The Growing Threat of Prepaid Card Fraud
Prepaid cards are enormously popular, and it’s not hard to understand why. They’re convenient, they make great gifts, and they allow people without traditional banking or credit accounts to make payments with merchants who only accept major card brands.
Sadly, the qualities that make them attractive to consumers also make them enticing to fraudsters who appreciate the fact that they’re hard to trace and easy to spend. Whenever fraudsters are on the scene, transaction disputes are sure to follow. How can merchants avoid getting taken advantage of by fraudsters attempting to launder money with prepaid cards?
Like debit cards, prepaid cards carry a balance that gets depleted as funds are spent. Some prepaid cards must be purchased for a fixed amount, and once they’re spent up, they can no longer be used. Other prepaid cards can be reloaded and used again and again as long as there’s a balance remaining. Prepaid cards branded by Visa, Mastercard, or other card networks can be used just like regular credit or debit cards.
Worldwide, the prepaid card market is set to exceed $5,500 billion by 2027 if it maintains its current growth rate of nearly 15% per year. Students, travelers, and unbanked consumers are among the segments driving this growth, but merchants in every market can expect to see increased usage in the years ahead.
What Do Fraudsters Do With Prepaid Cards?
While reloadable cards do require the user to provide some personal information, prepaid cards can be easily purchased with cash and are not easily tied to specific identities. That makes it easy for fraudsters to use them for money laundering. They can purchase prepaid cards with stolen funds, then use them to make untraceable purchases anywhere they like.
As usage increases and prepaid card products become more sophisticated, so too increases their potential for use in criminal enterprises.
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.
Internal hacks of prepaid card systems are becoming more common, especially where issuers outsource prepaid card management to third party processors. Hackers who can gain access to these systems can copy card numbers, inflate balances, and remove withdrawal limits
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.
Because these cards are designed to be easy to purchase and use—even by people without identifying documentation or a credit history—they don’t come with the same data signifiers that make it possible to detect and filter out traditional forms of payment card fraud.
Are Prepaid Cards Subject to Disputes and Chargebacks?
Fraud always means that somebody else’s money is being spent, and when those victims find out they’ve been dragged into a prepaid card fraud scheme, they’re sure to contact their financial institutions and try to get their money back.
While the dispute and chargeback rules for most payment cards are laid out in the Fair Credit Billing Act and subsequent legislation, these laws do not cover prepaid cards.
All that means is that the Federal government of the United States isn't requiring banks to offer chargebacks on their prepaid cards.
However, card networks like Visa and Mastercard have a vested interest in maintaining consumer confidence in prepaid cards, and so they do offer fraud protection and dispute options for consumers who purchase prepaid cards carrying their brand name.
- Visa prepaid cards are covered under Visa’s Zero Liability program, but the cardholder must report the card as lost or stolen first, and certain “anonymous prepaid card transactions” are not included. Cardholders are directed to bring other disputes to the prepaid card issuer, which may have their own forms or processes for handling transaction disputes.
- Mastercard requires cardholders to register their cards before they can file a dispute claim. They too will send cardholders to the card issuer if specific disputes come up that aren’t covered under the general policy.
Chargebacks may also hit merchants who sell prepaid cards when fraudsters purchase those cards for money laundering purposes. The cardholder will dispute the transaction that was used to make the prepaid card purchase, and then the merchant will be left with an uncontestable true fraud chargeback.
At this point, 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. As usage increases and prepaid card offerings become more widespread and diverse, prepaid card fraud and chargebacks may pose a much bigger problem in the future than they do now.
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 the 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.