Top prepaid card fraud scams

Best practices for mitigating fraud, safeguarding reputation and ensuring a good customer experience

The prevalence of fraud in the prepaid card space is low but persistent. Consumers rely on prepaid cards for many reasons. They're confident of a card's safety because it's not tied to their personal information or banking account. But because prepaid cards are not attached to a bank account, customers who become fraud victims have no legal recourse. That makes it particularly difficult to uncover the crime.

Addressing fraud in this space helps ensure a good experience for the prepaid card customer. Good fraud prevention measures will also safeguard your organization's reputation.

Free paper: Balancing Fraud Detection and the Customer Experience

Here are some of the most popular prepaid card scams and best practices for mitigating them.

Advance fee scams

For these increasingly common scams, the details vary but the gist is the same: If the victim pays a small amount upfront – usually to cover taxes, shipping costs or a similar expense – they’re promised a big payday down the road.

Advance fee scams can take many forms. You might get an email from someone claiming to be a foreign official who promises a large share of money in exchange for a lesser amount to enable the deal. Or you could get a call from a fake lottery official who just needs money for taxes before releasing the supposed winnings.

Wire transfers used to be the preferred payment method for these types of scams. But prepaid cards have gained favor in recent years because they’re irreversible and hard to trace.

How to mitigate this scam

Be wary of unsolicited money-making offers and risky payment types like wire transfers and gift cards.

Telephone scams

Most phone-based prepaid card scams involve a fraudster and an unwitting citizen who gets duped into sharing their card credentials. But sometimes it’s employees who get scammed. This could be a merchant who gets tricked into sharing card details as part of a bogus test of a credit card terminal. Or the same fraudster could call a card issuer or a card company that reloads cards and trick them into loading a card they’ve just stolen from a store.

Preventing telephone scams

You can counter this type of scam through training and velocity monitoring.

Card swaps

A fraudster enters a location with prepaid cards hanging on racks in card packs. The fraudster steals a card pack, uses a razor blade to open it and replaces the real cards with fake cards. He then takes the card pack with the fake cards back to the store and waits for the fake cards to be activated. When they’re activated, the fraudster uses the loaded cards in his pocket to buy whatever he wants.

How to mitigate card swaps

Design a tamperless package and train clerks to detect this activity.

Method of tender

If you accept prepaid cards for payment, chances are you'll get stolen cards presented for payment. If you suspect card fraud, report it to your local law enforcement agency and the Federal Trade Commission at ReportFraud.ftc.gov.

How to avoid this type of scam

Train your retailers on how to protect the card acceptance process at the point of sale. To do this, they should:

  • Have the card present for the transaction.
  • Get a signature from the sales clerk.
  • Get an electronic authorization.

If the retailer completes these steps, even if the card is stolen the retailer won't lose the money.

Skimming

Fraudsters take a gift card or reloadable prepaid card from the rack and copy the magnetic swipe data from one card to another. Then they wait for the skimmed card to be activated. Once it’s activated, they have an exact copy of the activated card that they can use to make purchases.

Skimming can take many forms: It can happen at a restaurant or store when a nefarious employee skims a prepaid card through a device designed to steal that information. Some criminals also break into stores and replace point-of-sale terminals with skimming devices. This gives them the data they need to make purchases online or over the phone with their ill-gotten funds.

Ways to prevent skimming

Redesign packaging so that the magnetic stripe can’t be accessed without destroying the packaging. Also, put the last four numbers of the card on the package – and train salesclerks to compare those numbers to ensure the integrity of the card.

Tax fraud

People owed tax refunds from federal and state governments can choose to receive their money via prepaid cards. Some prefer this method over mailed checks because they get paid faster. But this opens the door to a certain type of tax fraud. In this scenario, criminals complete tax returns using fraudulent identities – possibly via synthetic identity fraud – and they have the proceeds forwarded to their prepaid card.

Fighting tax fraud scams

Match the name on the prepaid card account to the name on the IRS return.

Repair fraud

This type of prepaid card fraud happens when someone impersonating a support person from a recognizable tech company calls to say there is something wrong with your computer. They could reference ransomware, identity theft – any number of bogus issues.

To fix the problem, the victim is told to purchase a gift card and give the caller the card number and PIN number. But it’s all a lie. The fraudster disappears with the money, never to be heard from again.

How to mitigate this scam

If you’re unsure whether a call is legitimate, hang up and call the company in question. Scammers are relentless, and they'll try to prevent this by drumming up urgency for you to remain on the line – something a genuine caller would never do.

Utility fraud

This scam targets people who are behind on their utility bills. The scammer calls pretending to be someone from the utility company. The message is urgent: The only way to avoid shutoff is to pay your outstanding balance today via prepaid card.

The scammer gives the victim a phone number to use when calling in with their payment information. But that number is answered by someone else who is in on the scam. Utility fraud isn’t limited to phone calls, though. Scammers increasingly use email because they can reach more potential victims in a shorter period of time.

Fight back against utility fraud scams

If you suspect you’re being targeted, call the utility directly to confirm the information you’re being told is true. Utilities will never ask for payment via prepaid card to avoid shutoff.

worried woman holding credit card

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