10
Dec 15

The Role of Phony Returns in Gift Card Fraud

On any given day, there are thousands of gift cards from top retailers for sale online that can be had for a fraction of their face value. Some of these are exactly what they appear to be: legitimate gift cards sold through third-party sites that specialize in reselling used or unwanted cards. But many of the more steeply discounted gift cards for sale online are in fact the product of merchandise return fraud, meaning consumers who purchase them unwittingly help thieves rob the stores that issued the cards.

giftcardsThis type of scam mainly impacts brick-and-mortar retailers that issue gift cards when consumers return merchandise at a store without presenting a receipt. Last week I heard from KrebsOnSecurity reader Lisa who recently went online to purchase a bunch of steeply discounted gift cards issued by pet supply chain Petco.

Lisa owns two Rottweilers that both eat a good chunk of their weight each month in dog food, so Lisa said she felt like she’d really hit on a bargain when she found a $165 Petco gift card for sale at a popular online gift card retailer for $120 (a nearly 30 percent discount on the value).

“When I went to Petco to get my monthly supply of dog food and snacks for my Rotties, I used my merchandise card and the manager shared with me that folks are stealing merchandise from one Petco store and returning the items to another without a receipt and then selling the cards to places like raise.com and cardpool.com at a discounted price,” Lisa recounted.

Petco’s official policy is that for returns more than 60 days after the purchase — or if the receipt is unavailable — the value of the goods returned will be refunded to a merchandise card. Lisa said she bought the Petco card from raise.com, but she said the company never disclosed that the card was a merchandise return card — a fact that was printed on the front of the card she received.

“I feel really bad now because my purchase of these cards may have contributed to unlawful activities,” Lisa said. “Even though I saved $40+, Petco actually lost money as a result.”

Neither Raise nor Petco responded to requests for comment. But a look at the available Petco cards for sale via one gift card tracking site — giftcardgranny.com — shows Petco cards routinely sell for at least 25 percent off their value.

In any case, this fraud scheme is hardly specific to Petco. Cards from Petsmart, a competitor that also offers merchandise return cards, generally sell at 20 percent off their value. Clothier H&M’s cards average about 30 percent off.

Contrast these discounts with those for gift cards from restaurants, fuel stations and other businesses that generally don’t have to deal with customer returns and you’ll notice two interesting patterns: For starters, the face value of the cards from merchants that don’t take customer returns are far more likely to be even amounts, such as $50, $25 and $40. The percentage off the face value also tends to be much lower — between 3 and 15 percent. For example, see the discount percentage and value of cards from Starbucks and Chevron.

“Twenty-five percent off is really high, and there aren’t many that offer that high of a discount,” said Damon McCoy, an assistant professor of computer science at New York University and an expert on fraud involving stored value cards. “Normally, it is around 5 percent to 15 percent.”

According to a study conducted jointly by KingRogers International and The Retail Equation, approximately nine percent of all returns in the United States are fraudulent. The National Retail Foundation estimates that the problem will cost U.S. retailers nearly $11 billion this year.

Investigators say the crimes very often are tied to identity theft rings and drug addicts. Last month, authorities in Michigan convicted a 46-year-old father of four for running a large-scale fencing operation that used teams of prostitutes, heroin users, parolees and panhandlers to steal high-priced items from local Home Depot stores and then return the goods to a different Home Depot location in exchange for store debit cards.

Of course, another huge source card of gift card fraud are cards purchased with stolen credit cards. Thieves will buy “dumps” — card data stolen from brick-and-mortar businesses — and encode that data onto anything with a magnetic strip and try to buy high-dollar gift cards from a range of retailers. The carded gift cards very often wind up for sale online at steep 20-30 percent discounts.

Earlier this year I saw part of this process in action at a Giant grocery store in Maryland. The man in front of me in line looked and smelled homeless. The only items he was trying to buy were several $200 gift cards that Giant had on sale for various retailers. When the first card he swiped was declined, the man fished two more cards out of his wallet. Each was similarly declined, but the man just shrugged and walked out of the store. I asked the cashier if this sort of thing happened often, and he just shook his head and said, “Man, you have no idea.”

