Loyalty Program Fraud

Sydney VaccaroFraud Prevention1 Comment

Loyalty programs are becoming more popular among retailers and restaurants. It makes sense that more merchants are hopping on the loyalty train. As you have probably heard before, “It costs more to earn a new customer than to retain one.” In fact, it can be 5 to 25 times more expensive to acquire new customers than it is to retain an existing one. If you need anymore encouragement to keep loyal customers around, it has been reported they on average make up 8% of a website’s traffic while also making up 40% of ecommerce revenue. 39.4% of those loyal customers will spend more on a product even if there are cheaper options elsewhere.

So after understanding the impact of those numbers, it makes sense that merchants would create a strategy to retain and please their existing customer base. Rewarding them through a loyalty program is the perfect way to do that. A customer loyalty program is where customers get rewarded for making frequent purchases. The program may give customers free merchandise, rewards, or coupons.

Merchants that implement these programs are seeing benefits. According to Bond’s 2017 Loyalty Report, 81% of customers say loyalty programs make them more likely to continue doing business with the brand. And about 66% of them said that they would modify their spending to maximize their reward benefits. And on average, a customer belongs to 14 different reward programs.

However, as these programs become more popular, they are attracting some fraudsters.

Loyalty Program Fraud

Fraudsters will always follow the money. We saw this when EMV chip technology was introduced for in-store purchases. This new technology made it very hard for fraudsters to get money from in-store purchases, so they turned to ecommerce. Now cybersecurity and protecting customer data are on every merchant’s mind. They are putting more time, energy, and money to protect their customers data and credit card information. Which is making it more difficult for a fraudster to be successful there.

So fraudsters are starting to target loyalty programs. The merchants and even the customers do not view reward points as currency; but fraudsters do. As long as that mentality exists, there is going to be less protection around the loyalty points than there would be around credit card information. This makes loyalty programs an easy target for fraudsters.

The percentage of cyberattacks targeting loyalty and rewards accounts nearly tripled from 2016 to 2017, with 48% of businesses being hit by ATO (Account Takeover) attacks. This has cost companies more than $2.3 billion worldwide. But with rewards not being viewed as money, customers and merchants alike are not keeping track of points in their account like they would in their bank account.

The Points and Losses

After a fraudster gains access to the reward points, they will quickly transfer the points to a dummy account. From there, the fraudster may hack many accounts and consolidate the points to then sell. Or they may even use stolen credit cards to increase the amount of points.

A customer losing their points not only affects the business by losing merchandise, points, or other benefits that the fraudster has now gained. It also angers and disappointed the customer. This will damage the customer loyalty and goodwill that the reward program was set up to build.

Travel Loyalty Fraud

As you may have already been thinking, one of the most sought after reward points that customers can earn is in the travel industry. If you have enough points, it can translate into plane tickets all over the world. Not only are flights a highly sought after product, they are also a big-ticket item for fraudsters to devote time to steal it. As of 2016, $48 billion in airline miles and other rewards sat unredeemed in customer accounts, signaling to fraudsters that those points are up for the taking.

What is Next?

As loyalty and ATO fraud continue to rise, merchants will need to take the necessary precautions to protect themselves and their customer relationships. By making loyalty points more secure, and treating them as a form of currency, this empowers the merchant’s ability to deter fraudsters.

One Comment on “Loyalty Program Fraud”

  1. Pingback: What Is Account Takeover Fraud? | Chargeback

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