3 Types of Loyalty Fraud and How to Prevent Them

September 24, 2019

By the security experts at Solink

 

Loyalty programs are an essential part of any modern business. In fact, an estimated 48 billion dollars’ worth of loyalty points and miles are currently unredeemed in the United States alone. However, most concerningly, 72% of customer loyalty programs have reported some type of theft or fraud. If you run a loyalty program, you should be aware of the three main types of loyalty fraud to watch out for so you can proactively recognize and stop them before they wreak havoc on your loyalty program.

Loyalty Card Fraud Is Often Committed by Customers

 

Your customers want to get the most for their money, but they won’t all go about it honestly. While having a customer loyalty program is extremely beneficial to your business, you should be aware that someone will always be looking to take advantage of the situation — maybe without realizing that their actions count as fraud.

How do they do it?

Loyalty fraud can be as simple as taking advantage of loopholes to push the limits of what’s normally deemed acceptable. If you’re not very explicit with your program limitations, or if an employee isn’t paying attention, a customer may be able to circumvent the system to earn extra loyalty points or rewards.

For example, if you run a promotion in which members earn 50 bonus points every time they spend $50 or more, they may try to split a $200 transaction into four to earn 200 extra points. By adding a limitation like “one per customer, per day,” your customers won’t be able to get away with these types of workarounds. But even if strict rules are in place, it’s up to your employees to enforce them.

Starbucks is another example. The coffee chain runs a loyalty program that rewards frequent visitors with a free coffee. One person figured out a way to game the system and walked away with a free beverage that ended up costing the company a whopping $55. While the customer wasn’t technically doing anything wrong on paper, if every member took advantage of the system that extravagantly, even a widely successful company like Starbucks might not be able to carry that kind of liability.

Why do they do it?

Your customers may love your business and your loyalty program, but sometimes they might want more than you can give them. Specifically, when it comes to “free” rewards, they might not always see the bigger picture or realize how their seemingly innocuous actions can negatively affect your business.

For instance, they might think that your company is immune to small cheats because it makes thousands or even millions of dollars per year. They might not realize how their seemingly inconsequential actions could impact your business in the grand scheme of things. The problem is that as a business owner or manager, you have direct insight into the cost of giving away freebies. If too many customers abuse the system, it won’t be sustainable and could affect your bottom line.

How can you stop it?

Your employees are your first line of defense against customer loyalty fraud. If they’re not fully trained to deal with a customer who’s trying to push the limits, they may not take the best course of action. One of the best ways to prevent fraud is therefore to teach your staff what is and isn’t acceptable within your loyalty program and to prepare them for the worst.

Start by providing your staff with the tools they need to identify customers who are trying to manipulate the system and confidently face them. For example, you could give your staff examples of what to say if a customer is upset about not being allowed to separate transactions. Be ready to back up your employees if necessary.

You could also use a smart video-surveillance solution such as Solink to learn from past in-store interactions and improve how you train your staff. By monitoring transactions, you could use saved video clips to teach your staff how to recognize fraud and how to handle it. Training based on real-life situations will make preparing your team simpler, and their response, more effective.

Loyalty Card Fraud Can Happen with Employees, Too

 

Your employees know your loyalty program better than anyone else. They have access to key functions and know how to manipulate the system. To secure your loyalty program, you should therefore consider the risks that your employees pose.

How do they do it?

Internal loyalty fraud can happen quickly and easily go unnoticed. All it takes is for an employee to hide their loyalty card at their workstation and scan it instead of a customer’s. Depending on the system, certain users may be able to manually alter the loyalty rewards in their account.

Why do they do it?

As with other types of employee theft, internal loyalty program fraud could happen for many reasons. For instance, employees who feel undervalued or overworked might believe that they deserve a little bonus. They may tell themselves that claiming points is a victimless crime: after all, a customer would have collected the points anyway, so what’s the harm in an employee doing so? Most likely, they might not even realize that earning points for a purchase they didn’t make could be viewed as theft. Regardless of the reason, these stolen points add up and could end up costing your company thousands of dollars.

How do you stop it?

Catching employees committing loyalty fraud can be difficult, but there are a few tricks you can try. For starters, you might want to monitor your employees’ transactions to see the rate at which loyalty cards are used. It’s highly unlikely that all your customers have a loyalty card, so if  loyalty points were earned with 100% of a cashier’s transactions, something is most likely wrong.

A versatile tool like Solink can give you insight into how smoothly your business is running and can make tracking your employees’ actions and identifying unusual transactions a snap. Watching video footage linked to each transaction is the key to confirming that your cashiers are scanning the right loyalty cards. You can use it to check in on average loyalty card uses, and if ever you notice suspicious behaviour, you can watch specific transactions to figure out if any one employee is scanning more member cards than the rest. If a series of transactions doesn’t line up with the average, you’ll be able to watch the clips to get context into the situation and see if a staff member was actually ringing through all those loyalty cards or if something more was going on.

It’s also important to restrict access to the backend of your loyalty system to limit the number of manual entries that can be made. The fewer people have access to sensitive features, the fewer people you’ll have to question should something go wrong.

Hackers Could Manipulate Your Loyalty Program

 

Your customers expect their information to be secure. But if ever hackers were to compromise your system, they could gain access to your members’ personal information and either use it to commit fraud or sell it on the black market, effectively putting your customers at risk.

How do they do it?

While all loyalty programs are different, most hackers use the same methods to break in. When a hacker finds a way into a system, they start “testing” it. This means that they’ll make several small transactions to see if anyone will notice. Once they’re confident that their tampering has can slip under the radar, they’ll start stealing larger chunks.

Why do they do it?

Hackers like to target loyalty programs because points are a nearly untraceable currency, like stolen cash. Once they’ve stolen enough loyalty points, hackers can use them to purchase things like gift cards or hotel stays, which are harder to track than stolen credit card information and therefore easier to sell on the black market.

Another reason that hackers target loyalty programs is because most cardholders don’t even bother checking their point balances and won’t even notice if anything is amiss. This gives hackers ample opportunity to complete their theft months before anyone realizes that something is off.

How do you stop it?

To mitigate the risk that hackers pose to your business, start by eliminating the backdoors from which they can gain entry to your system. This can be done as easily as choosing a loyalty solution provider with a strong focus on data security.

Another way to catch loyalty fraudsters is to indirectly encourage your customers to keep tabs on their loyalty point balances — without raising a red flag. How? Simply send them automated emails that tell them how close they are to earning a reward. Maybe throw in an enticing promotion. This will get them to check their point balances and hopefully even make a purchase. If any members report suspicious transactions or missing points, you’ll be able to put their loyalty card on hold pending an investigation or simply cancel it and issue a new one.

By pairing your loyalty program with smart video surveillance, you’ll gain valuable insight into your customers’ buying habits and needs. You’ll also gain a clearer picture of your busiest times of day, most popular items and most redeemed promotions. This data will help you narrow down the most effective incentives for your loyalty program.

Keep Your Loyalty Program Safe

 

Your loyalty program is one of your business’s most valuable resources. It can increase your revenue, encourage customer engagement, and most importantly, help your business grow over time. Trusting a secure loyalty solution and the right monitoring tools will make it easier for you to ensure that your customers get the value they want, that your employees are honest and that your information is safe from outside parties.

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