Lisa admits she remains conflicted over whether she would buy another steeply discounted card to help feed her dogs. But she said retailers could help stem this type of fraud by tying merchandise return cards to the identity of the person who returned the merchandise in the first place. Most stores that issue merchandise return cards now require the person returning the goods to show a valid state driver’s license, but the cards are not tied to that customer, nor do stores check ID when consumers use merchandise return cards at the store to purchase goods.

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77 comments

  1. This has been happening since at least 2005 when I worked at Best Buy…

    • I remember when I worked at Best Buy a few years ago there were employees taking advantage of the employee discount with high discount items like HDMI cables. Employees could buy an HDMI cable that retailed for $60 for about $5. So employees would spend $25 on 5 hdmi cables then have someone else return then at different stores and turn that into $300 worth of store credit. I believe Best Buy changed the maximum employee discount to 50% off after that and applied one of the safe guards mentioned at the end of the article by limiting individuals to 3 no receipt returns a year by asking for their drivers liscence on those type of returns and recording them.

  2. And banks still somehow claim that PINs won’t help? Just doesn’t add up.

    • How would a PIN help? As far as I could tell, what’s going on here is that actual merchandise is being shoplifted, and then returned. The thieves are using gift cards to monetize the shoplifting.

      In Krebs’ example, when the thief (or possibly Petco customer) returned the (stolen?) product, they’dd get a PIN along with the card. They sell that PIN with the card. A little more hassle (for thieves and legit users both) but no more security.

      What am I missing?

  3. Ugh. Now conflicted.

    I was going to buy tonight $2,000+ in gift cards for 5-10% savings to get that refrigerator I wanted. I am buying them from a well known gift card site but I guess that means whole dollar/5% discount cards only.

  4. There are plenty of organized crime rings using this and similar methods, including purchasing retail items like clothing online with stolen credit cards. Mules then return them for cash or store credit. From what I’ve seen shopping, there’s a few specific companies that appear to be getting heavily targeted and I’m guessing the stores have a disconnect between business units (Online retail vs. Brick & Mortar). Rings can exploit the disconnect so that cashiers cannot ask to “see the credit card with the last 4 numbers” or other forms of validation. Even if they printed the “e-receipt” they can just change the last 4 numbers to something on a card they have in their possession, since this part of the validation is usually eyeballed.

    Fun times!

  5. Your friend, Lisa, should have no guilt feelings at all as the store’s loss was their fault when the item was initially lifted. That is the only problem the stores have – shoplifting – not card reselling. The resale of these cards does not cost the store a dime and may have actually helped them defer the shoplifting costs by bringing in a customer and probably selling them more than the value of the gift card. I can also think of multiple reasons why I would sell a gift card at a discount, not the least of which is I was unhappy with the store and had no intention of returning! At least the resale of the card “replaced” a lost customer.

    • Although Petco does receive the product back to resell, they still lose in payment processing, card stock, and labor costs, because the initial theft didn’t generate any profit meant to offset those costs of handling the return and subsequent gift card redemption. So to say that “The resale of these cards does not cost the store a dime” is short-sighted.

    • So you’re saying it’s the store’s fault that someone is stealing from them? Okay… clearly you’re not a small business owner.

      Regardless, it seems you’re not taking the entire process into account here. Basically, the store ends up giving away free money by handing out gift cards to get back the items stolen from them. That free money then changes hands and the (possibly unwitting) gift card buyer is now receiving goods with the “free money.”

      There is no “deferring shoplifting costs” here. As soon as the items were shoplifted the store lost. The items being returned did not reverse that loss as they ended up paying for them in the form of a gift card. The fact that the gift card comes back and gets used does not reverse the initial loss, as the store then gives out more merchandise to get the gift card back.

    • “The resale of these cards does not cost the store a dime and may have actually helped them defer the shoplifting costs by bringing in a customer and probably selling them more than the value of the gift card.”

      lol.. Shoplifters are actually helping the stores they rob.. yeah, no.

  6. It depends. I purchase discount cards from cardpool.com quite often. Most of the time, I use the site to obtain a 5-6% discount on Starbuck’s cards.

    They sell many restaurant gift cards at anywhere between 10-30 percent discounts.

    I can easily see people selling the Starbuck’s or restaurant cards they received as a gift, for cash at the site.

