SCAM of the MONTH: How One E-Merchant Repeals $50K per Month in Fraud and Chargebacks

by Suresh Dakshina 0

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It seemed such a good idea for the family of five on a budget: have a nice night out using a discounted gift card for one of their favorite chain restaurants.

Yes, not just a gift card, but a discounted gift card. There are gift card websites, where you can buy a $50 gift card to restaurants, stores, websites or services for between seven and 10 percent off the value of the card. Buy three of those for $135, and you can take the family out to a great dinner, and save $15!

Imagine the confusion and embarrassment when the bill comes, and those gift cards are declined. Dad is furious, mom is mortified and the kids know that something’s wrong, because dad’s face is changing color.

Should he be angry at the restaurant, since their picture and logo are on the card? No, there’s nothing they can do about it. The card shows as invalid.

So it must be the website that sold him the card? No, while they’re apologetic, it’s not their fault. In fact, it’s going to wind up costing them more than it cost the person who bought the cards.

The fact is, they’ve been caught up in the Gift Card Scam.

There are numerous e-merchant sites where customers can buy discounted gift cards, to specific stores and restaurants, or general cards for stated dollar amounts. The merchants buy those cards from people who have gift cards they can’t or won’t use, and would rather take the cash.

Generally, the merchants buy them back at 15-20% less than their value. Then – after verifying the cards are good – they sell them at a discount, still making a 5-10 % profit.

That’s where the scam comes in. Fraudsters send in valid gift cards, but duplicate them before sending them in, scanning the barcode. Once the fraudster has received payment from the merchant, they go and use the duplicate gift card or certificate, thus invalidating that card for whomever buys it.

What normally happens is the person who purchased the now invalid card will file a chargeback with their credit card provider. And there’s simply no way for the card provider to know who’s telling the truth – and so they usually side with the card client.

The online merchant is not only out the revenue the customer paid – which is refunded by the card provider – they’re out what they paid for the gift card.

Thus, the transaction on a $100 card – which would have wound up bringing perhaps a $10 profit, instead costs the merchant as much as $185.

Which is why one such merchant began working with Chargeback Gurus. Soon after a series of chargeback losses, this merchant completely re-did their authorization process, at Chargeback Gurus’ suggestion.

Using our services, we now verify the validity of each card that is bought back by the merchant. We certify that the funds are available, and that the merchant is selling the card in good faith, and we document it.

If fraudsters then spend the value of the card and invalidate it, and the customer who buys the card files a chargeback, we fight it for our clients, as a third party independent authority. More often than not, when we appear on behalf of the client with documentation, the judge aligns with the impartial third party, and the merchant wins the case.

How often does this happen? Before this merchant began working with us, it was winning only about 23% of its chargebacks. Now, this client is winning about 73% – a significant increase.

But there’s still another side to the Gift Card Scam, which is a form of friendly fraud. In those occurrences, the consumer who buys the discounted gift card uses it, but then files a chargeback claiming they never received it.

This is especially rampant among electronic gift card users, where the card or certificate is emailed instantly.

And there’s even a NOT-so-friendly version of this fraud. Let’s say the person bought a gift card, went to the restaurant, had a meal, and then asked the restaurant for another gift card. They not only can then dispute that they never received the first gift card, they turn around and sell the second one.

But for our clients, we’ve created a process to protect the merchant in this case too. We send a read receipt email, which certifies delivery – and we document that. If that customer files a chargeback, we have proof that the card was received.

Another benefit to working with a chargeback and fraud protection service such as Chargeback Gurus is that we compile a list of known scammers and fraudsters who work in this way, and check our clients’ transactions against this list. We also set up tools that will flag purchases going to those individuals and all their known addresses, both physical and electronic.

It all results in a more efficient business process, and retention of revenue.

For this client, who had been averaging 5% fraud on an average of 50,000 gift card transactions a month, at an average of $50 per transaction, that adds up. After about 6 months of working with us, they are down to 2.5 percent – and that number will go even lower as they continue to implement our tools and recommended processes.

Which means that on the same amount of transactions, our client is retaining an average of an additional $50,000 per month or more. You could say that’s a pretty nice gift.

Suresh helps e‐commerce and Fortune 5000 companies enhance profitability by managing risk in a card-not-present environment. His company, Chargeback Gurus, ( does it by delivering the software and services companies need to lower their chargeback rate, win more chargeback disputes, and strengthen core functions such as customer service, fulfillment, and marketing.

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