How to Detect and Prevent Loyalty Program Fraud

Loyalty programs are a key driver of customer engagement and brand loyalty, offering rewards that incentivise repeat purchases and build lasting relationships. But as loyalty programs grow in popularity, so too does the threat of fraud. Fraudsters are constantly looking for ways to exploit these systems, causing significant damage to businesses and undermining the trust that loyal customers place in the brand.

According to Statista, loyalty fraud accounted for 27% of all fraud attempts experienced by online merchants. This alarming statistic highlights the growing threat posed by loyalty fraud and the urgent need for businesses to detect and prevent it.

In this blog, we’ll explore what loyalty fraud is, how it affects businesses, and the steps you can take to detect and prevent it; while showcasing how Opia’s innovative sales promotion solutions can protect your business.

What Is Loyalty Fraud?

Loyalty fraud occurs when individuals, whether opportunistic customers or organised fraudsters exploit the vulnerabilities in a loyalty program to gain unauthorised rewards. This fraud can take many forms, from account takeovers to creating fake accounts or manipulating transactions. The results can be devastating, including financial losses, devalued rewards, and a loss of trust from legitimate customers.

For example, loyalty fraud can occur through:

• Account Takeovers: Fraudsters gain access to customer accounts and redeem points or rewards.
• Fake Account Creation: Fraudsters create multiple accounts using fake identities to exploit sign-up bonuses and rewards.
• Transaction Manipulation: Fraudsters artificially increase transaction values and numbers of transactions to accumulate more loyalty points than they are entitled to.

In every case, fraudsters damage the integrity of your loyalty program and diminish its value to genuine customers.

How Loyalty Fraud Affects Your Business

Loyalty fraud doesn’t just affect your rewards program, it has far-reaching impacts on your entire business. Beyond financial losses, it can harm your brand reputation, reduce customer trust, and increase operational costs.

Here’s how loyalty fraud typically impacts businesses:

• Revenue loss: Fraudsters redeem fraudulent rewards, costing businesses money with little to no return.
• Brand Damage: When customers discover their loyalty points have been stolen, they often blame the business, leading to a loss of trust and brand loyalty.
• Operational Costs: Detecting and dealing with loyalty fraud is time-consuming and expensive, diverting resources from other business priorities. The cost impact of loyalty fraud can be especially high with complex loyalty programs, or where poor controls or manual processes are used to track and monitor suspected fraudulent activity.

Industries most frequently targeted by loyalty fraud include:

• Online Retail: E-commerce platforms with loyalty programs are prime targets. Fraudsters can use stolen accounts or create fake accounts to make fraudulent purchases, redeem rewards for themselves, or resell stolen goods/gift cards. The high volume of online transactions can make it harder to detect fraudulent activity.
  
• Airlines and Travel Agencies: Airline miles and travel points are highly valuable and can be easily traded or sold. Fraudsters may steal frequent flyer accounts, book flights or upgrades fraudulently, or use stolen points to purchase tickets for resale. The global nature of travel can make it challenging to track and prevent fraud across different jurisdictions.
  
• SaaS Companies: Software-as-a-Service companies that offer loyalty programs or rewards for referrals are vulnerable. Fraudsters may create fake accounts to exploit free trials, referral bonuses, or discounts. They may also target high-value accounts to gain access to sensitive data or disrupt services.
  
• Ride-Sharing Platforms: Ride-sharing services with rewards programs or promotional offers can be targeted. Fraudsters might create fake accounts to get free or discounted rides, manipulate referral systems, or use stolen credit card information to fund rides. The frequent use of promotional codes and discounts can make it easier for fraudsters to blend in with legitimate users.
  
• Fintech and Financial Services: Financial institutions and fintech companies offering rewards programs are attractive targets. Fraudsters may attempt to steal reward points, cash-back bonuses, or manipulate systems to gain unauthorised benefits. The sensitive nature of financial data makes these industries particularly vulnerable to data breaches and account takeovers.
  
• Gaming: Online gaming and gambling platforms often have loyalty programs with reward points, virtual currency, or bonuses. These digital assets are attractive to fraudsters who can steal them, launder money through them, or exploit them for profit.
  