    On the other hand, once upon a time, I knew of an individual that used to frequent garage and estate sales and would pick-up ‘like-new’ tools and such and take them to a well-known building supplies store for credit and was never questioned. What fools, if you ask me (they should have a database on such individuals).

    That specific store’s cards, usually go for a 5% discount at cardpool.com

    Obviously, cardpool.com also prices their cards based on supply and demand. Some can in fact be obtained at a 30% discount. Some, like Amazon’s are rarely available at all.

  7. The problem is elicit activities and or crime/drugs thst people who purchase the cards are aiding. All it would take to change the thrives game would be a change in policy by the brick n morter stores. They loose alot of money.

  8. Why not just require a receipt for returned goods? It’s the norm here in Aotearoa New Zealand. If customers are worried about losing the receipt, lots of shops will register purchases against your name in their database.

    • When you don’t have to show your ID to buy a gun, why in the world should you need to have a receipt to return goods!

      • You are incorrect. Private sales only, don’t require ID.

      • It’s not about how great or dumb gun policies and laws are, it’s about if a store cares if a returned item was ever bought from them or not, then they should require some kind of evidence. If they don’t care where the item came from, then is it any surprise that they get items that came from all kinds of sketchy sources? Receipts used to be the norm in the USA too, when did this change?

        • Stores may provide no-receipt returns to encourage people to purchase gifts at their store instead of another. Even if they only do it during the Christmas shopping season, it is typical for a store to not require a receipt for a month after Christmas. The legitimate customers pay for this in higher prices.

          • Here in Denmark many shops puts a “gift return sticker” with a barcode on the purchased items. Then the gift can be exchanged without a receipt AND the shop knows that the item has been bought in the shop (or chain if they allow returns in any shop, which most chains do), and they know it is not returned after the return period expired (around Christmas for up to 2 months).

            I’m flabbergasted that US shops allow returns without receipts. It’s like Christmas for criminals.

            • Very few stores will take a return without a receipt anymore, in my area of the US anyway.

            • The typical policy is money back with a receipt; store credit without a receipt, so long as the goods are resellable. If all you can do with the value of the stolen goods is exchange it for other goods at the same store, it’s not an increased incentive for crime — you could have stolen the item you really wanted in the first place. (And most theft from stores is actually by employees, not customers, so they have the opportunity to be choosey.)

              But when they started loading the store credit on plastic cards that can be sold anonymously on the internet, it changed the dynamic. They are basically using the store to fence their own stolen property.

    • THIS. Why are we still going by an antiquated receipt system? These companies are leaving lots of money on the table for these fraudsters to take.

    • I agree. It is stupid of stores to accept returns without receipts. It is your job as a consumer to keep the receipts for this very purpose – I tend to save them for a year or so. It is also very important if you have to complain about an item to have the receipts.

      I fully accept when stores refuse returns without proof.

      However, most of them do accept things like printed-out bank account statements showing the date and store and amount of purchase.

  9. Merchants are doing it to themselves. What’s so difficult about a policy of no receipt, no refund? That’s the way it used to be. I suspect the percentage of lost customers would statistically be zero. And stores would make it back, and lots more, by not incurring these losses.

    Whether B&M or online, receipts are always issued. All online, and most B&M purchases, espec. for expensive items, are made with a credit card. What’s so difficult about asking the customer to produce the credit card and ID if they want to return merchandise? They had to produce the card & ID when making the purchase. The store could be fully transparent about the reason: prevent fraud, keep prices low.

    • William Hager,

      Such common sense, I’m putting you in charge of loss prevention for all of America! 😉

      Restaurants enforce a “No Shirt, No Shoes, No Service” rule, the “No Receipt, No Refund” seems like a total no-brainer for retailers preventing fraud and keeping prices low.

      (I was amazed back in 2006 when Claude Allen, President Bush’s top domestic policy adviser, got arrested for fraudulent returns at a Target. Oh what a tangled web Mr. Allen weaved… his son was later declared insane after murdering a man with a hatchet. Go figure… Ref: https://en.wikipedia.org/wiki/Claude_Allen)

    • I can’t remember the last time I was asked for Id when making a purchase with a credit card.

      • Buy something from an NBA or NFL team store at the venue. You’ll be asked for ID every time. I guess those companies know how to keep making money.

