An employee at a Saks Fifth Avenue store in Florida has been arrested for running a multi-year gift card scam that cost the company hundreds of thousands of dollars—the latest event to highlight the growing issue of organized retail crime.
Saks client development manager Peter Matthew Pagan was arrested and charged with grand theft, organized fraud and credit card forgery last week, Local 10 News reported. Pagan was accused of defrauding the retailer’s Bal Harbour location out of about $800,000, authorities said, after Sak’s internal investigation found that he spent two years illicitly obtaining gift cards that he would either resell or use to make purchases.
Gift card sales are on the rise, bringing with them a host of vulnerabilities for brands, retailers and consumers. “Whereas gift cards were once an in-store purchase, it is now a convenient go-to for online shoppers,” Emily Grinzweig, director of insights at fraud management service Riskified, wrote in the company’s recent holiday report. Consumers spent 27 percent more on gift cards than last year, averaging $270 per person, she added.
According to the Federal Trade Commission (FTC), gift cards are more frequently reported for fraud than any other payment method, with scams reaching “staggering new highs” in recent years. During the first nine months of 2021, nearly 40,000 people reported $148 million in gift card-related losses. According to the commission, the vast majority of victims do not report these crimes, so the FTC’s numbers represent “only a fraction of the harm these scams cause.”
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Most gift card-related crimes are reported by consumers who have been targeted by bad actors by phone, the commission said. Thieves impersonate big-name brands like Target, Walmart and Apple, and instruct their targets to purchase gift cards at these stores in order to resolve a supposed security issue with their accounts. They then demand photos of the cards in order to verify the shopper’s information—allowing them to redeem the cards themselves. The FTC reported that scammers may also claim to be calling from government agencies like the Social Security Administration. Gift card scams—and losses—reached an all-time reported high of $51 million during the first quarter of 2021, up $40 million from the same period in 2018.
“Gift card fraud and e-commerce fraud in general has been on the rise in recent years,” Signifyd director of risk intelligence Michael Pezely told Sourcing Journal. The online fraud prevention platform analyzed this type of fraud from June through November, finding that “fraudulent transactions to buy gift cards were soaring—well beyond the rise in attempted fraudulent purchases overall.”
Covid-19 exacerbated all retail crime, incentivizing thieves “to expand their targets and the vulnerabilities they exploit,” Pezely said. The company’s recent State of Fraud report found that by mid-2021, fraud pressure on Signifyd’s network had grown by 350 percent compared to pre-pandemic levels.
Signifyd’s client data—including insights from Lacoste, Stance and Quicksilver—revealed that gift card sales during the back half of 2021 jumped 164 percent year over year. Fraud pressure on transactions involving this method of payment increased by 121 percent during the six months analyzed. Signifyd tracks fluctuations in fraud pressure by aggregating the volume of suspicious transactions on its commerce network, which includes thousands of retailers. “’Very risky’ orders are those that contain enough red flags to be considered fraudulent,” Pezely said.
This rise of e-commerce opens up new opportunities for criminals, he added. “As for gift cards, it turns out they are convenient both for consumers and for fraudsters,” he said, noting that they can’t be easily traced to their owners and are easy to convert to cash online.
Signifyd detected a “dramatic increase” in bot attacks during 2020 as the pandemic took hold, “and a significant movement into new flavors of fraud and abuse, including false item-not-received claims and return fraud,” Pezely added. These types of schemes have continued to gain steam.
Brands that sell online typically try to guard against these attacks by “increasing their defenses”—requiring extra steps in the purchase process to confirm a consumer’s identity, increasing scrutiny of online orders as they are placed, and even implementing manual reviews. Those methods can slow down the purchase process for legitimate transactions, and even inadvertently reject them altogether.
“These legacy approaches are at an added disadvantage when it comes to gift cards because when gift cards are purchased online, they are most often delivered electronically, meaning a fraudster doesn’t have to worry about a mismatch between the order’s billing address and delivery address,” Pezely said. With a standard purchase, such a mismatch might be an indication of potential fraud. But if a criminal is able to illegally obtain someone’s financial information, they could purchase gift cards and have them sent to any email address they want.
Amid the uptick in e-commerce fraud, Signifyd has taken a different approach to detection. “We rely on the millions of transactions on our network and machine learning models to provide insights into the identity and intent behind every transaction,” Pezely added. The algorithmic model provides an “instant decision” about whether an order is good to go, or should be stopped in its tracks. The company is constantly working with clients to identify new threats, passing along those insights to its product and data science teams to create new models for detection.
Digital gift cards aren’t going away so brands must prepare to combat bad actors. “It sounds kind of basic, but the way to stay ahead of these trends is to remain ever-vigilant,” Pezely said.