Prepaid Card Fraud

Prepaid (a.k.a. Stored Value) card usage is growing rapidly, the value of branded and private label cards in the U.S. being expected to rise to in excess of $170 billion in the U.S. over the next 3 years.

Closed Loop
Closed Loop prepaid cards are typically gift cards issued by retailers which can only be redeemed for goods and services at that retailer but not for cash. Mostly, such cards are not reloadable once the initial value is used.

Open Loop
Open loop cards are network-branded (i.e. Visa, Mastercard, American Express etc) prepaid cards which can be used at any merchant that accepts the payment network’s cards. In some cases, they can also be used to make ATM cash withdrawals. Network branded prepaid cards are becoming increasingly accepted as alternative ways of making, for example, payroll payments and cross border transfers. Network-branded cards are generally reloadable via direct deposit, internet banking or at participating retailers.

Fraud and money laundering
A clear attraction of prepaid cards is the possibility of delivering financial services to the unbanked. But these same features have increasingly led to pre-paid being targeted by financial criminals for fraud and money laundering purposes.

For example, in the case of gift cards, the 2005 National Security Retail Security Survey estimates that more than 60% of gift card fraud was attributable to insider employees at gift card vending locations, with 13% attributed to lost and stolen cards.

Prepaid card fraud can also be intimately linked with credit card fraud wherein a lost, stolen or counterfeit credit card (or even just the card details, not the physical card) are used to buy or load a succession of anonymous prepaid cards, which are then sold on by the card fraudster at a discount to the value they contain, in order to realize value.

Anonymous network-branded prepaid cards are a tempting vehicle for money launderers, particularly as such cards can be used cross border (for example, to withdraw cash at ATMs), which presents a quick, easy and anonymous way of transferring money.

Combating fraud and money laundering
To combat fraud and money laundering institutions, retailers and payment networks need to introduce systems which can monitor key parameters and alert or block prepaid card usage. At a simplistic level, typical parameters which need to be monitored include

• Number of accounts/cards per customer
• Number of card loads per day
• Number of account loads daily and over time
• Number of account loads on a card at the same location

Alaric’s Fractals fraud detection system provides a fast to deploy way for monitoring such parameters in real time and for creating intelligent models based on such parameters. Fractals enables end users to set thresholds and parameters and to easily create, test and deploy sophisticated rules without programming knowledge, enabling fraud analysts to react rapidly in a dynamically changing environment.