If you are part of the 81% of eCommerce retailers who offer eGift cards, you should be celebrating. eGift cards are growing wildly popular and business is booming. 82% of retailers who offer eGift cards experience an increase in sales, and global eGift card sales are projected to hit $698.2 billion in 2024. It’s definitely a great time to be offering eGift cards!

eGift cards offer a fantastic alternative source of revenue for retailers, but they have also become a cause for concern. eGift cards are fraudsters’ favorites, suffering the highest fraud attempt rate among all products sold between Black Friday and Christmas. Naturally, retailers react by erring on the side of caution– Best Buy, Target and Walmart have made changes to their gift card programs by implementing stricter purchasing rules. Unfortunately, having rules restricts your sales conversion rates by driving genuine customers away. That’s a waste, since eGift cards are perfect little tools to increase your customer base! Let’s evaluate the effectiveness of a rule-based fraud management in allowing you to take full advantage of the potential of eGift cards, without compromising your security.

Tackling eGift card fraud: fraud detection rules and their restrictions

In an attempt to beat the crooks, most retailers increase their security measures by implementing a rule-based fraud management. Unfortunately, these rules might very well be smashing your chances at increasing your customer base. This is especially when millennials are your biggest consumers and unsurprisingly, they are the least tolerant of such security hurdles.

Let’s examine some of the most common rules implemented, and the ways in which they might affect you:

1. Daily purchasing limits

This rule limits customers to purchasing a certain number of eGift cards at a time, up to a certain value. This rule is meant to reduce losses if a fraudster uses stolen credit cards to buy a truckload of eGift cards. These eGift cards can be easily resold on online discount sites and converted into cash. Thus, most retailers would require customers to contact them personally to raise the daily limit or buy in bulk.

Problem: Restricting customer acquisition during holiday season

Rules impede your holiday sales

Put yourself in the shoes of your customer: Imagine you were shopping for eGift cards as presents, and were intending to purchase 5 cards with a value of $100 each. Unfortunately, the purchase limit was set at $300 per day, and you were unable to complete your purchase several times. The next logical thing you would do would be to find a different store that could allow you to purchase what you needed without restrictions.

Having daily purchasing limits makes it inconvenient for legitimate customers to make purchases. Eventually, you are pushing your customers away. This is particularly so if you are a retailer with mostly small-ticket items. Since your customers are more price-sensitive, the holiday season is undoubtedly the biggest money-making period for you, representing 30% of yearly sales for some retailers. It’s also one of the few times your customers are willing to spend more, either on themselves or loved ones. With 3 out of 4 adults buying an eGift card during holiday sales, it goes without saying that this is a critical period for you to address. Unfortunately, your rules are likely driving your customers into the arms of your competitors.

2. Maximum value of each card sold

Many retailers also place limits on the amount loaded onto each eGift card. This is to deter money launderers from exploiting the cards by anonymously loading cash onto them. Case in point: the maximum value allowed on each Uniqlo eGift card is $250.

Problem: restricts customer acquisition with poor user experience

Rules compromise customer experience

Take this scenario: Patrick is browsing an online tour agency site, intending to treat his parents to a romantic getaway for their wedding anniversary. After much difficulty of choosing one location, he has decided to buy an eGift card, which would give them the freedom of choice. Unfortunately, the $500 maximum value purchase stops Patrick’s purchase of a $2000 eGift card from going through. He is disappointed, and jumps to a different store that allows eGift card value purchases as high as $5000.

If you are a retailer with big-ticket items, the capped dollar restriction of each eGift card might put your customers through a similar experience. To put it simply, customers can easily reach and exceed the capped value due to the costliness of your products. Placing such limitations on your customers’ purchases will have dire effects, especially since you grow your customer base by offering a fast and hassle-free user experience. Your customers value a good shopping experience, and it doesn’t take much for them to switch over to your rivals. In fact, 67% of customers are “serial switchers”. It is near impossible to attract dissatisfied customers to patronize again, much less have them introduce their friends to your brand.

3. Attaching a validity period to each card

Retailers have also taken to giving each eGift card a limited validity. Most people do not use their eGift cards straightaway, with only 30% of recipients using the card within a month. On the contrary, crooks would redeem fraudulently obtained cards immediately in order to resell them as soon as they can. Giving eGift cards a validity period will also make it easier for retailers to control the rate of use. For example, customers cannot redeem Broadway.com cards valued at more than $500, until at least 96 hours after purchase.

