Maryland has become the first state to pass a law combatting gift card draining, mandating tamper-proof packaging for most gift cards sold in person. The intent is to curb the growing problem of buying prepaid cards only to find their balances have been emptied.
Card draining involves thieves removing gift cards from stores, taking their numeric codes, and putting the products back on display. When a genuine customer later loads money onto a tampered card, criminals can access it online and steal the balance.
Card draining grew sharply during the pandemic, thanks to the ingenuity of Chinese organized crime rings. Big box retailers operated with little traffic or supervision during the COVID-19 lockdowns, leaving hundreds of gift cards available to the public on their racks. According to an investigation by ProPublica, criminals learned to remove and replace the security stickers and packaging that conceal the card’s codes.
Open-loop gift cards, such as those issued by Visa, Mastercard, or American Express, are particularly popular with draining gangs. These cards can be redeemed at any business that accepts debit payments, as opposed to closed-loop cards that can be spent only at a single business.
An Expensive Problem
The Maryland law, which passed in May and will go into effect in June 2025, faced strong opposition from retailers. Lobbyists from Walmart, Target, and Home Depot argued that changing their card packaging to comply with the new rule would be very costly to design and manufacture.
However, the problem is also very costly for consumers. ProPublica cited research from Javelin Strategy & Research, which estimated that $570 billion is loaded onto gift and prepaid cards each year in the United States. A 2022 AARP study found that a quarter of U.S. respondents had been given or received a card with no balance, presumably because it had been tampered with.
At the same time, Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research, is not so sure the Maryland law will have a significant impact. “I think it will have limited effect,” he told PaymentsJournal. “It’s limited in scope to not just one state, but a state where a large percent of the population can and does live and work in a multi-jurisdiction geography.
“The problems are known, and the industry is working to improve packaging and processes,” he said. “To be truly effective I believe there needs to be more of a partnership between regulators and the industry to agree on parameters that eliminate state-by-state regulations.”