Promotional fraud, like other forms of fraud in retail, is on the rise. Ravelin’s Online Merchant Perspectives Fraud & Payments Survey 2022 revealed that digital sales fraud continued its rising trend in 2022, and around 62% of merchants saw new fraud types emerge. Promotions abuse was said to be on the rise by 55% of those surveyed.

The cost of dealing with fraud is far greater than the cost of just ‘taking the hit’ on profits; according to Lexis Nexis’s True Cost of Fraud report in the US, every $1 of fraud costs retail and ecommerce merchants $3.75. While the attitudes towards fraud have always been a balance between zero tolerance and an acceptance that closing the fraud window completely isn’t feasible, in the current economic circumstances, as brands and merchants feel the financial pinch, many are less able to absorb the cost of fraud even at low levels.

Fraud is not a victimless crime.  Vendors who take the hit experience shrinkage – i.e. reduced profit levels – and must increase their overall costs, which get passed onto customers. For example, if a fraud is based on a free goods or an introductory offer promotion, and fraudsters take the free or low cost goods and cancel a subscription after the promotion ends, a vendor has not only given away goods, it has lost new business. And if a vendor is subject to a particularly significant, focussed fraud that is publicised, its reputation may suffer.

Types of promotional fraud

Fraud is present on most promotions. The industry standard for banking is a fraud rate of less than 5% of customer contact, this provides a benchmark for other industries and a typical fraud rate for retail promotions is between 0.3 to 0.7% of claims, with 3 to 5% of claims requiring investigation.

Fraud analysts focus on the Fraud Triangle, comprising motivation, rationalisation and opportunity. As far as brands and retailers are concerned it is opportunity that must be the focus for fraud prevention, because this is the only part of the triangle they have any control over.

Brands and retailers must ensure that fraud prevention is an active part of every promotion. Some types of fraud are much more prevalent than others, and these are often extremely easy for people to put in place, and so it is very important for vendors to be aware of them and watchful for them.

The most common types of fraud are:

  1. Falsely modified documents: a fraudster edits documentation relating to a real purchase in order to claim a promotional reward – buying a low value item and making it look like they have bought the more expensive item that qualifies for the reward. Spotting edited documentation is incredibly difficult using the human eye alone. Factors such as the sophistication of readily available editing software and simple human fatigue come in to play. But our software tools are faster and more efficient at flagging potential fraudulent submissions, and once identified, we can investigate further.
  2. Malicious returns: these scams occur when a person purchases an item from a retail store or online, immediately claims the promotion, but with the intent to return it immediately or use duplicate receipts to get the money back and the promotion.
  3. Maximum redemption limit: the fraudsters use promotional codes many times, using multiple email addresses, or multiple home delivery addresses, for example. A human would struggle to correlate the many variables that can be at play here, but our software tools can do this task as a matter of course, on every promotional code redemption, not just on a random subset.

Threat analytics and promotional understanding go hand in hand

To understand promotional fraud, it’s important that the fraud team understands the promotion itself, including the relevant purchases and mechanics. Unlike other merchant frauds, promotional fraud is very unique. Threat analytics help to flag suspicious activity and trigger alerts – based around digital identity, IP addresses, browsers and hundreds of combinations of data – but it’s the threat analysts themselves that have to investigate and take action or allow the customer transactions to go ahead.

That is an equally important consideration: the customer journey has to remain frictionless. Fraud governance can’t be so severe as to make the act of claiming a promotion too difficult for legitimate customers as that impacts negatively on the brand. Hence, it’s important to risk assess every promotion based on the type of promotion, mechanic, value, volume of claims expected and speed of fulfilment.

This has never mattered more. All promotions are different, all vendors are different. The trend for fraud is upwards, not downwards, and vendors are more conscious than ever of the fact that finances are tight, and profit margins at risk. When putting promotions in place, brands and merchants need to know that their in-house fraud teams are supported by specialist teams with the experience to spot and prevent fraud in high profile promotions campaigns.