Problem: restricts customer acquisition by reducing value of products

Rules reduce the quality of products sold

Suppose that you have overestimated the demand for dairy products and you have cartons of milk expiring in 6 days. You hope to get rid of them before they expire, and that’s when a lady comes in with an eGift card, wanting to buy the milk. You were elated until she realizes that the eGift card can only be activated and redeemed after 72 hours. If she does purchase the milk after redeeming the card, it will expire in only 3 days. She decides against the purchase, and there you have it: you lost a potential customer.

If you are a retailer selling perishable goods, you are clearly aware of the challenges you face: your goods have a highly variable demand, and only a limited period of product life cycle. This means that it is not easy to maintain your inventory, and there are often situations of shortages or excesses. Your priority is for the goods to reach your customers in the best condition possible, at the fastest time possible. Unfortunately, attaching a validity period to your eGift cards will only make it harder to sell your products within their life cycle. This leads to either unhappy customers, or wastage of food. More crucially, this means that your customers will have a bad shopping experience, and will not return. 

Growing your customer base with eGift cards

It is evident that a rule-based fraud management restricts your sales conversion rates heavily. These rules hinder you from taking full advantage of the benefits of offering eGift cards – and there are many. eGift cards encourage customers to spend more, and are also offer a surefire way to attract new faces. Customers who receive your eGift cards as gifts will visit your store to make good use of the card. These cards are also great for your loyal customers to conveniently share their love with others, increasing your brand awareness. Furthermore, more than half of these eGift card recipients will also visit you repeatedly to deplete the value in the card. It’s safe to say that eGift cards have great potential to increase your customer base – and it’s up to you to maximize it.

Out with the hard rules, in with the accurate decisions

The key is to have a fraud management solution that can make accurate decisions. A rule-based fraud management builds a rigid wall that keeps out genuine customers, restricting the sales conversion rate. In contrast, enhancing the accuracy of your decisions will allow you to proactively detect and block solely illegitimate transactions, in real-time. This gives your genuine customers a good shopping experience, keeping them happy and encouraging them to return with their friends and family.

Thus, it is important to reduce reliance on rules and instead, move towards a system that combines behavioral analysis and machine learning to make more accurate decisions.

1. Focus on behavior

Instead of rigid rules that block transactions based only on the characteristics of the final order, such as the number of eGift cards, or the amount of value bought, you should be looking at how the purchase was made. In other words, you should be looking at the user’s behavior to differentiate between genuine and fraudulent behavior.

A machine learning system can analyze every incoming transaction in real-time, slicing into millions of data points within seconds. Real-time pattern recognition identifies fraudulent patterns based on the user’s behavior, using data points such as how the cursor moves or whether the user has connected to social media. This also allows the system to detect when a fraudster is trying to appear legitimate by making micro-changes between each eGift card transaction, to avoid suspicion for purchasing many cards at once. By accurately identifying fraudulent behavior, you can be in a better position to block fraud without blocking genuine customers.

2. Take optimized risks

Making accurate decisions also involves taking optimized risks. Rules are ineffective because they are rigidly risk averse. Rather than to risk accepting a fraudulent transaction, these rules choose to completely prevent the transaction from taking place. However, prohibiting a genuine customer from buying 20 eGift cards at one go will not only cost you potential revenue, but also the lifetime value of the customer.

Instead, you should be taking optimized risks. One way to do so is to make sense of the risk financially, by seeing transactions as part of an investment portfolio. CashShield does this by combining machine learning with high frequency algorithms (HFT) to find the optimal risk level to maximize the merchant’s revenue potential. After which, a decision is made to accept or reject a transaction. By optimizing your risks, you can be more accurate in making decisions to accept transactions from genuine customers, instead of subjecting them to hard rules.

The perfect gift for all seasons

eGift cards are getting more attractive than ever to consumers, which translates to big business for retailers. To fully capitalize on the potential of the eGift card to increase your customer base, make sure your rule-based fraud management does not drive them away. The right fraud solution will empower you to maximize the perks of the eGift card by attracting more customers and earning their loyalty, while keeping the fraudsters away.