• Hospitality: Hotels and hotel chains with rewards programs are susceptible. Fraudsters can exploit stolen credentials to book free stays, upgrade rooms, or access other benefits.
  
• Food and Beverage: Coffee shops, restaurant chains, and food delivery services with loyalty programs are increasingly targeted. Fraudsters may steal accounts to get free food and drinks or resell stolen accounts/points.
  
• Retail (General): This expands beyond online retail to include brick-and-mortar stores with loyalty programs. Think department stores, supermarkets, and specialty retailers. Fraudsters may use stolen or counterfeit loyalty cards, manipulate coupons, claim fraudulent cashback, or claim fraudulent free gift or gift with purchase promotions run by retailers, phone networks or b2b or b2c consumer goods manufacturers, or exploit return policies for fraudulent gain.
  
• Fuel and Convenience Stores: Petrol station chains and convenience stores with rewards programs can be targeted for fuel discounts or merchandise. Fraudsters may use stolen credit cards, loyalty cards, or manipulate pump systems to obtain unauthorised fuel discounts.
  
• Entertainment: This can include cinemas, theme parks, and event ticketing platforms with loyalty schemes where points can be redeemed for tickets or experiences. Fraudsters may steal accounts to access free tickets, resell tickets obtained through fraudulent means, or exploit vulnerabilities in online booking systems.

Each of these industries faces unique challenges, but loyalty points are treated like currency across all sectors, making fraud detection critical.

Common Types of Loyalty Program Fraud

Loyalty fraud can take various forms. Below are the most common types, with examples to illustrate how they occur:

1. Account Takeover Fraud

Fraudsters gain access to a legitimate customer’s account, often using phishing or data breaches. Once inside, they steal points, change account details, or resell rewards.

Example: A fraudster gains access to a hotel loyalty account and redeems accumulated points for a free stay, leaving the legitimate customer without rewards and damaging the hotel’s reputation.

2. Fake Account Creation

Fraudsters create multiple accounts using fake identities to exploit sign-up bonuses or referral programs. This not only drains genuine customer engagement but also inflates the perceived success of the program.

Example: A fraudster uses fake email addresses to create 50 accounts and claim referral bonuses, costing the company hundreds in rewards with no actual customer retention.

3. Transaction Manipulation

Fraudsters manipulate transactions to accumulate more rewards than they should. For instance, repeatedly making low-value purchases to gain points disproportionately.

Example: A customer repeatedly makes small purchases in an e-commerce store just under the threshold required for free shipping, earning points without making meaningful purchases.

4. Fraudulent Receipt Uploads

For loyalty programs that use receipt scanning, fraudsters upload manipulated or duplicated receipts to falsely claim rewards.

Example: In a grocery store loyalty program, fraudsters upload altered receipts to claim cashback rewards for products they didn’t actually purchase.

5. Referral Collusion

Multiple individuals conspire to create fake accounts or share referral codes illegitimately to gain rewards.

Example: A group of individuals sign up using fake email addresses and continuously refer to each other, triggering referral bonuses without any genuine customer acquisition.

6. Coupon Code Abuse

Fraudsters exploit promotional codes meant for specific customer segments by using loopholes in the system, claiming discounts they aren’t eligible for.

Example: A fraudster shares a promotional code meant for a regional campaign on a coupon-sharing website, allowing users outside the target area to claim discounts not intended for them.

Coupon abuse is just one form of fraud that can affect your business. Discover strategies to protect your program in our guide on How to Prevent Coupon Fraud and Abuse.

How to Detect and Prevent Loyalty Fraud

Preventing loyalty fraud is essential for the success of your program. Here are the most effective strategies:

1. Monitor Account Activity

Implement systems that regularly monitor loyalty account activity, flagging suspicious behaviours such as multiple accounts from the same IP address, rapid accumulation of points, or frequent reward redemptions.

2. Use Multi-Factor Authentication (MFA)

Require MFA for account logins, especially when customers log in from new devices or unfamiliar locations. This significantly reduces the risk of account takeovers.

3. Limit Points Transferability

By limiting the ability to transfer points between accounts, you can reduce the risk of fraudsters reselling or misusing loyalty points.

