4 Types of Rewards Fraud and How to Prevent Them

rewards fraud

For businesses, customer loyalty is the key to success. The cost of attracting a new customer is five times greater than the cost of retaining an existing customer. Companies offer incentives such as loyalty programs and rewards to encourage customers to remain loyal to your brand. But what happens when an enemy is emerging, lurking in the shadows? Loyalty fraud is taking over, with its risks intensifying on a day-to-day basis, with more people falling victims to this undraped foe.

What happens when these programs are taken advantage of?

Loyalty fraud is a type of fraud that occurs when someone uses a loyalty program to earn rewards they are not entitled to – by creating fake accounts, using someone else’s account without their permission, using stolen or counterfeit loyalty points or miles to redeem rewards or get discounts on merchandise or travel. 

In this blog post, we’ll discuss the most common types of loyalty fraud and their prevention techniques. 

What Exactly Is Loyalty Fraud?

Loyalty fraud occurs when a person uses a loyalty program to gain rewards by making false or unauthorized transactions. Around 72 percent of loyalty programs experience some type of fraud. This can include using stolen loyalty cards, creating fake accounts, or redeeming points without actually making a purchase. Loyalty fraud can be costly for businesses, as it can lead to lost revenue and a poor bottom line.

Is Friendly Fraud a Type of Reward Fraud?

Like loyalty fraud, friendly fraud occurs when a customer gets an unauthorized benefit during a purchase. Whether that is done through redeeming rewards points for travel, merchandise, or cash back without actually taking the trip or making the purchase. In some cases, friendly fraudsters will even use stolen credit cards to rack up points before cashing them in. 

Friendly fraud gets tricky because it can’t be disputed easily. It is much cheaper for most companies to offer a refund to customers than to bear the fees of chargebacks. 

Friendly fraud can be of different types:

  • Family fraud: A family member using someone else’s card to make a purchase. A typical example is a child using their parent’s card to make an online purchase. 
  • Merchant error: There’s a problem from the merchant’s end. The reason could be delivery issues, incomplete products delivered, etc. 
  • Policy abuse fraud: Using refund requests more than the average amount. 
  • Unintentional friendly fraud: This is done when a customer doesn’t recognize that a transaction has already been done from their bank. Similarly, there can be an honest mistake. For instance, a customer might forget that they performed a transaction. 
  • Intentional friendly fraud: A refund request is issued to the bank even though the customer knows they have already purchased the item.

Types of Friendly Fraud

Now that we know the types of friendly fraud let’s discuss the different ways in which loyalty fraud occurs. 

  • Points Schemes

In such a scheme, customers will try to gather as many points as possible. 

For instance, a cafe might introduce a points program where you get 50 points for every $10 spent. A particular customer wants to purchase eateries worth $30. Instead of buying them all at once, the customer splits the bill into three and, as a result, gains 150 points. 

Customers come up with unique ways of collecting points. They’ll then redeem those points for high-value items the particular company sells. To prevent this type of fraud, businesses should limit the number of points earned in a day, week, or month.

  • Counterfeit Means

False applications occur when fraudsters apply for multiple credit cards to collect the sign-up bonuses. They’ll then cancel the cards before incurring any fees or interest charges. 

Hackers target loyalty programs because points are untraceable.

Hackers can break into a system to steal loyalty points. Once they have enough points, they can redeem that at different places. Loyalty programs are easy targets. Most credit card holders are not aware of their existing points. Even if hackers redeem their current points, it’s difficult for credit card holders to find out. 

Although it’s getting complicated with the increasing number of authentication steps required, fraudulent account creation is still a threat. Anyone can create a fake account using stolen or synthetic identities in order to collect points. In some cases, fraudsters will even go so far as to create multiple accounts to collect more points. 

  • Excessive Returns

Excessive returns happen when dishonest customers return merchandise they’ve used slightly. It can be any accessory or clothing used significantly less, such that it still looks as good as new. 

Sometimes customers might abuse the loyalty program without realizing they are committing fraud.

Customers often do this to receive store credit that can be used to buy other items. Using store credits, customers can use their points to purchase other items at a discount. For instance, some customers will abuse the returns policy by issuing too many refund requests. 

Technically they’re not doing anything wrong since refunds are allowed by the company. However, companies must draw a line between how much they want customer loyalty and how much they care about their bottom line. 

  • Internal Fraud

This is when members from within the organization abuse the loyalty programs. This can be done by employees or management giving themselves points or rewards or by selling customer information to third-party marketers. 

Employees abuse their position within a company by giving friends and family freebies or discounts.

To prevent internal fraud, businesses should have clear policies and procedures in place regarding the use of loyalty programs. Preventing internal fraud is tricky. If companies closely monitor employee transactions, employees are being micro-managed, which could lead to low morale. A better way is to have clear policies and procedures in place and trust your employees to adhere to them. 

Employee transactions and activity should only be monitored if there are any red flags. For instance, conducting random audits of transactions can help prevent internal fraud if there’s a doubt that policies are being exploited. 

How to Prevent Your Company from Rewards Fraud?

Having loyalty programs has its advantages, such as repeat customers and word-of-mouth marketing, but it also has a few disadvantages. The main disadvantage is that if your company doesn’t have a strong protection link, then it is easily targeted by fraudsters. 

To prevent loyalty fraud, businesses should adopt the following strategies: 

  • Require customers to provide proof of purchase when redeeming rewards. For example, customers could be asked to show their boarding pass when redeeming points for travel-related rewards. 
  • Require new members to provide a valid ID when signing up for a loyalty program.
  • Require ID verification when points are redeemed. This will ensure that only the account holder can redeem rewards. 
  • Review your program regularly and make changes as needed.
  • Educate your employees on the signs of loyalty fraud and how to prevent it. 
  • Monitor accounts for suspicious activity and take action as needed.
  • Keep track of return patterns and institute a policy requiring ID for all returns.
  • Use AI predictive engines to analyze the instances of potential future frauds.
  • Require applicants to provide proof of income and employment history.

(Read: How AI can take businesses to the next level)

In short, loyalty fraud can be costly for businesses and customers alike. By taking steps to prevent loyalty fraud, businesses can protect their bottom line and their customers’ hard-earned points.

Final Verdict: can you avoid loyalty frauds? 

Loyalty programs are designed to reward customers for their continued patronage, but they can also leave businesses vulnerable to fraud. Loyalty fraud can have a significant impact on businesses, as it can lead to lost revenue and decreased customer satisfaction. 

So, can your business have loyalty programs and refrain from falling victim to loyalty fraud? 

Well, the answer is simple, yes.

To protect your business from loyalty fraud, it is essential to have systems in place that can identify and prevent fraudulent activity. Here’s a quick summary of the different ways you can avoid the occurrence of loyalty fraud.

  • Requiring customers to provide identification when signing up for a loyalty program
  • Monitoring transactions for suspicious activity
  • Offering customer support in case a problem arises.

By taking steps to prevent loyalty fraud, protect your business, and ensure that your customers can take advantage of your loyalty program. Be aware of these types of fraud and institute policies to prevent them.

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