Stored Value Card Statistics by iha11513

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									Fighting Stored Value Card Fraud


     From “Paper to Plastic”



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               Paper Certificates
                   Then…..
• Paper certificates represented a small part of
  business
• Easy to copy and counterfeit
• Labor intensive to manage
• Difficult to determine paper trail
• Shortages often went unresolved


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              Stored Value Cards
                   Now…….
• Most retailers have eliminated paper gift
  certificates
• More easily controlled
• Less Fraud
• Less Labor intense
• Can be sold thorough different venues
  –   In store
  –   Third Party Sales
  –   On-line
  –   B2C/B2B
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         Stored Value Cards
              Now…….

Profitable model
    • Stored value card breakage: $43 million of pre-
      tax income for F.Y. 2005 – Best Buy
    • Limited Brands reported a $30.4 million gain
      from breakage on its gift card program in its
      2005 fiscal fourth quarter




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                                             Some Statistics
                                   Retail stored value card purchase                              ~$100
                                            volume forecast
                                               ($ billions)
                                                                         ~$75

                                                                  ~$60

                                             ~$45
                   ~$36




                  2002                       2003                 2004   2005E                   2006E
Source: First Annapolis estimates and research; company surveys
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            Some Statistics

• Sales of “closed loop” stored value
  cards totaled $47.1 billion in 2004.
• Represented 12% of 2005 holiday
  sales
• By 2008 predictions are that stored
  value card sales will reach $97.7 billion.


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                Some Statistics
• Stored value cards are most popular among 25-34 age
  group
• 75% of all US Adults have bought or received a stored
  value card
• US Adults have purchased an Average of 6.5 stored
  value cards Annually in 2005
• 57% of US Adults spend more than the initial value of
  the stored value card
• 75% of those US Adults adding their own money to a
  stored value card, to make a purchase, add up to 25%
  of the purchase price
• 2005 projected average spend using stored value cards
  is $248 vs. $183 in 03
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           Some Statistics


• 93% of all US teens have bought or
  received a stored value card
• 82% of US children, age 5 -14, have
  bought or received a stored value card
• Birthdays are cited as the most popular
  giving occasion
• Winter Holiday Season is the second most
  popular event
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                      Some Statistics

• Men and women purchase equal amounts of stored value
  cards, but men received them more (31% Men vs. 28%
  Women)
• Gift Card Market Segment - Share:
   –   Retailer (Hard line & Soft line) - 70%
   –   Restaurants & Quick Service Restaurants (QSRs) - 12%
   –   Supermarkets & Grocery Stores - 6%
   –   Entertainment-based Businesses - 5%.
• Stored value cards were the 3rd most popular gifting item
  in 2005 behind video/CD & apparel Gifts for the 2005
  Holiday Season
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                 2005 Recap
   Holiday Season Stored Value Card
              Est. Sales
                 ($B)               ~$18.5
~$17.2              ~$17.3




2003                   2004                           2005
                                                    (Estimate
                                                   Pre-Holiday)

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     First Generation Stored Value Cards


• Little understanding of how they work
• Minimal initial security features included
• Little L.P. Education on subject
• Mandatory guidelines for credit card security
  (PCI, CISP)
• No exception reporting
• Potential fraud was unknown

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  First Generation Stored Value Cards



• Many not prepared for the potential
  fraud changes
• Customers can be negatively impacted
• Low industry exposure, compared to
  credit card fraud


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    The Life Cycle

                     Implementation
                        Testing
Personalization        QA System
                      Compatibility
                       With retailer
                     P O S platform




                          Retailer
                  Activates card through
  Customer
                       POS platform
                   $$$ put on the card



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           Stored Value Card Fraud

• Retailers combat fraud & shoplifting
  everyday
  – Fact of doing business
     • Bank Check        • Vendor Fraud
      • Cash              • Shoplifting
      • Credit cards      • Debit Cards


  – Strong internal controls create barriers for fraudsters
  – Proactive loss prevention anti-fraud measures
  – Exception Reporting that identifies fraudulent activity

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              Stored Value Card Fraud
•   Types of Gift Card Fraud
    – Associates card swapping at the register
    – Cashier copies the human readable account number and
      strips the scratch off to obtain the PIN number for web
      purchases
    – Smearing of barcode & human readable account number
    – Individuals create a “duplicate” label of a UPC Barcode &
      places “1st” card label over “2nd” card UPC Barcode
          •    Dials for dollars and then uses cloned card




