News, Education and Events Decoding Digital Payments & Fraud

News, Education and Events Decoding Digital Payments & Fraud

Loyalty Program Fraud Comes Out of the Shadows

Loyalty Program Fraud Comes Out of the Shadows

By Barry Kirk, Vice President of Loyalty, Maritz Motivation Solutions

Every sizable loyalty program was a victim of attempted fraud or hacking in 2017. Those who believe they weren’t simply haven’t paid attention.

The fact that loyalty programs are at significant risk for hacking shouldn’t be a shock. Customer data breaches are predicted to cost business some $8 trillion over the next five years. In the e-commerce space specifically, fraud already exhausts 8 percent of the average merchant’s revenue stream, while fraud management accounts for 21 percent of operational costs.

Fraud and hacking are a daily reality in an increasingly connected consumer world. The loyalty industry, which manages vast amounts of consumer data and tens of billions of dollars in point value, is not immune. And innovations like point pooling, gifting and liquid currency, while bringing new choices for consumers, have also added new access points for fraud.

The overall loyalty industry’s risk of exposure on this topic is significant, as I explained in an interview with Kiplinger earlier this year:

“Loyalty managers have kept a low profile with regard to breaches that have occurred, but it’s just a matter of time until there’s a well-publicized breach of a large program—most likely in airline or hotel rewards because members accrue significant value in those programs.”

Thankfully, a major high-profile breach has yet to occur. But loyalty program fraud still became an unavoidable topic in 2017.

The Weak Link

This year, the loyalty space began to address the topic of fraud. Until very recently, program fraud was only discussed in hushed tones or dismissed as a non-issue. Now all major loyalty agencies proudly promote their fraud protection tools and process. Increased awareness has also inspired the launch of several new industry events dedicated solely to addressing fraud detection and prevention. The topic is also a frequent subject of mainstream media coverage.

Companies with programs now recognize that hackers and organized criminal networks have identified loyalty currencies as potentially easy targets for one simple reason: low consumer awareness. Unlike their bank and credit card accounts, few consumers closely monitor their earned point balances or update account passwords on a frequent basis.

However, consumer awareness may be shifting. According to new consumer research from a 2017 Maritz study:

  • 56 percent of consumers now indicate they are concerned about loyalty program fraud
  • While only 7 percent of consumers identify themselves as having been a victim of program fraud, of those who have experienced fraud, 58 percent say the event made them less trusting of the brand overall, and 45 percent said they are less likely to purchase from that brand in the future.

What does this change mean for loyalty marketing?

As consumer awareness of loyalty point fraud rises, the risk to brands will be three-fold:

  • Breaches of member accounts pose a major PR risk, both to your program and to your brand, since more attention is likely to be paid when a breach does occur.
  • Breaches pose a financial risk as brands are responsible for reimbursing lost points or fraudulent redemptions.
  • Most importantly, defrauded loyalty program member may become a lost program member.

But, there is an upside.  While the potential consequences are serious and could be costly, the sunlight now shining on the possibility of program fraud should reduce the risk of fraud occurring. Heightened awareness by brands should bring increased attention to fraud/hacking prevention best practices, with increased expectations that loyalty partners provide advanced fraud detection tools. Similarly, consumers who realize their points could be attractive to criminals will likely monitor their accounts more closely and recognize the real dollar value of those points. Increased vigilance by both groups will be a major win for loyalty marketing in 2018.

Barry KirkBarry Kirk’s expertise and passion is the design of compelling human experiences that drive engagement and loyalty. He works to apply that expertise in solving real-world challenges in the consumer marketing space, the travel industry, and on behalf of a number of non-profits by utilizing deep insights from the human sciences, behavioral economics, game thinking and techniques from the emerging discipline of Persuasive Design. Barry is also the originator of “The 4-Dimensional Loyalty Framework,” a human-centered model for evaluating and improving consumer engagement strategies. 

 

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