Loyalty Fraud, What is it? And How to Stop it!

Loyalty fraud is a problem that many businesses have suffered from over the past few years. While loyalty fraud is rare, occasionally someone will discover a loophole and exploit it for their own personal gain.

For that reason, you need to be aware of different types of loyalty fraud, learn how to detect them, and know what to do to safeguard your business against them. In this post we’ll explore everything you need to know about loyalty fraud and how you can stay one step ahead so you’re aware of any problems before they get out of control.



Types of Loyalty Fraud by Customers

Most loyalty fraud committed by consumers can be traced to activities that can be repeated to rapidly accumulate points. Older loyalty programs involving stamps or hole-punches were easily gamed by creating counterfeit stamps or by staffers stealing stamps and selling them.

Another type of fraud committed by consumers takes place when a customer rewards program is visit-based rather than transaction-based. For example, if visits are recorded by a Bluetooth BLE beacon in a store entrance that recognizes a member’s smartphone, what’s to stop a person “checking in” over and over to amass points?

With particularly lucrative programs, like airline programs, fraud artists sometimes create fictitious accounts with names very similar to those on legitimate accounts, then take over the identities of unsuspecting account-holders.

Loyalty Fraud by Employees

Loyalty fraud isn’t just committed by consumers, however. Sometimes employees get in on the act. If employees swipe their own cards on transactions for customers who don’t have cards, they can quickly accumulate a lot of points. Often they will wait for promotional transactions that they know earn double points so fewer swipes are required.

Another type of employee fraud involves registering a loyalty card, using it for customer transactions, then redeeming their own points for a customer purchase and pocketing the cash the customer gives them.

Franchise owners that are rated on how many people they sign up for loyalty programs have been known to sign up dozens or hundreds of fake accounts to meet quotas.

Steps to Guard Against Loyalty Fraud

It turns out that loyalty programs themselves can be good at discovering fraud. For example, if a cashier is swiping his or her loyalty card several times during one shift, it could be part of fraudulent activity like that described above. This activity would be clearly shown on daily reports of card swiping activity at a given location, which could be sorted by number of swipes or points accumulation.

By creating a customer rewards program that has built-in exception reporting, retailers can easily highlight unusual activity, like repeated unsuccessful login attempts to a rewards website, new shipping addresses in customer profiles, or spikes in redemption activity. If one customer’s name appears repeatedly when filling orders, and that person hasn’t been a heavy shopper before, it could be worth looking into further.

If you are considering implementing a customer rewards program, select a provider that records all transactions so that any fraudulent behaviour is documented and can be detected readily. You can also take steps like setting limits on the number of loyalty card transactions that a customer can perform in one day. Additionally, you can check points transfer statistics daily to see if any customers are accumulating points at an unusual rate and dig deeper to determine if anything fraudulent is taking place.

Don’t Let Loyalty Fraud Dissuade You

Don’t let loyalty fraud dissuade you from implementing a customer rewards program. Incidents of loyalty fraud are rare, and with today’s electronic tracking in real time, it’s easier than ever to prevent, detect, and stop it.

The Loyalty Box is a leading global provider of loyalty programs and specializes in helping small and midsize businesses develop exciting, effective programs that can increase revenues and boost customer loyalty significantly.

The Loyalty Box uses numerous checks and balances to help retailers prevent fraud and detect fraudulent activity early, before it can cause problems. To learn more, contact us at any time. We look forward to answering your questions about how a customer rewards program can make an enormous positive difference for your business.