Loyalty Fraud Is On The Rise…
Loyalty programs have grown steadily in the last decade because a well-designed and well-executed program can help retain existing customers, attract new customers, reduce turnover, and drive profits. Criminals have taken note of the popularity of these programs and loss from direct and indirect loyalty fraud is increasing (currently estimated at $1 billion every year 1 ).
The primary goal of loyalty programs is to drive customer retention and enhance lifetime customer value 2 . Fraud directly puts these objectives at risk and can result in:
- Direct Financial Loss – Fraudulently acquired points are redeemed for goods and services at a cost. In addition, the organization /should replace any points stolen from genuine customers
- Damaged Reputation – Customer loyalty is undermined with significant reputational damage, negative customer experience, and a decline in customer’s lifetime value
- Collapse of program sponsorship – Organizations that see significant sign-up abuse may be unwilling to provide new offerings or expand Loyalty Schemes
Malicious actors can be customers, internal staff, or 3rd party actors. However, one universal truth is that they /could research and exploit any and every opportunity available.
The negative impact of loyalty fraud has resulted in organizations starting to deploy ad hoc counter fraud solutions. However, the accuracy of these solutions is typically low (~40% – 60% 3 ). To deploy effective and optimal anti-fraud solutions that deliver a great customer experience, it is critical to identify and quantify organization-specific loyalty fraud hotspots across the end-to-end customer journey.
…And Loyalty Fraud Is Present Throughout The Customer Journey.
Today, in North America, digital customer interaction accounts for 65% of total customer interactions4. Customers increasingly prefer managing their loyal programs – from accounting opening to redeeming points – through digital platforms. This provides fraudsters multiple entry points, for example
- Hacking into active and inactive accounts (i.e., Account takeover)- Exploiting points and payment instruments
- Creating fake accounts (i.e., ID theft) – Often using stolen identities to accumulate, store, sell and redeem points
- Exploiting overshare schemes (i.e., Policy abuse, returns fraud, dispute fraud, etc.) – Violating policies, and illegitimately gaining program rewards
- Colluding to steal points (i.e., asset misappropriation) – Taking advantage of physical and technology access
We have highlighted the top fraud threat vectors from account creation to refund/dispute management below.
Figure 1: Threat Vectors Across Customer Journey
With over 300% rise in the availability of breached credentials on the dark web, coupled with low-cost brute-force password crackers and account checker bots (cheaper than a cup of coffee – $4 USD 4 , identity theft and account takeovers have never been easier. To add to it, with an estimated $48 trillion of unspent loyalty points globally and ~45% of memberships being inactive 5 – customers tend to pay less attention to their loyalty program accounts and notice missing points months or even years after the fraud attack.
With a whopping 15.5% increase in digital commerce in 2021 6 (when compared to 2019), customers are becoming increasingly exposed and aware of the policy loopholes and technology limitations. From obtaining bonus points by opening multiple accounts, collecting promotion points by bulk-buying goods at discounts then reselling later, to falsely reporting lost or stolen points after actual redemption, bad customers/actors exploit opportunities throughout the customer lifecycle.
Internal staff may also drive-up loyalty fraud by asset misappropriation, i.e., by crediting points related to customer purchases to their own accounts, accumulating goodwill points below the threshold, or with the right system access, transferring customer points to own accounts.
As customer expectations, digital customer experience, and fraud schemes are constantly evolving, organizations need to take a holistic approach to mitigate loyalty fraud while reducing customer friction. Being nimble at managing loyalty fraud is key, and organizations can start by strategically structuring loyalty fraud programs.
(To be continued…)
- Customer Lifetime Value = Average Total Order Amount * Average # Purchases Per Year * Retention Rate
- Accenture Functional Experience 4 https://www.statista.com/statistics/1248804/share-of-customer-interactions-that-are-digital/