How to Combat Referral Abuse and Fraud in 2024?

If your job is to upkeep the acquisition and churn rates in a healthy balance, the pressure of collecting new leads and customers will give you a few sleepless nights. There are many marketing strategies aimed at generating buzz around your brand, such as paid ads, SEO, social media presence, and you’ve guessed it – satisfied customers. 

According to Viral Loops, as much as 90% of consumers are more likely to trust and buy from a brand recommended by a friend. Hence, referrals prove to be one of the most effective forms of advertising your brand and acquiring new customers. 

The beauty of using referral marketing to your advantage is that any company can use it, provided, of course, that it has a few dozen happy customers ready to spread the word. But, hold your horses, remember that out of 99% of customers who will play fair, there is 1% of those who will try to game the system.

Sadly, referral fraud seems to be among the most popular types of fraud attacks experienced by e-commerce businesses in 2021, amounting to 21% of all attacks, according to Statista.

What is affiliate fraud?

Affiliate fraud refers to any fraudulent activity which is operated in order to generate profit from an affiliate marketing campaign. 

In this post, you will learn the basics of protecting your referral program from fraudsters so you and your business stay safe. 

You will also be educated on:

• What are the types of referral fraud and how does referral fraud impact your business. 
• How to secure your referral program by IT means.
• What constitutes the most popular referral fraud attempts.
• Actionable tips on safeguarding your referral incentives.

If you intend to run or you are already running a referral program, these tips are for you.

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What are the most common forms of referral fraud?

While you want to give your customers the best possible discount in order to incentivize them to shop more and build a superb loyalty experience, their intentions may not always be honourable. They may try to make themselves eligible for a single promotion multiple times or share your codes with an unauthorised audience. In order to protect yourself from referral fraud, it is best to know what you need to watch out for. 

Here are the 5 most popular forms of referral abuse:

1. Self-referrals and multi-accounting

Let’s say your campaign model looks like this: when customer X refers your business to customer Y, and when customer Y signs up, either just customer X receives a discount or they both do.

This may prompt existing customers to create multiple fake accounts in order to receive as many possible discount coupons (or other forms of rewards) as possible. The new customer IDs may be created while using special tech tools or, worse case scenario, stolen from legitimate customers of your business and then modified. 

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2. Account abuse

While granting discounts to referrers and referees, make sure your validation rules are properly set up. Otherwise, customer X may receive a discount when customer Y has not yet become your customer (and possibly has no interest in becoming one). For example, customer Y (the referee) has not completed an order at all or completed it and immediately cancelled after customer X (the referrer) received the code. 

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3. Repeat referrals 

This is a much simpler form of fraud as it simply exploits any sorts of loopholes in your referral program and its validation rules – customers may simply try to redeem the referral code multiple times and succeed. 

If you will not limit the number of redemption of your referral codes while setting up the campaign or your website will not be able to detect repeated redemptions of the same code, your customers may take advantage of using the code more than once. In the end, it will not be any sort of a crime on their part. 

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4. Discount sharing or broadcasting

Unfortunately, there exists an entire web of pages where you can find various discount codes to use while shopping at particular ecommerce stores. The codes, however, are frequently placed there and distributed without the owner’s consent. 

The fraudsters may share your referral codes online making it available to everyone and, in consequence, when your codes are not fraud-proof, multiple people will be able to use and redeem them. 

While this again is not considered a criminal behaviour, sharing such codes definitely violates terms and conditions of your promotion and makes unauthorised users use your codes which impairs your efforts to reward your truly loyal customers. 

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5. Account cycling

When you take care of the repeated and self-referrals, remember that some customers are willing to keep deleting and creating new accounts on your business’ website over and over again in order to benefit from promotions designated solely for new customers and designated sign-up offers. 

Ultimately, the more data you will require while signing up, the more difficult it will be for fraudsters to make any sort of undesirable actions towards getting one-time special offers multiple times with new accounts. 

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What are the signs that your business has fallen a victim of referral abuse?

• A sudden surge of the number of referral codes redeemed (or discount codes granted via referrals). 
• Suspicious email addresses gathered from referral campaigns as well as dubious customer data.
• An excessive number of entries onto your website from the same IP address.
• An increase in the number of cancelled orders.

What are the consequences of referral fraud for your business?

• Erosion of trust – handling referral fraud poorly may cause your business to lose reputation among your customers and business partners. In the end, nobody likes to be deceived and that includes both your customers who work honestly and redeem their discounts properly and your partners who put their trust in you while collaborating. 
• Money lossage – investing in a fraudulent campaign is one downside, but being deceived during the process of, for instance, discount redemption is another way where you are losing your money instead of building a coherent customer base. The referrals will simply not materialise and the flow of the campaign will be significantly impaired. 
• Improper data – when your referral campaign is susceptible to fraud, your system might be confused concerning the analytical process, as well as KPIs, and attribution numbers. You may think that your campaign is doing really well, but actually, you will be losing money due to fraudulent behaviour such as one person creating multiple fake accounts just to redeem discounts. Determination of what marketing channels work for you will prove difficult.
• Risking compliance fees – when your business is associated with fraud, you may be held accountable and pay heavy fines for the sake of Anti-Money Laundering (AML) or Know Your Customer (KYC) organisations. Even if committing fraud will not be your intention, you will still be fined for failure to comply with the rules and guidelines concerning, for instance, customer safety. 
• Lost time and effort – once your campaign is in full operation, it will be difficult for your marketing and development team to detect it and it might take a while before anybody notices it. Instead of putting their effort towards developing future campaigns, everyone will have to focus on detecting, among other things, phoney users. 

