Maker of popular gift cards sued over alleged ‘card draining’ scam risk

By CNN Newsource

Published December 20, 2023 4:00 AM

By Olivia LaBorde and Parija Kavilanz, CNN

New York (CNN) — A Georgia-based company that makes many popular gift cards faces a lawsuit in California alleging it failed to take precautions to prevent scammers from draining gift cards of their value – a scam that experts say is common.

The lawsuit, filed by San Francisco City Attorney David Chiu, draws attention to InComm Financial Services’ proprietary nonreloadable gift cards, “Vanilla Gift” and “One Vanilla,” which it says are sold around the country and accepted wherever debit cards are allowed. Scammers are using different methods to drain money from gift cards before they can be used for their intended purchase, according to Chiu.

The lawsuit alleges InComm and its partners have “known for years that its nonreloadable Vanilla debit card’s lax security features (have led) to numerous card-draining incidents,” but have “not sufficiently improved the cards’ packaging or implemented other changes to prevent those losses.

Gift card buyers and users need to be especially vigilant about this type of scam, said Christopher Peltz, cyber security expert with Guidepoint Security. “So far, card draining is the most prevalent scam this holiday season,” he said.

The lawsuit details how the packaging of the Vanilla cards allegedly makes it easier for criminals to duplicate or tamper with what should be secure numbers and bar codes on the cards.

“InComm’s negligence has opened the door for scammers to defraud thousands of consumers,” said Chiu.

In response to Chiu’s allegations, a Vanilla Gift representative told CNN that the company “categorically denies the baseless allegations made in the San Francisco complaint and are proud of our long history of innovation and consumer focus that has made us an undisputed industry leader.”

The lawsuit also accuses InComm of poor customer service after the fact saying, “contrary to their legal obligations, defendants regularly fail to provide refunds for unauthorized transactions on Vanilla cards.”

Chiu filed the lawsuit on behalf of citizens of California, where by law providers of gift cards are obligated to reimburse cardholders for unauthorized transaction. “InComm regularly refuses, in violation of state law, to refund consumers who are scammed out of their money as a result of Vanilla gift card draining,” he said.

“As we kick off the holiday season, we are filing this lawsuit to sound the alarm, to compel InComm to adopt industry-standard security features to stop card draining, and obtain restitution for consumers who have been harmed,” Chiu said in a press release.

More common than you think

“Card draining” is particularly nefarious and has become the go-to scam of the moment for thieves because of the prevalence of gift cards and the fact that consumers are loading gift cards with more value than ever, said Peltz.

Thieves target preloaded gift cards more than credit or debit cards because gift cards generally are less protected with multiple security and fraud protection measures, he added.

Card draining works in two ways. In the first instance, scammers attach a barcode from a card they already have to an unsold gift card in a store.

“When someone buys the card that’s been tampered with and loads money on it, they’re actually loading money onto the scammer’s card,” said Peltz.

The second way to perpetrate the scam is by stealing the details off of a legitimate gift card and then putting it back on the rack. “The scammer already has the card info, and they track when it is bought and loaded with value and then quickly access the money and use it before the buyer of the card is able to,” he said.

The reason why prepaid Visa Vanilla gift cards as well as other prepaid gift cards are being targeted by card draining scams is because of their versatility. These kinds of cards “can be used anytime and anywhere,” Peltz said.

He urged shoppers to exercise caution when buying gift cards.

“Check the packaging for any suspicious stickers or tampering or if the card looks bent or resealed,” he said. Always keep the receipt, which makes it much easier to report any issues with the card, he added.

“Buy an online gift card directly from the store or company that’s selling them,” said Peltz. “Not having a physical card mitigates the card draining scamming techniques.”