How to Stop Loyalty Program Fraud in 9 Simple Steps in 2024?

In this post, you will learn the top 9 tips on securing your loyalty program from fraud.

You will also get:

• Examples of top loyalty programs (e.g., Sephora) and how they fight against fraud.
• Definition and examples of loyalty fraud.

Running a loyalty scheme is an appealing way to improve customer relationships and to boost sales. Though most customers who subscribe to your loyalty scheme participate as you expect, there are some who join only to get the benefits of the program.

W‍hat is loyalty fraud and fraud types?

Loyalty program fraud happens when a customer is abusing a loyalty program’s processes or terms and conditions to get financial gains. Loyalty fraud can be committed in several ways, for example by signing up multiple times, manipulating orders, etc.

Customers who commit fraud are called fraudsters. Fraudsters cannot only undermine your desired ROI but also can endanger your whole rewards program. Therefore, loyalty fraud prevention needs to be a part of your marketing strategy. Continue reading and find out how to implement anti-fraud measures and make your loyalty scheme a success story!

Fraudsters cannot only undermine your desired ROI but also can endanger your whole loyalty program.

What are the most common types of loyalty fraud?

As a marketer, you need to know the most common types of loyalty fraud and their impact on your rewards program:

1. Loyalty points hacking – fraudsters can manipulate loyalty systems to increase their rewards balance through unauthorized means, such as exploiting software vulnerabilities or using bots. This not only undermines the perceived value of the rewards, but it also creates operational costs for the program, especially if the vulnerability goes viral.
2. Account takeover – this type of fraud occurs when fraudsters gain access to a legitimate customer's loyalty account and redeem rewards or manipulate the account balance. This is usually achieved through phishing attacks, password reuse, or exploiting weak security measures. The consequences of account takeover can range from a loss of rewards to a loss of customer trust in the program.
3. Fake loyalty programs – a fake loyalty program is created to trick customers into joining and providing personal and financial information. Fraudsters can then use this information for identity theft or other types of financial fraud. This type of fraud is especially harmful as it can cause irreparable damage to the brand reputation.
4. Redemption fraud – this type of fraud happens when rewards are redeemed through false or illegitimate means, such as using fake credentials or expired promotions. Redemption fraud not only affects the financial performance of the program but also erodes the value of the rewards.
5. Data breaches – data leakage can be a major risk for loyalty programs, as they often store large amounts of customer data, including sensitive information such as payment information and transaction history.

As a loyalty marketer, it's important to have robust security measures in place and to continuously monitor your program for signs of fraud. This can include using advanced authentication methods, regularly reviewing program data, and working with dedicated fraud teams to identify and prevent fraudulent activity. Here are some ways to quickly minimize the risk of loyalty program fraud.

How to stop loyalty fraud in 9 simple steps:

1. Re-think your rewards
2. Create customer segments
3. Reward engagement and purchases, not invites
4. Verify email addresses
5. Offer non-monetary loyalty rewards
6. Limit redemptions
7. Define upper discount value
8. Implement monitoring tools
9. Work with better customer loyalty software
   

1. Re-think your rewards

Analyze the costs of your products and margins, define a budget for your rewards program and offer reasonable incentives that create value for the loyal customers and for your business. Step by step, you will get closer to a fraud-free loyalty scheme.

Fraudsters are looking to pick the low-hanging fruit. If it is effortless to get the rewards or the reward is too valuable, fraudulent behavior might appear soon. If it is too challenging to get the rewards or the value of the rewards is too low, no one will take part in your loyalty program.

To know whether you got the reward value right, ask yourself the following questions:

• Does the value of your discount makes sense when compared to average order value? Irrational discounts attract fraudulent activity.
• Does the margin on every product cover this offer? If not, customers might find a product that has a lower price than the market price, and take advantage of it.
• What are the terms and conditions? Can the discount be redeemed once or multiple times?

Learn more: How to think outside the box when it comes to loyalty rewards?

2. Create customer segments

Customer segments are specific groups of customers defined by buying profile, location or interactions (e.g., new customers, customers already signed up for newsletter, customers who have already spent €100, customers from the EU or the US, etc.).

Create customer segments (also called membership tiers) for your program to make sure that redemptions will be invoked only by customers from a certain group. It costs more time, money and effort to become a top tier customer. By using customer segments, you can offer higher discounts to the experienced customers, who are less likely to commit fraud.

Besides protecting your budget from fraudsters, you can offer more personalized customer experiences with targeted coupons for different customer tiers.