        • Ah, even though I live in a city with an NBA team and have previously lived in cities that had both NBA and NFL teams, I’ve never been to a game.

          I think Best Buy used to ask for Id, but it’s been years since I’ve purchased anything from Best Buy.

      • My understanding is their merchant agreement stipulates that they can’t require ID. I’m white and rarely get asked, either, and I always thank they clerks when they do ask.

  10. Speaking of fraud… this is not the same type of fraud but it is plain immoral. Costco has a fabulous return policy and people abuse it. I have heard (emphais in heard, not seen) that people buy big screen TVs before the Superbowl and return them days or weeks after the game. Costco sends returns to a third party discount seller. It cost Costco money and thus it raises the prices for the honest members.

    • Amoralism is probably a better term. There’s no intent to make money by the individual. Amoralism can have negative effects on others as well, but I’d say it’s amoral as opposed to purely definition of immoral.

      On the other hand, shoplifting IS immoral, as is CC fraud.

      • It’s theft of services. If they rented a TV for the game, it would cover the cost of wear and tear on the TV, loss of value as the TV is not sold before newer models become available, and the value of the time employees spend processing the sale and return. It’s like expecting to ride a taxi free as long as you don’t steal the cab.

  11. Funny. “sell at 20 percent off their value”. At first I read ” sell at 20 percent of their value” 😉

  12. Its been a few years, but in the Costco Stores they had NFL.com gift cards valued at 100 usd which were selling at 79.99. I bought a few of them and handed them out as Christmas Gifts.

    Discounts can be found on some merchants offering a slightly higher amount on the deal. I had bought a phone card online for a burn phone many times and it offers 20% more air time if you will.

    Good legit deals are out there, but it is hard not to believe there are a ton of bad offerings. The only good thing about those low cost cards in the blog is that at least the purchase of those cards gets customers in the store in hope that they will buy more than what they initially came in for.

    • Mostly at Christmas time, Costco sells branded gift cards for 30% to 50% off face value. I vaguely remember seeing one last week that was worth $100 at some higher end steak house selling for $50.

  13. I worked in Asset Protection for a few years. Return fraud is such a large component of fraud especially for retailers that have a return policy where the customer does not need a receipt such as Home Depot and Walmart. Their understanding besides grade A customer service is if they get their product back at least the money will be spent at their stores – adding to the bottom line.

  14. Along the same line, there’s an episode of ‘Drugs Inc.’ covering heroin in Columbus, Oh (yay hometown!). Anyways the addicts would take clothes right off the rack and return them at the same place for gift cards. They didn’t even have to take the stolen goods out of the store! They showed this at a local outlet I recognized that doesn’t tag their merch.

  15. I prefer Lowes way to handle the receipt issue. They give you a Lowes ID with a barcode that rides on my key chain. This can be used in place of a receipt. Every time you buy something they scan your ID and that is saved in their system along with the purchased items. You can make a return either way at any Lowes anywhere.

    • Yeah, I like how Square does it: when you swipe your card, you can opt for email receipt, paper receipt, etc. Once you choose email and enter your address, your card (or, hopefully, a has of your card) is in their system, and any time you use Square with that card it will automagically send you a receipt via email.

  16. If retailers are truly concerned about this type of fraud all they have to do is not allow returns without a receipt. It’s so simple.

    • Or, at the very least only allow exchanges for the same item. Sometimes someone may receive clothing as a gift, but the size is wrong. Some stores may want to allow them to exchange it for the same item, but different size. But, to give any kind of credit, including a store GC, as a refund to someone who doesn’t have a receipt is just asking for fraud.

  17. Walmart and Target had a huge problem with this a couple years back. People who got WIC or other government subsidy would buy baby formula and return it to other stores to get the cash back on a gift card. They have both since changed their policy to require ID. I talked to an employee at a local Walmart when this was happening and she said the regional stores figured out the scam when they had an overabundance of baby formula in stock. Losers!

  18. I worked in the Wal-Mart electronics department during high school. Our return desk dropped off a cart of returned merchandise for re-stocking. One item of note was a VHS copy of Bambi with a Target price tag on the front.

    While I generally agree with the “no receipt, no return” sentiment, some retailers are so focused on customer service that they’re content to write off a % of shrinkage in the name of customer satisfaction, even if it means saving you a drive to Target when you realize you already own a copy of Bambi.