4. Leverage AI and Data Analytics

Opia’s advanced software can help detect unusual patterns in customer behaviour, such as rapid point accumulation or high redemption rates. Our real-time monitoring helps stop fraud before it escalates.

Case Study: Opia’s: Combating Fraud with Opia’s AI-Powered Monitoring

In today’s digital landscape, promotional campaigns are highly susceptible to fraudulent activities. Both individual bad actors and organised groups constantly seek to exploit promotions for their gain, costing businesses millions in lost revenue and undermining campaign integrity. Opia’s AI-powered monitoring systems have been instrumental in preventing such fraudulent activity, safeguarding our clients’ promotions and ensuring that rewards reach only legitimate customers.

The Challenge: Detecting and Preventing Diverse Fraudulent Tactics

Fraudulent activities targeting promotions can take various forms, including:

• Multiple redemptions by single users: Individuals attempting to use the same promo code multiple times
• Bot attacks: Automated bots exploiting promotions at scale
• Account sharing: Users sharing promotional codes with ineligible individuals
• Fake accounts: Creating numerous fake accounts to exploit promotions

Traditional fraud prevention methods often struggle to keep pace with these evolving tactics. Opia’s AI-powered monitoring system addresses this challenge by providing real-time analysis and proactive intervention.

Opia’s Solution: AI-Powered Monitoring and Real-time Fraud Prevention

Opia’s AI-powered monitoring system continuously analyses vast amounts of data, including user behaviour, redemption patterns, and device information. This enables the system to identify suspicious activities and flag potentially fraudulent transactions.

Results: Millions of Pounds Saved and Enhanced Campaign Integrity

Opia’s AI-powered monitoring system has successfully prevented millions of pounds of fraudulent activity across our clients’ promotions. By proactively identifying and blocking fraudulent transactions, Opia has helped businesses:

• Protect their bottom line: Preventing financial losses due to fraud
• Maintain campaign integrity: Ensuring that promotions are fair and rewards reach the intended audience
• Enhance brand reputation: Safeguarding customer trust and brand image
• Gain valuable insights: Understanding fraud patterns and improving future campaign strategies

The right technology is essential to prevent fraud. Explore our list of the Best Customer Loyalty Software to find solutions that fit your needs.

5. Educate Customers

Regularly educate customers on the importance of securing their loyalty accounts with strong passwords and avoiding phishing scams. Customers should view their loyalty points like cash; valuable and worth protecting.

6. Delay Redemption Periods

Implementing a delay between point accumulation and redemption gives you time to detect suspicious activity before rewards are issued.

7. Regular Audits and Updated Terms

Regularly audit your loyalty program for potential loopholes and tighten the terms and conditions to prevent customers from exploiting them. Ensuring your program’s policies are robust and clear will help prevent both opportunistic and organised fraud.

Understanding consumer behaviour is critical to designing effective loyalty programs that prevent fraud. Learn more in our article on The Psychology Behind Sales Promotions.

Opia’s Sales Promotion Solutions for Fraud Prevention

At Opia, we know that protecting your loyalty programs from fraud is vital to maintaining customer trust. Our bespoke sales promotion solutions are designed not only to boost engagement, and encourage repeat purchase from your loyal customers, some of whom are excited to update their device on a regular basis, and are seeking an offer to encourage them to update.

• Cashback Promotions: Our cashback promotions are more cost-effective than traditional discounts, encouraging genuine purchases while controlling reward distribution. Our validation process allows cashback promotions to be run omnichannel including multiple retailers and in multiple territories.
• Gift with Purchase Promotions: Our Gift with Purchase Promotions involves offering a free accessory to customers who purchase a specific device. This strategy incentivise customers to buy the primary product by adding value to their purchase. The free accessory could be anything that complements the main item, such as headphones for a smartphone or a case for a tablet.
• Referral & Rewards Programs: Opia’s innovative referral programs drive customer loyalty while incorporating fraud prevention measures like real-time monitoring and secure customer verification.
• Instant Win Promotions: Our instant win promotions create excitement around your products while preventing fraud through robust verification processes and advanced monitoring.

With over 16 years of experience working with global brands, Opia can help you design and implement a secure loyalty program that keeps fraud at bay.