchase those cards. Because the underlying purchase may be unauthorized, these disputes can be difficult to fight successfully. The outcome will depend on factors such as the transaction type, authentication method, applicable reason code, network rules, and available evidence.

At the moment, prepaid card fraud may be a big problem for some merchants and a vanishingly small concern for others. Merchants who don’t sell prepaid cards don’t have to worry about chargebacks from victims of money laundering schemes, but all merchants who accept credit cards are vulnerable to disputes resulting from the theft or misuse of prepaid cards.

Merchants in regions or markets that already deal in a high volume of prepaid card transactions may already have firsthand experience dealing with these issues. If you’re not sure where you stand, analyzing your chargeback data can tell you. You should be able to sort out chargebacks by card type and see how many of them are coming from prepaid cards, whether those cards are fixed or reloadable, and which brands and issuers they come from.

An in-depth data analysis can help you identify the sources of your chargebacks so you can tell if particular distributors, customers, or shopping patterns are key indicators that fraud is likely to occur. When you can arm yourself with this information, you can stay a step ahead of the fraudsters and implement changes and policies that will make it harder for them to target you.

Just remember that if you’re having trouble analyzing your data or executing an effective anti-fraud strategy, it might be time to call in the chargeback specialists for some expert advice.

Emerging Trends in Prepaid Cards

As the prepaid card market continues to grow, so too does the need for advanced security measures and innovative solutions to prevent fraud. Here are some emerging trends and strategies that merchants and consumers should be aware of:

Increased Adoption in Various Sectors

Prepaid cards are no longer limited to consumer retail transactions; they are increasingly being adopted across various sectors such as healthcare, travel, and government disbursements. For instance, healthcare providers use prepaid cards to distribute funds to patients for specific medical expenses, ensuring that the money is spent appropriately. Similarly, travel agencies offer prepaid travel cards to customers as a convenient and secure alternative to carrying cash.

Government agencies also use prepaid cards for distributing benefits and aid. This method ensures timely and efficient disbursement of funds while reducing administrative costs. With the rise in digital nomadism and global travel, prepaid cards provide a hassle-free way to manage finances across different countries and currencies.

Technological Advancements

The advancement of artificial intelligence (AI) and machine learning (ML) technology will continue to be a driving factor in the future of fraud prevention. AI and ML algorithms analyze transaction patterns in real-time, flagging suspicious activities that deviate from normal spending behaviors. These technologies can identify subtle indicators of fraud, such as unusual spending locations or rapid depletion of card balances, allowing for immediate intervention.

In addition, the use of biometric authentication is becoming more prevalent. Biometric methods, such as fingerprint scanning and facial recognition, offer an additional layer of security, making it harder for fraudsters to gain unauthorized access to prepaid cards. These technologies can not only enhance security but also improve user convenience by streamlining the authentication process.

Future Outlook

The future of prepaid card security lies in the continuous evolution of technology and regulatory frameworks. As fraudsters develop more sophisticated techniques, the industry must stay ahead by investing in cutting-edge technologies and fostering a culture of vigilance and collaboration. Merchants and consumers alike must remain informed and proactive, adopting best practices and leveraging advanced security measures to safeguard against fraud.