Protecting Your Business From Loyalty Fraud

Today, businesses are realising that a top-notch customer experience is the key to staying one step ahead in a highly competitive market. Enterprises are investing in loyalty schemes to elevate the online shopping experience for their most valued customers.

Unfortunately, fraud rings have shifted towards account-based vulnerabilities and target loyalty schemes through sophisticated fraudulent techniques. Not only that, but individual customers and internal staff can also exploit loyalty schemes and commit fraud, according to Signifyd’s ecommerce data report. We explore how to protect your business from loyalty fraud to reduce both brand reputation and customer relationship damage.

What is loyalty fraud?

Businesses all over the world are investing in schemes intended to reward their valued customers and increase brand loyalty. Merchants, airlines, and hotel chains are the organisations that are employing this technique the most. American Airlines’ loyalty program, for example, can be valued “anywhere from$18 billion to $30 billion,” says CFO Derek Kerr.

Loyalty points are equivalent to currency, as they can be used to make financial transactions, and that’s what makes them appealing to fraudsters. They engage in excessive or fraudulent reward points redemption for unfair gain, which is considered loyalty fraud.

Nevertheless, loyalty fraud often remains overlooked by retailers. Loyalty points can easily be exchanged on the dark web, as there is minimal communication between the seller and the buyer, or they can be exchanged for gift cards, which can easily be converted to cash on many marketplaces. Another reason why there is an increase in loyalty fraud is that loyalty programs are far less scrutinised by their account holders because they don’t see them as high risk.

The pandemic gave even more rise to loyalty fraud as neglected loyalty program accounts are an easy target for fraudsters. People were using their miles significantly less to travel by air. The flight market revenue reduced from around £18 billion to around £5.1 billion between 2019 and 2020 in the UK. Although it’s slowly recovering, it will take a while until it reaches pre-pandemic levels, and loyalty fraud will still be an issue. Similarly, consumer spending on hotels and restaurants in the UK decreased by 42% between 2019 and 2020.

Types of loyalty fraud

The three most common types of loyalty fraud include account takeover, internal fraud, and customer fraud.

Account takeover

Account takeover or ATO as it’s more commonly known as a type of fraud that both retailers and customers have been battling for years. It involves stealing account holder credentials through a data breach, malware, or phishing, and using them to make unauthorised transactions or loyalty points redemptions.

During the pandemic, fraudsters became even more innovative in terms of their social engineering tactics, and they have come up with new methods to directly target consumers with the aim of stealing their personally identifiable information, according to a study by Javelin Strategy & Research.

Internal fraud

Employees can also commit loyalty fraud by exploiting their ‘insider’ privileges against the terms and conditions or the IT Systems of the loyalty program. They may manipulate customers’ details steal unclaimed points, add extra points to their balances, or encourage customers to sign up for the program.

Customer fraud

This type of fraud occurs when a customer finds a loophole or a hack to exploit the system for personal gain. For example, they can sell or transfer points illegally, claim air miles twice for a shared-revenue ticket, or create multiple accounts to earn more points.

How to protect your business from loyalty fraud

The risk from loyalty fraud is real for both businesses and customers. Thankfully, there are preventative measures that can be taken to stop loyalty fraud in its tracks before negative consequences occur, such as hard costs or damaged reputation and relationships.

· Keep informed about the latest loyalty fraud methods to be able to mitigate the action quickly.

· Regularly examine your loyalty program for potential loopholes.

· Always notify account holders if a data breach occurs and instruct them to carefully check their accounts.

· Limit employee access to the loyalty program data as much as you can.

· Strengthen account access security by implementing multi-factor authentication.

· Invest in a fraud-protection solution that uses machine learning and automation to prevent account fraud while providing a frictionless customer experience.

With the rise of loyalty programs comes the rise of loyalty fraud that aims to exploit customer details for personal gain. Thankfully, with awareness about the various preventative measures, loyalty fraud can be minimised, and businesses can continue rewarding their valued customers.

Sources

https://www.forbes.com/sites/willhorton1/2020/05/20/aadvantage-miles-will-soon-be-government-collateral-as-american-airlines-pledges-frequent-flyer-program-for-coronavirus-loan/?sh=66f08b8678f8

https://thewisemarketer.com/data-and-privacy/48-trillion-reasons-loyalty-fraud-is-on-the-rise/

https://www.statista.com/forecasts/518759/revenue-in-the-flights-market-in-the-united-kingdom

https://www.statista.com/statistics/476625/restaurant-and-hotels-consumer-spending-uk/

https://www.javelinstrategy.com/press-release/total-identity-fraud-losses-soar-56-billion-2020

Homepage – DC360 Promo – November 2023

Ed Whitehead

managing director of EMEA for Signifyd

How E-commerce Marketers Can Win Black Friday

Sue Azari • 11th November 2024

As new global eCommerce players expand their influence across both European and US markets, traditional brands are navigating a rapidly shifting landscape. These fast-growing Asian platforms have gained traction by offering ultra-low prices, rapid product turnarounds, heavy investment in paid user acquisition, and leveraging viral social media trends to create demand almost in real-time. This...

Why microgrids are big news

Craig Tropea • 31st October 2024

As the world continues its march towards a greener future, businesses, communities, and individuals alike are all increasingly turning towards renewable energy sources to power their operations. What is most interesting, though, is how many of them are taking the pro-active position of researching, selecting, and implementing their preferred solutions without the assistance of traditional...

Is automation the silver bullet for customer retention?

Carter Busse • 22nd October 2024

CX innovation has accelerated rapidly since 2020, as business and consumer expectations evolved dramatically during the Covid-19 pandemic. Now, finding the best way to engage and respond to customers has become a top business priority and a key business challenge. Not only do customers expect the highest standard, but companies are prioritising superb CX to...

Automated Testing Tools and Their Impact on Software Quality

Natalia Yanchii • 09th October 2024

Test automation refers to using specialized software tools and frameworks to automate the execution of test cases, thereby reducing the time and effort required for manual testing. This approach ensures that automation tests run quickly and consistently, allowing development teams to identify and resolve defects more effectively. Test automation provides greater accuracy by eliminating human...

Custom Software Development

Natalia Yanchii • 04th October 2024

There is a wide performance gap between industry-leading companies and other market players. What helps these top businesses outperform their competitors? McKinsey & Company researchers are confident that these are digital technologies and custom software solutions. Nearly 70% of the top performers develop their proprietary products to differentiate themselves from competitors and drive growth. As...

The Impact of Test Automation on Software Quality

Natalia Yanchii • 04th October 2024

Software systems have become highly complex now, with multiple interconnected components, diverse user interfaces, and business logic. To ensure quality, QA engineers thoroughly test these systems through either automated or manual testing. At Testlum, we met many software development teams who were pressured to deliver new features and updates at a faster pace. The manual...