Gift cards used to be all about convenient gift-giving. However, in recent years, they’ve gone way beyond gifts to become a payment force all their own.

Digital gift cards are one factor driving the increase in usage. According to research by Blackhawk Network Holdings, 55 percent of consumers say they’re interested in digital gift cards they can add to a mobile app or wallet. For Millennials, the percentage jumps to 67 percent.

A major trend behind the interest is consumer self-usage of gift cards. Sparked by creative marketing by merchants that broadened the definition of gift cards through credit card loyalty programs and retailers like Costco consistently offering 25 percent discounts on national brand cards, 42 percent of consumers report buying gift cards for their own use, according to Blackhawk Network.

Recognizing the trend, new m-commerce companies dedicated to enhancing customer access and transaction experiences have gotten into the game. Gyft was one of the first on the scene offering a consolidated third-party gift card shopping option. Later, companies like Raise, which launched in 2013, took gift cards into the digital space, providing discounts and the ability for consumers to sell gift cards for cash. Now options like Swych exist to help consumers transfer plastic gift cards to digital wallets, exchange unwanted cards, and manage card balances.

What’s the Downside?

With so many cards being purchased at a discount, retailers have given up some of the profit margin they may have retained had they not offered the extra incentive. However, due to the prevalence of discounted cards, combined with the change in customer expectations, merchants can’t go back now without angering customers.

Given that, the biggest concerns for retailers are security-related. Fifty-seven percent of merchants cite identity verification as a key challenge with digital gift card purchases. The immediacy of the purchase process makes the digital cards a target for fast fraud: Criminals purchase cards with stolen IDs and spend them quickly, before they can be caught. Some sites even allow anonymous purchasing, which makes them a go-to for identity thieves.

The other draw for thieves is the personally identifiable data — credit card numbers, email addresses, phone numbers — captured by merchants as part of e-gift card transactions. These have become targets for hackers looking to steal gift cards or consumer identities.

Closing the Security Gap

Addressing the security challenges comes down to having strong know-your-customer methodologies in place before a digital gift card is sold. When a merchant knows who it’s selling to and can confirm that the payment source actually belongs to that purchaser, the opportunity for fraud is significantly reduced.

Tactics including multifactor authentication of both the buyer and his device, correlation of the device to the purchasing cardholder’s information, and comparison against past behavioral information about the purchaser are essential for merchants operating in the online gift card space.

Consumer appetite for the convenience and savings offered by digital gift cards is growing. Ensuring that security measures keep pace must be a top priority for merchants that want to protect both their customers and themselves.