Gift Card Scams 101: Why These Scams Happen Every Day

This blog post is the second installment of our gift card scams series. You can read the previous post here, to understand why we are covering this topic now.

Today we are going to dig into why these gift card scams are so prevalent.

The first thing you need to know is that gift cards are an anonymous currency. The best way to explain this is to give you an example. Let’s say it is your friend’s birthday. So you purchase a $25 gift card to her favorite coffee shop. Yes, the purchase of that gift card is attached to your credit card, BUT you are not the intended recipient, are you? You give your friend her gift card and now she is the owner of the gift card. But a store or a processor has no way of knowing who your friend is. There is no registration process or account set up necessary for her to use the gift card to buy her coffee, thus it is anonymous.

So why does the anonymity of the gift card matter?

Fraudsters can pose as, let's say a member of your church congregation or an IRS agent, and have you go out and buy $1,000 in gift cards which they then resell online for less than face value and still make a lot of money. They can do this by just having the serial number and the pin number off the back of the card because there are so many gift card resale sites that will take a physical product and turn it into a digital one. It is shocking for many people to know how much money laundering goes through gift cards. Gift cards are not regulated like other financial products, and are subject to different laws than your credit card or your bank account. They are treated as personal property.

Because gift cards are treated as personal property, they are also subject to escheatment and unclaimed property laws.

What is escheatment?

The SEC lays out to process on their website, but as it pertains to gift card specifically we are paraphrasing a bit of what they have on their website below:

All states require retailers or the gift card issuers to report when a gift card has been deemed “abandoned” or unclaimed after a period of time specified by state law. Before it can be considered abandoned or unclaimed, the retailer or issuer must make efforts to try to locate the gift card owner. If they are unable to do so, and the gift card has remained unredeemed (this could be for the full amount or even if there is a $1.25 left on the card) for the period of time specified by state law, the firm must report the card to the state where the account is held (meaning if Jane Doe, lives in Illinois and the retailer knows she is holding the card, the gift card is subject to the laws of Illinois. If I do not know that Jane Doe has the gift card, the laws default to the state the retailer or issuer is incorporated in). The state then claims the account through a process called "escheatment," whereby the state becomes the owner of the gift card balance.

As part of the escheatment process, the state will hold the gift card balance as a bookkeeping entry, against which the former owner may make a claim.

As you can see, when retailers have to report to almost every different state on a product that can change hands multiples times; it feels so cumbersome that many retailers elect to not even attempt to know who is holding the gift card.

Now all of this is not to say retailers prefer you never use the gift card... in fact retailers would strongly prefer you came into the store to redeem your gift card. Then at least there is the chance you will overspend the value of that gift card (on average, consumers spend $59 over the face value of the gift card), and maybe you will become just a little more loyal to their brand. For that matter, many retailers are very concerned about gift card scams and want to make sure the consumer experience is the best it can be.

In our next post, we will talk about what retailers can do to help protect consumers.