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Buying gift cards with a credit card gets harder, for now

Fraud risk plus slow EMV certification mean rewards chasers thwarted

By Bobbi Dempsey

Buying gift cards with a credit card gets harder (for now, at least) Rob Goebel, Lana Kotioukova/CreditCards.com

 

Buying gift cards with a credit card gets harder (for now, at least) Rob Goebel, Lana Kotioukova/CreditCards.com

Consumers who attempt to use a credit card to buy gift cards at certain retail locations may find themselves out of luck – at least for now.

In an effort to minimize potential loss due to fraud, some stores have recently enacted policies that limit or prohibit gift card purchases using credit cards as payment. This stems in large part from new credit card rules that went into effect in October 2015, requiring merchants to upgrade their equipment to accept EMV chip cards or face liability for fraudulent charges made with EMV cards.

Those efforts have been slowed for many merchants by delays in certification of their new EMV equipment by the card networks. The card companies are working on speeding up the certification process and creating new rules that will lower merchant liability for fraudulent small-dollar purchases. But changes are still some months away.

As more merchants are enabling to accept EMV chip cards to reduce counterfeit card fraud in stores, gift cards are becoming a high-value target for fraudsters.

— Randy Vanderhoof
Director, EMV Migration Forum

Greg Ferrara, senior vice president of government relations and public affairs for the National Grocers Association, says merchants that aren’t able to put their new equipment into service risk incurring significant losses in the form of chargebacks caused by fraudulent or disputed charges. “Just in the first quarter of 2016 alone, some stores have seen chargebacks that were greater than all of last year.”

In many cases, stores that want to avoid incurring major fraud-related losses have placed tighter controls on gift card sales. Giant Food, a grocery store chain with almost 200 locations throughout the East Coast and mid-Atlantic region, recently enacted a policy prohibiting the purchase of gift cards with a credit card. The company wouldn’t comment on the policy, but signs posted at Giant store checkouts inform customers that, “Effective immediately, all purchases of Visa, MasterCard, American Express Gift Cards and all General Purpose Reloadable or Prepaid Cards may only be made with Cash or Bank Pin-based Debit.”

Mallory Duncan, senior vice president and general counsel at the National Retail Federation, says the NRF has noticed the increase in these policies – and, like Ferrara, he attributed the increase to the bottleneck in the EMV certification process. “Many merchants have said they aren’t going to sell gift cards at all, or they limit the ways people can buy them,” Duncan says. “Some retailers have put a cap on the dollar amount or quantity that someone can buy at one time.”

While he doesn’t have exact figures, Duncan says these policies are very common right now. “If they have gotten certification, it’s less likely.”

Timm Walsh, Retail Gift Card Association Board chair, says the topic is affecting many gift card retailers. “More and more retailers are putting safeguards in place, especially for higher-dollar transaction amounts.” 

Walsh notes that retailers are making individual determinations about whether such policies are needed, often based on their assessment of potential risk. “It varies by retailer based on where they are in the EMV process. Retailers are looking at a lot of reports and trends, to try and identify where the potential for fraud is most common.”  

Gift cards pose strong appeal – and unique concerns
Why the focus on gift cards? The short answer is because they are extremely popular with both customers and scammers. Crooks will use a stolen credit card – or (in the case of online purchases) credit card number – and quickly buy a bunch of gift cards or prepaid cards, before the stolen or compromised credit card is frozen or deactivated.

These illegally obtained gift cards can then be sold on gift card exchange sites, essentially giving the scammer a way to turn a stolen credit card into quick cash.  “They are thriving on the exchange sites where they can sell gift cards quickly,” Walsh says. “Bargain hunters may then unknowingly buy these illegally obtained gift cards, lured by the discounted prices.”

Randy Vanderhoof, director of the EMV Migration Forum, says scammers often juggle a succession of cards quickly. “As more merchants are enabling to accept EMV chip cards to reduce counterfeit card fraud in stores, gift cards are becoming a high-value target for fraudsters,” Vanderhoof says. “This is because fraudsters can buy a gift card with a counterfeit magnetic stripe [credit] card at a location that is not chip-enabled, and then use the gift card at the chip-enabled location or sell the gift card for cash.”

It's definitely making things more difficult for rewards chasers, especially people that were buying cash equivalents like Visa, MasterCard or American Express gift cards.

– William Charles
Founder, Doctor of Credit

Gift cards may be irresistible to scammers, but they also mean big business to many retailers. A 2015 CEB report forecast a record $130 billion in U.S. gift card spend last year, an increase of more than 6 percent from the year before.

One major credit card company sees these gift card policies as a short-term inconvenience while improvements are made that will ultimately benefit everyone (except maybe scammers). MasterCard declined an interview request, but provided this statement: “As some merchants continue their move to accepting chip cards, they’re temporarily modifying some policies to help manage against potential fraud. What we see now is a short-term effect on both merchants and issuers as the market migrates to chip and adopts the EMV standard. This is similar to what other markets experienced as they adopted chip. Ultimately, the U.S. migration will reduce counterfeit fraud in the long run and will bring the U.S. in line with other markets.”

Rewards chasers lament
While these new policies may be an inconvenience to all gift card shoppers hoping to use a credit card, the trend is particularly unwelcome among one group of consumers. Die-hard credit card rewards points collectors – often known as “rewards chasers” – frequently buy gift cards with a credit card in order to accumulate rewards points for the purchases – especially when they’re trying to hit a certain spend requirement for a sign-up bonus.

William Charles, founder of Doctor of Credit, says, “It's definitely making things more difficult for rewards chasers, especially people that were buying cash equivalents like Visa, MasterCard or American Express gift cards.”  

Lee Huffman, a credit card expert who founded BaldThoughts.com, says his local grocery stores stopped accepting credit cards for gift card purchases because they haven’t yet switched to the new chip card technology. As someone who routinely makes significant gift card purchases to reap a variety of credit card benefits, Huffman says this has had a big impact on his normal routine.

“I've personally had to change my gift card buying strategy with the recent changes,” says Huffman. “I used to buy $10,000 to $15,000 a month from my local grocery stores because of the convenience and bonus category multiples I would receive for ‘grocery’ purchases.” Surprisingly, Huffman says his level of spending is actually small compared to some other rewards chasers. “I know of people who buy 10 times the amount of gift cards that I buy.”

For the time being, shoppers should just be aware of these policies, and check with retailers about their specific rules regarding gift card purchases. Details about such policies are often posted on a merchant’s website. Walsh notes that rather than enact an outright ban on credit card transactions involving gift card purchases, some stores are just adding a few simple security measures, such as checking IDs before processing these charges.

Meanwhile, Huffman advises consumers who want to continue buying gift cards with their credit cards to visit rewards blogs and online forums to keep up on the latest news – and also to learn tips and tricks for maximizing their rewards from other types of purchases.

See related: Card issuers impose limits on rewards card churningVideo: Do I need a PIN for my EMV credit card?, 7 things you need to know about gift cards

Published: July 18, 2016


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Updated: 12-11-2016


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