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Loyalty Program Fraud Prevention: Everything You Need to Know

Morgan Ackley | Wednesday, April 26th, 2023 | 5 minutes

Offering rewards and incentives to your customers through loyalty programs is a great way to maintain positive customer relationships. Unfortunately, good things often attract fraudsters and opportunistic customers. These programs can become easy targets — which is why you need to be prepared to counter loyalty program fraud.


What is Loyalty Program Fraud?

Loyalty program fraud is when a fraudster or opportunistic customer manipulates the rules of a rewards program. It can also involve stealing points from a loyalty account. Most programs allow customers to accrue loyalty points that are redeemable for cash, bonuses, products, or services — which is what makes loyalty accounts so appealing to fraudsters.


Types of Loyalty Fraud

There are a few ways that loyalty program fraud happens. And it can happen at any point throughout the customer journey — which is why it’s important to have a complete fraud detection solution.

1. New account fraud

Fraudsters and opportunistic customers create fake accounts — sometimes using untraceable synthetic identities — to accumulate loyalty points. Fake accounts might also be created to transfer loyalty points from fraudster to fraudster. If you offer rewards for opening an account, watch for attacks.

2. Account takeover fraud

During an account takeover (ATO) attack, a fraudster aims to gain unauthorized access to an account associated with a loyalty rewards program. The fraudster typically works from a list of stolen email addresses and passwords, then programs bots to test the credentials.

3. Policy abuse and exploitation

Customers often perpetuate loyalty fraud by abusing the rules of a rewards program or exploiting its benefits. For example, if you offer a free item for customer birthdays, they may accept the item and later try to get a refund for it.


Why Fraudsters Target Loyalty Program Members

Many customers don’t monitor their loyalty accounts regularly and often reuse passwords across multiple accounts — which leaves the window of opportunity open for fraud. Plus, merchants often don’t exercise the same scrutiny over loyalty programs as other transactions — making it easier for fraudsters to access accounts.

Fraudsters are increasingly targeting accounts because once they gain access, they can drain, use, transfer, or resell loyalty points and rewards. To make matters worse, they can also gain access to all the stored customer data. And if the account password is used elsewhere — such as online banking accounts, digital wallets, etc. — they can get access to those, too.


How Loyalty Program Fraud Affects Businesses

If you haven’t included loyalty program scams in your fraud prevention strategy, your business is susceptible to exploitation. And the lack of protection can be costly — both in revenue and customer loyalty.

1. Revenue loss

If a fraudster hacks into a customer’s account, steals and redeems points worth $100, then you theoretically lose that $100. Because that fraudster most likely won’t be doing business with you long-term. That adds up quickly. In 2020 alone, the Loyalty Security Association (LSA) estimated that $3.1 billion of redeemed loyalty points were fraudulent.

And if the victim detects the loss, you may be asked to replace the rewards that were stolen.

2. Brand damage

Negative public perception can harm you just as much as revenue loss. If word gets out that your accounts — and their contents — aren’t safe, you could lose brand loyalty and trust.

Depending on the type of attack, you could face regulatory fines and penalties. Ultimately, you could potentially lose your business altogether.

3. Negative customer experiences

Some customers spend a lot of time accruing points. If those are stolen, they will most likely blame you for not protecting their accounts. They may stop shopping with you altogether. And considering that 64% of US online adult consumers spend more with brands that offer loyalty programs, you have a lot to lose.

4. Operational costs

Fighting fraud on your own can be expensive and inefficient. A common approach is to hire a team to manually review interactions, but that may not provide the most accurate results or be the most cost-effective option.


Ways to Prevent Loyalty Fraud

Here are some things you can do to prevent fraudulent activity.

Add a Captcha

Improve your security protocols at the front door. Add captchas to catch most scripts and bots that are used to test account credentials.

Set up a firewall

Bolster your network security and better monitor traffic to your site by setting up a firewall. Look for one with a botnet prevention feature.

Secure logins

Implement account security protocols — like multi-factor authentication — for new or unknown devices. Offer login options with less friction for known users.

Educate customers about their account value

Customer accounts are as good as cash. Communicate regularly with your customers about the value of their accounts and safety measures they can take to secure them.

Require strong passwords

Complex passwords make it harder for fraudsters to hack into accounts. Require your customers to set up strong passwords and encourage routine password updates. Frequent updates will ensure loyalty members to log into their accounts more often — and maybe make a purchase while they’re on your site.

Limit sign ups and coupon use

Deter customers from taking advantage of rewards programs by limiting the number of accounts they can sign up for on a single device or IP address.

Set limit on attempts to enter codes

Limit the number of attempts a customer can make when entering in a promo code. Too many incorrect attempts may signal abuse.

Delay point redemption period

Set up certain time periods that loyalty points can be used or delays in redemption to prevent customers from scamming the system.

Shorten refund and return windows

When customers can use points freely, they may collect rewards only to return the purchased items for a refund. To avoid this exploit, shorten refund and return windows if loyalty points are used for a purchase.


Detect and Prevent Loyalty Program Fraud with Kount®

Loyalty programs are incredibly valuable. They can bolster your sales and encourage long-lasting relationships with consumers. That’s why it’s so important to protect those programs — and your customers.

Preventing loyalty fraud on your own might seem daunting. Where do you even start? Fortunately, you have options. Working with a fraud technology provider like Kount is one of the most effective strategies for managing loyalty fraud. And fortunately, we can walk you through a solution that’s right for you. Sign up for a demo today to learn more.

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AUTHOR

Morgan Ackley

Content Strategist

Morgan has worked in the tech industry for over 5 years. Her breadth of knowledge and curiosity about technology and all things fraud-related drive her to craft compelling, educational pieces for readers seeking answers.