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.
Worldwide, the prepaid card market is anticipated to exceed $3.6 trillion by 2022, with the U.S. market exceeding 350 billion. Students, travelers, and unbanked customers are among the segments driving this growth, but merchants in every market can expect to see increased usage in the years ahead.
While reloadable cards do require the user to provide some personal information, prepaid cards often aren't 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, we may also see greater use of these cards to conduct criminal activity. According to law enforcement agencies, these cards have already been used in drug trafficking operations and in preparation for terrorist attacks. However, their most common use is still simple financial fraud.
In the U.S., there were 38,000 reported cases of crime in 2019 that involved the use of prepaid cards, with the combined losses totaling $103 million.
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.
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.
Here are a few common types of fraud and scams that often involve prepaid cards:
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.
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.
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.
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.
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