Broken Gift Card Industry Moves Online, But is it Safe?

The gift card industry is broken. Bold opinion, but one that is pervasive among the expanding virtual gift card industry, encompassing emailed gift cards, social media gift cards and gift cards accessible through mobile applications. As physical gift cards become dated, online gift cards have stepped in to fill the void. But as businesses increasingly tap into the virtual gift card market, so have scammers, decreasing consumer confidence in online gift cards.

Facebook, easily the most prominent social network, has been frequently hit by hackers in the last year as companies gravitate toward the profit potential of the networking portal. Repeated attempts to curb hackers – frequently promulgating gift card scams – have seemed to be for naught. Just this past week, a fake $25 Apple iTunes Giftcard scam widely circulated Facebook.

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Such wrongdoing hasn’t slowed the tide of businesses moving to electronic platforms, though. Consulting firm Aite Group projected the cash value of virtual cards to jump to $10 billion in the U.S. in 2015; last year the value was $500 million. A bevy of startups are angling to cash in on this presumed rise. GiftRocket, which sends gift cards to users mobile phones based on which stores their GPS shows they are entering, has raised significant money from prominent venture capital firms. Cold Stone Creamery gift cards can be sent to consumers via Facebook when they mention they’re heading to a Cold Stone location.

And this presumed change is predicted to benefit both consumers – with personally tailored gift cards and frequent reminders to redeem – and retailers – studies show that cardholders spend 50 percent more than a cards value once the card is redeemed. Currently, the average U.S. household has five gift cards lying around with total values surpassing $100. But moving these cards online gives retailers new channels to engage consumers to encourage redeeming or recharging a gift card, or converting a gift card into a loyalty card.

Third-party websites like Digitallanding.com have popped up to help users search for locate gift cards and discounts. Transaction Wireless, a five-year-old company dedicated to electronic B2C and B2B gift card programs, was just granted a patent for delivering digital gift cards on Facebook. The company had previously patented a gift card service for mobile devices and worked with retailers such as AMC Entertainment, Travelocity and American Eagle Outfitters.

Virtual gift cards will also be built into the much-hyped digital wallet apps for mobile phones being developed by Google and ISIS – the combined effort of AT&T, T-Mobile USA and Verizon Wireless – further inundating the market with virtual gift cards. Currently, mobile gift cards are almost non-existence, but industry consultant TowerGroup told Businessweek that within a year the value will top $1 billion in the U.S. Within two to five years, the use of mobile gift cards could be two to three times that of physical gift cards.

But security concerns remain. Last year, high-profile scams offering $1,000 Best Buy and Ikea gift cards, a $500 Whole Foods card and lesser offers from hackers posing as Target and Walmart. The Ikea page alone piled up 70,000 fans before Facebook shut it down. In these scams, users were directed to links or "surveys" which either drove traffic for advertisers or convinced people to give out personal information. Frequently, the information in these scams is used by affiliate marketers for advertising purposes, but some scams – the Whole Foods one among them – have been connected to identity theft and harmful software.

Facebook has consistently gone on the offensive against these scammers.

"We’ve started building an automated system to detect this type of suspicious content and behavior more quickly before it's even reported," said Facebook spokesman Simon Axten last year, emphasizing the minor scale of these outbreaks relative to the media coverage they receive.

But PC World described the social networking site’s efforts as "the social networking version of whack-a-mole, with a team of engineers monitoring the problem and deleting groups, applications and fan pages as quickly as it can find them." Facebook, for now, cannot fix the main problem – that anyone can make a company page on Facebook.

Thus, some have suggested that Facebook’s basic reliance on advertising and third-party applications means the platform’s security is fatally flawed. Facebook used to offer an application review process in 2008, minting approved apps with an official seal of approval, but backed off when app developers refused to pay the $375 fee associated with the process. This means that third-party gift card apps will always have an air of suspicion.

Consensus among consultants and industry experts remains, however, that the move to online and social gift card giving is inevitable. The yet-to-be determined element is how retailers, start-ups and app developers will convince consumers of the security of their gift card programs and how social media platforms can counteract scammers. Until this element is resolved, consumers might remain wary of fully embracing new engagement opportunities with companies.