by Ronda Sifford
Platinum Member, Merchant Risk Council
In the e-commerce world alternate payment solutions are a viable commodity for capturing additional demographics and reducing bank fees.
One solution we implemented was gift cards. Gift cards were not much of a stray from your traditional paper gift certificates, however they did offer many added benefits.
Paper gift certificates opened several doors for fraudulent activity and basically closed the door on controls. Once the certificate was sold, it was virtually impossible to track and shut down.
Technology increased the opportunity for counterfeiting, alteration and forgery and as a result we shifted toward a gift card solution as an alternative.
If you are considering utilizing gift cards in your business, this piece simply outlines some suggestions from the experiences we encountered.
The following document is not a recommendation against or for gift cards and in no way should be used as an operating procedure for your business. Each business requires individual evaluation to determine what solutions will best suit your needs.
First, prior to entering into the cash card arena, we evaluated our chosen vendors closely and ensured that they managed business for us on a private network, that the database was maintained separately from other clients, and we were are assigned a unique BIN range.
After reviewing several proposals and determining a well-suited vendor we were ready to set up teams to begin our project.
We have seen that retail cash cards present themselves as a convenient payment vehicle for our customers and a valuable marketing tool for our business. Customers cannot only give the cards as gifts but they can experience the value of using them as a savings tool by incrementally adding funds for a future purchase.
Also, they pose the added convenience of re-loading funds for recurring purchases, both personal and business related. Some of our customers will reload several cards for employees to purchase supplies or add value to cards for student expenses while away from home, leveraging a way reconcile and limit expenses.
As a business incentive, gift cards can be used for applications such as, promotions, customer service issues and refunds.
Since the tender of a gift card, when used, is up-front, the management of accounting processes and controls are significant. Once or in concert with the overall implementation project, there are many back-end operational functions that should be addressed prior to releasing the product for purchase and use.
Communication between your accounting departments and your gift card vendor will be imperative for reconciling cash in and cash out with very specific procedures for identifying un-matched transactions.
After an order is placed using a gift card, communication could be interrupted either from the merchant to the vendor or from the vendor back to the merchant.
If this happens, funds could be decreased from the card without being deposited with the vendor or vice versa.
This would cause an imbalance of gift card values. You should set up a program to monitor any inconsistencies and all anomalies should be addressed immediately to prevent both customer inconveniences and incorrect general ledger figures.
We specifically assigned responsibility to both IS and Accounting employees to oversee these processes with our vendor.
Another consideration to be made is whether the cash cards will be accepted between both your e-commerce and brick and mortar business, if applicable. If the cards are universally accepted, you will need to determine which features will be allowed in both environments.
There are certain features that may present different obstacles between shopping environments.
For example, gift cards can be reloaded for continued use. However, reloading via the web can increase fraud and it is advised that extreme caution is used when verifying this type of orders.
The web option presents a digital goods fraud dilemma that may increase your bad debt liability. Since nothing is actually shipped and the transfer is entirely electronic, tracking and fraud prosecution can be extremely difficult.
For example, verifying the billing address (AVS) will not have the same value as it would for an order where something is actually shipping to a physical address.
Many gift card vendors offer a reload by phone option for customers at an additional cost to the merchant for fraud management and processing.
As mentioned above, fraud management is an area that cannot be neglected. Since gift cards are easily converted to cash, their purchase should be closely monitored and appropriate changes made to your fraud screening models to accommodate the new product.
You may want to focus additional attention to orders for gift cards and set up some unique screening tools. Allowing your customers to cash out gift cards may also present a fraud concern and should be reviewed by management to determine the customer service / fraud equation.
If you are considering offering the sale of gift cards in a brick and mortar location, pay special attention to the packaging of your cards. Factors to consider are whether you intend to merchandise on the floor or in restricted areas.
In general, the cards are not activated until processed through the point of sale; however, there are internal issues to consider surrounding the security of the gift card number and pin.
A fraudster or dishonest employee can use the card and pin numbers of a gift card later purchased by a customer to commit fraud. A velocity tool can be implemented, linked with the telephone inquiry system, to prevent the fraud. The cards can be packaged to conceal the pin number from view and tampering at an additional cost from your chosen vendor.
Fulfillment and packaging for e-commerce transactions offer additional challenges. First, you will need to determine which best suits your business model; to fulfill the cards yourself at pre-loaded amounts or fulfill via a third party vendor.
By fulfilling yourself, the cards may be pre-loaded and the security of your inventory is critical to prevent loss. Then you will need to develop a method for linking the cash card number purchased with the e-commerce order. In the event a card is not received or lost, you will need to reference the number to verify the card amount and reduce funds if applicable. Or, you may choose to fulfill via a third party at an additional cost to manage these processes.
Once customers begin to utilize the cards on your website, take into consideration that customers may have several cards and the amount of tender lines at check-out will need to be significantly increased.
When the card is entered as tender and the transaction is completed, the validation process will occur immediately with your gift card vendor to determine a valid card/pin combination and the availability of funds.
This process should happen in real time whether you are currently using real time authorization or operating in a batch mode. This will prevent multiple use of the same card and increment or decrement value appropriately.
For security purposes, it is strongly recommended your IS group develop a velocity tool to prevent fraudsters from generating random card/pin combinations.
Some other fraud concerns to be evaluated are from an internal standpoint. A strict limitation of access to your inquiry and adjustment browser functionality for gift card valuation is critical to ensuring that internal controls are in place.
There are many scenarios where a gift card(s) balance(s) will have to be manually adjusted. Some common situations we discovered were for cancelled transactions, refunds and non- receipt claims.
The action taken depends upon whether the request to cancel occurs prior to credit authorization or afterward. Generally, if the request to cancel is after credit card authorization, the funds will not automatically be reimbursed to the gift card balance requiring a manual adjustment.
In the event that a cancel or refund request is received after the original order was placed, it may be necessary to contact the customer to ensure they still have the card in their possession, otherwise a new card may need to be sent.
We have found that the gift card solution tapped a wide demographic. One group are those consumers who believe that their personal information may be compromised by entering credit card information on the Internet.
The ability to purchase a gift card in a brick and mortar environment for use on the Internet can be a comforting factor in generating new traffic to the web.
In conclusion, we found the main areas to address, when implementing the sale and use of gift cards, were:
- customer experience
- communication with our vendor
- accounting
- fulfillment and
- fraud.
Overall, the addition of gift cards has been a good experience and a valuable compass to test the impact of alternate payment solutions.
Published with permission from Merchant Risk Council. This article was written by Rhonda Sifford, a Platinum Member of the Merchant Risk Council.
The Merchant Risk Council FKA Merchant Fraud Squad is a not-for-profit organization, formed in 2000, with currently over 6000 subscribers. Through its website, www.MerchantRiskCouncil.org, the organization educates merchants about fraud prevention techniques and provides a forum wherein best practices and new anti-fraud initiatives can be shared.
