A look at how the blockchain could disrupt the gift card industry

As of 2020, blockchain is officially a household name. It is the “magic potion” that is clearly going to revolutionize our current global financial industry. From increasing security to eliminating double-spending, the blockchain sounds promising. But can it also solve gift card fraud? In this article, we discuss details on whether blockchain can help reduce gift card fraud.

Fraud in the Gift Card Industry

The gift card industry is worth billions of dollars but it loses millions every year to fraud. According to the Federal Trade Commission, the industry lost $78 million to scams in 2018, an increase from $40 million in 2017.

Since its origin, both physical and e-gift cards have been vulnerable to theft and abuse. With physical gift cards, it's difficult to prove ownership in the face of balance theft while e-gift cards are susceptible to double-spending. Moreover, e-gift cards put the privacy of consumers at risk because the card is often tied directly to the purchaser.

“Gift card security, which at one point followed state of the art standards, has remained stagnant over the years. The stagnant security measures metamorphosed the once secure gift card into an insecure entity, plaguing the industry with increasing amounts of gift card fraud,”  – Akshay Sood writes on MLG Blockchain.

Many physical gift cards have a 16 to 19-digit number encoded on a magnetic stripe. The number identifies the card and you can use it to load or redeem the card. Sometimes, cards also have an additional security in the form of a four or eight-digit PIN hidden at the back (Whole Foods gift cards is an example).

Throughout the distribution chain, the gift card’s identifying number remains the same and it is up to everyone in this chain to ensure that the card is unreplicable. However, expecting trustworthiness from everyone is unrealistic. As a result, this leaves room for fraud.

The same issue plagues the distribution of e-gift cards. Like physical gift cards, they have low-security measures. Also, it is now easier for people to liquidate stolen gift cards for cash online.

That said, fraud leads to losses and some retailers might conclude that gift cards are not a feasible business venture.  

Is Blockchain Technology a Solution?

Blockchain technology offers transparency, security, and privacy. These are all the things the gift card industry needs. The blockchain is a digital ledger that stores transactions in a chain of blocks in a fast, transparent, and secure way.

Here are the reasons why blockchain technology is a plausible solution to identify gift cards.

  • Security: each block is connected to the one before it making it difficult to delete the information on one block without deleting the information on all the other blocks.
  • Transparency: blockchain technology uses a consensus mechanism to record transactions. This means that nodes will only add a block to the blockchain once they all agree that a transaction is valid.
  • Low costs: the blockchain gets rid of middlemen, thereby reducing the cost of transferring a commodity to the consumer. Gift card retailers and consumers would benefit greatly in this case.
  • Prevents double-spending: every block on the blockchain is time-stamped and arranged chronologically. If you try to spend the same money on one product simultaneously, nodes add the transaction with the most confirmations to the blockchain while the other is marked as invalid. The chronological order and time-stamp allow the easy tracking of transactions.
  • Privacy: a private blockchain solves privacy issues by ensuring that information is only accessible to those that have received permission from the nodes on the network.

Implementing Blockchain in the Gift Card Industry

Let us imagine a scenario where an e-commerce platform launches a blockchain-based e-gift card system. Each gift card that is created is recorded on a digital ledger.  When you buy a gift card on this platform, the transaction transfers its ownership to you. The nodes record this transaction on a block. From this point, you can use the gift card or gift it to someone. To send it, the recipient will require a blockchain address.

With such a system, it is impossible to change the recorded data because each block is connected to the one before it. Also, the consensus mechanism ensures that only valid transactions are added to the blockchain.

Third parties target ads to consumers based on the collected non-personally identifiable information (non-PII) data linked to their IP addresses. In a blockchain system, retailers will instead target ads based on the collected non-PII data linked to the consumers’ public blockchain addresses. This keeps consumers’ data private.

Physical gift cards can benefit from cryptography through the use of multi-signature encryption of the identifiable details. Once this gift card gets to the retailer side of the distribution chain, you can decrypt it on the blockchain. As a result, the duplication or loss of information declines. Cryptography is an encryption algorithm used in the workings of a blockchain.

Closing Thoughts

Undoubtedly, blockchain technology is positively disruptive, the effects of which will play out in due time. At Redeeem.com we believe the gift card industry can hit is on the brink of a technological breakthrough, catalyzed by the blockchain.

To trade gift cards for cryptocurrencies, join Redeem today. Also, read about the origin of gift cards in this piece.