The Growing Threat of Prepaid Card Fraud
Instances of hackers compromising the databases of prepaid card systems are becoming more common, especially where issuers have outsourced 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 kinds of associated cardholder information that make it possible to detect and filter out traditional forms of payment card fraud.
What Are the Most Common Scams Conducted Using Prepaid Cards?
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.
Because these cards aren't tied to a specific issuing bank or lender, they are hard to track for fraud prevention purposes. However, many prepaid cards are tied to credit card networks, which provides some level of security.
Are Prepaid Cards Subject to Disputes and Chargebacks?
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 United States government isn't requiring banks to offer chargebacks on their prepaid cards.
However, card networks like Visa and Mastercard have a vested interest in maintaining customer confidence in prepaid cards, and so they do offer fraud protection and dispute options for customers 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 incontestable true fraud chargeback.
How Can Merchants Prevent Prepaid Card Fraud
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.
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 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.
Regulatory Enhancements
As the prepaid card market expands, regulatory bodies are implementing stricter guidelines to enhance security and protect consumers. The Financial Crimes Enforcement Network (FinCEN) and other international regulatory agencies have introduced regulations requiring enhanced due diligence and reporting for prepaid card transactions. These regulations aim to prevent money laundering and other illicit activities by ensuring that prepaid card issuers maintain comprehensive records of transactions and cardholder information.
Consumer Education and Awareness
Educating consumers about the risks associated with prepaid cards and the importance of safeguarding their card information is crucial in the fight against fraud. Many issuers and merchants now provide educational resources that guide consumers on how to recognize and avoid common scams. These resources include tips on securely handling prepaid cards, recognizing phishing attempts, and reporting lost or stolen cards promptly.
Additionally, consumers are encouraged to register their prepaid cards with the issuing company. Registration not only facilitates dispute resolution but also enables issuers to monitor transactions more effectively and provide timely alerts in case of suspicious activities.
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.