  19. Lets not forget my favorite way to make money. Dumpster Diving. Many retailers throw there returns away. The employee is supposed to destroy the return but doesn’t. So you find an item and return it. If it is missing something or doesn’t look returnable you buy the exact same item and use that receipt to return it for your money back. Then you return the new item you bought for a gift card.
    I’ve been doing this since 2009.

  20. Not only on gift card reselling sites. I see this on craigslist all the time as well.

    Retail operations I have always been involved with required a receipt for a return otherwise you get a store credit under your name validated by a drivers license.

  21. For those who work(ed) in retail and handled returns w/o receipt on condition of recording a DL/name/id – was this information recorded electronically or written on a receipt? Was it actually referenced for future returns?

    Just curious because the few times I’ve had to do a return w/o receipt, they simply write down my address or DL# on a paper receipt, so I doubt it really gets cross checked for future returns.

  22. One day I was in Walmart returning an item purchased online when the lady in front of me returned two iPhone 6 still wrapped in plastic. They gave her cash and she did have a receipt. I was certain I was watching some laundering in from of me.

    • This is stolen card fraud. The criminals use stolen cards to buy expensive items, get gift receipts and then return with gift receipt to prevent the store from tryung to credit back the original card. This disconnects the payout from the original fraud, and is laundering and fencing stolen goods.

  23. Stores should implement a new restocking return fee policy for returns without a receipt. For example, the total refund amount less the 33% fee for restocking the return without a receipt under its terms and conditions. It’s the customer’s responsibilities for saving the receipt. Stores can also help customers maintain receipts by providing receipts to emails or logging consumer purchases to club memberships.

    • You don’t understand the criminal interest here – they will accept a 66% conversion because it is still better than getting stuck with the merchandise and getting 0%.

      The stores on the other hand, will pat themselves on the back for reducing return losses by 33%.

  24. Whenever I have the opportunity, I tell people about the various “great deals online” scams. So many don’t want to hear it, because then…well then they know they are complicit. Thing is, most people find a way to rationalize it anyway.

    The 3 times is easy enough for the frauders to get around. It’s the shoplifter who has to have skills. The returners just have to be losers willing to do the no-risk dirty work – and there’s a plentiful supply of those around in any town.

  25. Easy no receipt only non-transferable store credit in your name at that store when first presenting identification. The policy may not be universally liked, but it will minimize the original theft which is a big saving.

  26. While tying an ID to a merchandise return card could solve one problem, it creates another. Unclaimed property laws in some states require companies to contact property owners when their identity is known. For that reason, retailers prefer anonymous stored-value card issuance.

  27. Also, the depth of discount on a merchandise return card isn’t determined because of its likelihood to be fraudulent or not. It’s based on inventory supply and popularity of the brand. If the Petco example were instead Macy’s, the discount would be far less.

  28. I used to work for Petco and I wouldn’t feel bad about the discounted gift cards. While the individual stores would try and stop the returns of stolen merchandise all the thief would have to get the return would be a call to corporate and we would have to give them the return and an apology. It didn’t matter that they said it was purchased last week and we hadn’t sold any of the items in the last 3 months. They would rather take the loss than have us managers use our judgement.

  29. I don’t feel to sorry for the retailers. The reason they do this is the same reason that REI used to offer lifetime returns–it is good business. Businesses will only take action when the cost of the fraud is more than the revenue of the customers through the door. REI eventually was forced too, so maybe these retailers will too. But it is hard for me to call something a scam when all the parties are playing along.

  30. I’ll go as high as 15% discount when I buy a gift card online. Anything more is “just too good to be true.”

    I did like a website named raisedotcom, but the last Denny’s gift card I bought from them was no good, and since I’d bought more than one with the same face value, I couldn’t tell the cards apart. It was only a card for $25, but that one bum card took the fun out of the game for me.

    I have found that stores I like (such as Denny’s and Jamba Juice) offer good deals in-store. Such as, purchasing a $25 gift card for the store will get you an extra $5 gift card during special promotions, equaling whatever discount I might have found online buying a gift card.

    Also, if you have a Target credit card (I don’t have and won’t use their debit card because that’s tied directly to a checking account) you can get a 5% discount at the register on all purchases in-store, including gift cards.