Example: Sephora's Beauty Insider program

Sephora’s Beauty Insider program is a great example of managing customer tiers. Members of the program receive 1 point for each $ spent. These points are redeemable for gift cards, exclusive products (limited edition products, products that are not available to the public) or in-store beauty tutorials.

The Beauty Insider program became extremely popular. The program counts more than 17 million loyal members (data from 2019) that make up 80% of the company’s annual sales.

3. Reward engagement and purchases, not invites

If a referral program is part of your loyalty program, you need to be cautious. Referral fraud is common and prevention is essential. For fraudsters, inviting themselves multiple times to a loyalty program is almost effortless. Do you want to reward it? Of course not. To avoid referral fraud, you need to define clear rules for a successful referral. For example, the referee can only receive his or her reward, after the new customer makes a minimal purchase.

Learn more: How to combat referral fraud?

4. Verify email addresses

Loyalty program fraud happens when one customer signs up multiple times.

How?

• By using  the same email address again and again.
• By using mixed-case characters (JeNNa@rspective.pl and JENNa@rspective.pl).
• By creating email aliases*. ‍
  

*An email alias is a way to create an additional name for an email account. Fraudsters often use aliases to sign up for loyalty or referral programs to use your incentives multiple times.

Avoid these fraud attempts by limiting, lowercasing and filtering email addresses and by implementing a double opt-in feature (the double opt-in feature verifies the existence of the email address before finishing registration).

5. Offer non-monetary loyalty rewards

Fraudsters prefer receiving cash, therefore it's less likely that they will tap your loyalty program if you offer non-monetary rewards. Non-monetary rewards include points, free products, or charity donations.

Developing a pointing system is safe, and it will bring you a small sum of profit back via bonus purchases triggered by discounts and free points, increasing the overall loyalty ROI. Redeemable points increase the average order value of the customers and in the meantime, encourage customers to stay with your brand.

Additionally, a pointing system opens up new opportunities for both parties. You can offer points to your customers for their purchases, for their reviews on products, for social media sharing or for referring their friends. Then, the customers can make their own choices when it comes to choosing a specific reward. They can exchange points for products, discount coupons, or even charity vouchers.

Example: ClubBebe loyalty program

ClubBebe is the rewards program of Bebe, an American boutique chain. Customers are rewarded 1 point for each $ spent, 15 points for product reviews, 20 points for social media connection and 200 points for each successful referral. ClubBebe is a diverse loyalty program that enables their customers to interact with the brand in more ways than placing orders.

Example: TOMS One for One Program

Charity loyalty programs offer free products or financial help for charity organizations. This non-monetary incentive works great for customers who are more engaged in the issues of social justice and equality.

TOMS One for One Program is a great example of a charity loyalty programs. TOMS is an American company designing shoes, eyewear, and other apparel. TOMS offers shoes, glasses, water, and education in regions in need.

6. Limit redemptions

A big discount might be attractive for new customers to join the program, but it is also an invitation to fraud. Whenever you offer a voucher for loyalty program members, make sure that you limit voucher redemptions* to prevent fraud.

*Redemption of a voucher – exchanging a voucher for goods. A customer can redeem a voucher once or multiple times depending on the selected limit (quantity).

7. Define upper discount value

Upper discount value is the maximum value of a discount that customers can get while redeeming codes. To protect your ROI and marketing budget from fraud, it is advisable to set the maximum discount that your customers can get.

Let’s assume you run a campaign with 10% discount coupons and the upper discount value is $100. Every order of $1000 or less gets 10% off the price depending on the value. The upper discount value will be used at orders that are worth more than $1000. These orders will get a maximum of $100 discount (which is eventually less than 10%).

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8. Implement monitoring tools

Make sure you can monitor your customers to filter suspicious behavior. Look for the red flags like orders with extremely low or high values, cancelled orders, failed referrals or customers with many unused points. If you want to create a fraud-proof loyalty program that fits your marketing budget and your target market, you will need a promotional system that gives you a great variety of anti-fraud tools. It is worth investing in a system that has strong fraud detection and prevention features, like Voucherify. By following these steps you can make sure that you have done everything to reduce risks of loyalty program fraud.

9. Work with better customer loyalty software

A great customer loyalty software should have in-built features that help you fight fraud. Everything mentioned previously, from customer segmentation, rewards personalization, earning rules, redemption limits, e-mail verification to monitoring tools are a part of a features stack offered by great customer loyalty software. If your loyalty software doesn't offer such functionalities out-of-the-box, maybe it's time to consider upgrading your technology stack.

Voucherify is a headless, API-first customer loyalty software that offers all previously mentioned anti-fraud features out-of-the-box.

Learn more: Explore Voucherify's Open Source Loyalty Accelerator

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