What can you do right now to prevent referral fraud?

This section aims to give you a ready to implement list of technical and practical referral anti-fraud options that will protect your referral program from going down the drain.

Practical solution to referral fraud include:

• Offer non-monetary rewards (discounts, gift or loyalty card points) for each referred customer.
• Rewards customer purchases or engagements, not solely invites. 
• Constantly monitor the referral program performance.
• Limit the number of times a customer can use his/her referral code. 

Technical solutions to referral fraud include:

• Monitor IP addresses.
• Track similar email addresses and email patterns.
• Check the referral rates.
• Block referral redemptions coming from rooted devices and emulators.
  

Nip it in the bud – how to design a referral program to avoid referral abuse and fraud?

The most common types of referral fraud include the creation of fake email accounts and email aliases, publishing codes on the internet via sites like Reddit, and setting up small-scale schemes for monetary gains via the use of the same referral codes over and over again. 

Here is my list of 4 things you can do while creating your referral program that will help prevent this type of referral abuse. 

1. Go for points or discounts, instead of cash rewards

Remember that opportunity makes the thief. If you give customers a chance to get 20$ for each referred user, you may expect that at least a few will try to get some cash out of your referral program. Monetary gains are, of course, the most attractive reward for customers, yet they pose too much of a risk. 

Instead of using cash as an incentive, try using loyalty or gift card points or discounts. Non-monetary rewards are a safer route to take, and they will bring you a small sum of profit back via bonus purchases triggered by discounts and free points, increasing the overall referral ROI. 

2. Reward engagement and purchases, not invites

Another trick that you can implement right at the beginning of sketching out your referral program is to set up that sending a referral code to a friend is not synonymous with receiving the referral reward straight away. A good idea is to reward customer engagements, preferably making a purchase.

But be careful. Simply establishing that making any purchase entitles the referer or the referee (or both parties in the case of double-sided referral program) is not enough. Remember to determine the minimum amount required for the purchase to be counted as successful. Otherwise, you may have many customers making 1$ purchases and receiving many referral benefits in return.

3. Watch out for shady user activity

Whether you decide to build your software architecture for handling a referral program or use SaaS referral providers, you always need to make sure that you have monitoring tools in place. In case of users performing any suspicious activities, such as failing to redeem the referral code several times in a row or providing false email addresses several times, you can react in real-time and manually prevent the given user from taking part in your referral program. Having logs and a list of recorded events connected with the given customer or referral code will be a great aid to make sure that no referral abuses will take place on your watch. 

4. Put limits on referral codes and rewards

The last thing (but not the least important) that I’d like you to consider doing is limiting the number of referral code redemptions. Otherwise, the redemptions will be unlimited, which may pose a significant risk to the safety of your referral program, especially if you have no other fraud prevention tools set in place. Limiting the redemption count and the timeframe of your campaign can help in creating a sense of urgency and may force users to choose wisely with whom they decide to share their referral codes giving you a bigger opportunity for high-quality leads. 

How can you safeguard your referral program programmatically?

Let’s assume that you’ve already done all you could with the referral program workflow to prevent and protect yourself against referral fraud. Designing a proper workflow can be substantially enhanced by setting up certain technical blocks that will allow you to flag individual user’s behaviours as suspicious. ‍

1. Track User’s IP Address

Monitoring IP addresses is one of the least complicated solutions to block attempts at referral fraud. There are several ways in which you can utilize IP tracking in identifying suspicious user’s activity. For example, you can mark the user as suspicious if he or she gets more than four referred friends from the same IP address. Also, you may block users who share an IP address with a friend he or she invited to your referral program.  

2. Keep an eye on email patterns

In most cases, referred users would need to use their email address to log into your website and perform the activities that would mark the referral process as successful. That gives you an excellent opportunity to check each email address for uniqueness and other features that you deem necessary. You can block referrals coming from similar email addresses or email aliases. 

What is an email alias? Well, an email alias is an additional name for an email account. It allows you to create alternative email addresses without having to create another email box. Make sure that your referral system automatically blocks email addresses containing "+" so that customers cannot provide email addresses such as jenna+google@email.pl or jenna+yahoo@email.pl to receive referral rewards. 

Also, you may want to flag all users who used email addresses coming from temporary email domains. 

3. Have referral rates under control

Another simple technical trick is to set up an automatic block on users whose referral activity rates are staggering. What staggering means depends solely on your business. For example, you may decide that if a referrer gets more than five friends in an hour, he or she will automatically get blocked. For other businesses, it can be ten friends and so on. 

Keeping track of referral rates should be plain sailing if you choose a referral provider that offers easy access to in-depth analytics and user activity logs.

4. Rooted devices and emulator devices 

My last bit of advice concerns the use of rooted devices and emulators. Identifying such devices can help you find fake IP addresses that can be used to cover referral fraud and referrals coming from the same person but two different IP addresses. 

All the above tips should help you identify potential fraudsters, but remember that errors happen, and you should not block users immediately after noticing some suspicious activity on their accounts. What you can do instead is reach out to them, either via manual or automatic message, to find out whether they ran into any problems or maybe made a typo while typing in the email address. 

Referral programs always entail some percentage of unwanted user activity as it is an integral part of any direct business cooperation with customers. Just keep that in mind, do all you can to prevent referral fraud with the tips I gave you, and enjoy some new customers on board as positives coming from well-planned referral schemes outweigh the negatives. 

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