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Retailers on guard against gift card fraud
[January 19, 2006]

Retailers on guard against gift card fraud

(Dallas Morning News, The (KRT) Via Thomson Dialog NewsEdge) DALLAS _ Now that holiday gift card givers have handed out billions in plastic presents, the scam artists are as busy as Christmas elves.

Gift card fraud _ be it a simple sleight of hand or elaborate techno thievery _ is on the rise, experts say. As the use of gift cards grows, so does their attractiveness to crooks. Consumers bought an estimated $18.5 billion in gift cards this holiday season, up 6.6 percent from 2004.

Retailers and restaurateurs are working with trade groups, processors and law enforcement to spot and stop the latest scams without making the system too burdensome for legitimate consumers.

"Gift card fraud is a growing concern among retailers nationwide," said Joseph LaRocca, vice president of loss prevention for the National Retail Federation, an industry trade group.

"Gift cards are being used as mainstream currency among retailers, from fast-food restaurants to major department stores."

In fact, restaurateurs, although later to the gift card game than their retailing cousins, represent a rapidly growing group of gift card sellers.

Major retailers continue to dominate, with a 70 percent share of gift cards purchased.

But restaurants accounted for 12 percent of gift cards purchased in 2005, more than double the 5 percent reported two years before, according to First Data Corp., which processes electronic transactions.

Since so many gift cards are given during the holidays, January and February become prime months for gift card redemption, by consumers and thieves.

Experts describe gift card fraud as a small part of the overall $31 billion in retail "shrink." The catch-all term includes everything from employee theft to vendor fraud at retail stores, not including restaurants.

"When you look at that number, the gift card fraud losses that I'm aware of are minuscule," LaRocca said.

He and others said they've not seen solid numbers that can quantify the problem.

"There isn't a lot of good data," said Richard Hollinger, a criminology professor at the University of Florida who produces the annual National Retail Security Survey. "Companies have private data on the extent to which they're having a problem."

But many of those companies, wary of tipping off thieves and scaring off customers, are secretive about their fraud losses and prevention tactics. Several restaurant companies declined to comment for this article due to security concerns.

Experts said they see the problem as significant and growing _ and the thieves as increasingly sophisticated.

"Each of the various retail companies has investigative teams that are working on this," Hollinger said, adding that the FBI gets involved in cracking some scams.

Gift card fraud can take various forms _ and each presents challenges for the companies that get into the gift card game.

The easiest to pull off is the simple sleight of hand. The store clerk or restaurant server hands you a card that you think has value when it doesn't, then pockets the real card.

That fraud is harder for diners at sit-down restaurants to immediately detect because the card leaves their sight.

Increasingly, Hollinger said, gift card fraud is tied to organized shoplifting. Thieves steal merchandise and bring it back for a refund, sans receipt.

Many retailers now put refunds on gift cards, which can then be marketed via online auction sites.

LaRocca calls that "e-fencing."


That fraud affects retailers more than restaurants since consumers rarely return cheeseburgers.

But all industry segments are on the alert _ and on the offensive.

To fight back, retailers, restaurateurs and the transaction processing industry are stepping up monitoring of gift card sales and redemptions, in some cases requiring a manager's approval for a sale.

Others create extensive databases that key in on unusual transactions or patterns involving the same person or group.

"We track things, looking for strange activity," such as the frequency with which money is put onto a card and then taken off, said Andrew Robbins, president of Paytronix Systems Inc. in Cambridge, Mass., which helps restaurants run their gift card programs.

"We try to find the people who are doing that the most," he said.

People are going to find a way to cheat, said Tamara Jones, vice president of business services for Plano, Texas-based Metromedia Restaurant Group, speaking at a recent restaurant technology conference.

"But the reporting is such that you can narrow it down to the server," she said.


Concerns about thievery have not been enough to keep growing numbers of restaurateurs and retailers out of the game.

"Most often, they have a big concern up front about fraud, then when they start looking at the upside, it more than outweighs any issue about fraud," said Adam de Malignon, sales director for Gift Card Solutions, a Salt Lake City provider of paper and electronic gift products and services.

Merchants like gift cards because they can increase sales (consumers often spend more than the card's value), bring in first-time customers, build brand awareness and, if the customer registers the card online, serve as a marketing tool.

"I've seen ... (wariness) delay people, but they see there's too much money to be made," he said.


(c) 2006, The Dallas Morning News.

Visit The Dallas Morning News on the World Wide Web at

Distributed by Knight Ridder/Tribune Information Services.


GRAPHIC (from KRT Graphics, 202-383-6064): GIFTCARDFRAUD

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