A prominent prepaid card issuer is being sued for allegedly failing to prevent one of the most prevalent scams from using its cards.

Attorney David Chiu of San Francisco filed the case last month, claiming that "insufficient" packaging and "lax security features" on Incom's "Vanilla Gift" and "One Vanilla" non-reloadable cards left them vulnerable to fraud.

(Photo : by Justin Sullivan/Getty Images)
A prominent prepaid card issuer is being sued for allegedly failing to prevent one of the most prevalent scams from using its cards.

Consumers Fall Victim to Card Draining Scam

Card draining is the term for the practice of criminals recording the barcode and PIN information on gift cards in order to make unlawful purchases. The lawsuit claims that this is possible because the packaging makes it "easy access to the card inside."

The complaint also claims that despite knowing that the product's defective design resulted in theft instances, Incomm did not enhance the packaging for its goods.

Additionally, the lawsuit claims that Incomm and its partners refused to give refunds to victims who claimed that their money had been stolen.

According to Consumer Reports, "card draining is a scam in which con artists carefully take an unpaid gift card out of its packaging, note its number and PIN code, and then put it back in its original packaging."

Once a gullible victim buys a hacked card and loads money onto it, the fraudster will utilize the information they have obtained to make illegal purchases, depleting the gift card's prepaid balance.

Although compromised gift cards may be difficult to identify, Pennsylvania Attorney General Michelle Henry says there are a few steps customers may take to guard against falling victim to fraud.

In a consumer advisory, Henry recommended that before purchasing a gift card, buyers should always check the card's packaging for any damage and make sure the scratch-off cover that hides the PIN number is still in place.

As per Henry, if a customer finds out that the card they purchased has been hacked, they should notify the card provider right once and request a reimbursement.

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Card Draining Is More Common Than You Think

Because gift cards are so common and because people are filling them with more value than ever, "card draining" is especially evil and has emerged as the thieves' preferred scheme, according to Peltz.

Preloaded gift cards are more often targeted by thieves than credit or debit cards, he continued, because gift cards often have less security and fraud prevention features.

In one prevalent method of this scam, perpetrators tamper with gift cards, enabling them to siphon funds from unsuspecting buyers.

According to Peltz, the unsuspecting purchaser, upon loading money onto the tampered card, unknowingly directs funds to the scammer's card instead. This deceptive tactic allows scammers to exploit the financial transactions associated with these manipulated gift cards.

Another tactic involves the theft of details from legitimate gift cards, followed by surreptitious placement back on store racks. Peltz explained that scammers, armed with the pilfered card information, monitor its purchase and loading activities. Subsequently, they swiftly access and utilize the loaded funds before the legitimate buyer can utilize the card.

The appeal of prepaid Visa Vanilla gift cards, along with other prepaid gift cards, lies in their versatile usability, as Peltz pointed out, making them prime targets for these draining scams due to their unrestricted application "anytime and anywhere."

To safeguard against falling victim to such schemes, Peltz advised shoppers to exercise caution during gift card purchases. He recommended thorough inspection of the card's packaging for any signs of tampering or suspicious stickers, and to scrutinize the physical condition of the card itself, looking for indications of bending or resealing.

Emphasizing the importance of retaining the receipt, Peltz highlighted that it significantly facilitates the reporting of any issues with the card. As a preventive measure, he urged consumers to consider purchasing online gift cards directly from the respective store or company, emphasizing that opting for digital alternatives mitigates the risk of falling prey to card-draining scams.

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