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        Stored Value Card Fraud

•   Types of Gift Card Fraud
    – “Skimming” - Fraudster invests in magnetic stripe hand
      reader/encoder & makes duplicate credit cards and gift
      cards
    – Duplicate gift & credit cards are produced
          •   Magnetic stripe encoding machines & computers
               –   “Skimming – to create duplicate credit & stored value cards
          •   Fraudsters repeatedly called the merchant’s 800 #’s
               –   To determine if skimmed stored value cards were active
               –   Manual & auto-dialers were used to call the 800 #’s



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             Stored Value Card Fraud

• Types of Gift Card Fraud
   – Fraudsters obtain active credit card & gift card account numbers from
     employees of Retailers
       • Retail Associates, waiters & waitresses at restaurants are bribed for active credit card
         numbers
       • Retailers’ Point of Sale (POS) “receipt tapes” are stolen to obtain credit card & gift
         card numbers
   – Fraudsters present “stolen & counterfeit” credit cards to purchase stored
     value cards
       • P.O.S. internal breech allowed for value to be put on stored value card prior to credit
         card charge authorization
       • Remote fraudster accomplice with “skimmed – duplicate” stored value card made
         purchases at “sister store”, after being “text messaged” that stored value card has
         value on card by fraudster who is trying to make purchase of stored value card



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Stored Value Card Fraud




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Stored Value Card Fraud




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Stored Value Card Fraud




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Stored Value Card Fraud




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Stored Value Card Fraud




          Skimming Device
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               Case Study

•   $19 K Case
•   Associate loads one card for $300
•   Reboots POS
•   Transfer balance from card to 3- $100 cards
•   Sells Cards
•   Uses for exact tender transactions
•   Charged with grand larceny

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Case Study




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      Loss Prevention Opportunities


• Work with IT or Stored Value Card Vendor on
  POS System Controls
• Use of Exception Based Reporting
  – Multiple IVR Inquiries
  – Employees using Stored Value Cards
  – Stored Value Cards used to purchase other
    Stored Value Cards
  – Multiple Stored Value Card Purchases by the
    same account number
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    Loss Prevention Opportunities


• Bar Code Solution
  – IT Solution
  – Link Barcode to Card Number
  – Database difficult to compromise
  – Difficult to duplicate barcode



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      Loss Prevention Opportunities

• Establish Policies/ Guidelines
  –   Do not accept checks
  –   Do not accept hand keyed credit cards
  –   Handling of lost or stolen cards (State Laws)
  –   Investigation Process
  –   Eliminate Return Cards being converted to cash
• Placement of Physical Cards at POS
  – Visible Location


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          Loss Prevention Opportunities

• Periodic review of In-Store stored value Card inventory
   – Verify that “scratch offs” are still intact
   – Check to make sure no “list of stored value card account
     numbers” are located under POS “counters” or “registers”
• Perform criminal background checks on key associates
  who have access to cash/credit & stored value cards
• Promote Communication of stored value card fraud
  issues
   – Internally
   – Externally


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   Loss Prevention Opportunities


• Value Add Cards
  – Reduce per transaction amount that can
    be reloaded
  – Reduce the number of times a card can
    be reloaded



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     Loss Prevention Opportunities


• Communication
  – Inform your stored value card vendor of any
    credit card or gift card fraud trends
  – Inform law enforcement agencies
  – Work with the trade associations
    • N.R.F.

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     New Venue Challenges

• On-Line purchases
  – Electronic
  – Credit Card not Present
  – Open to Organized Retail Crime
• LP Opportunities
  – PIN activation
  – RNG for IP address
  – Fraud admonitions
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           Industry Initiatives


• Best Practices - NRF & RILA working with
  retailers and EBay to stop fraud
  – One prominent retailer reported to the NRF that
    80% of their cards sold over eBay were fraudulent
  – Result – EBay instituted new anti-fraud measures
      Maximum of 3 cards sold at a time
      Limited the total dollar amount to $500


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           Conclusion

• The use of stored value cards will
  continue to increase
• Risks will be ever-present, unless you
  adopt effective controls
• Effective controls will impact long term
  program success
• LP efforts need to evolve at the same
  rate of the business
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