Frauds in Loyalty Programs. What Are They and How to Prevent Them?

As the popularity and scale of loyalty programs grows, so does the threat of various types of fraud. Frauds and scams have a negative impact on the good functioning of the program, reducing its attractiveness in the eyes of customers. Detecting and countering fraud is becoming one of the main challenges facing loyalty program organizers. Unfortunately, for many companies, protecting against fraud and scams is a low priority. Despite the increase in rewards program fraud, 42% of vendors say they don’t have the skills and nearly 50% don’t have the resources to prevent it. What are the most common scam methods and how can they be countered?

1. Data falsification

Data falsification is one of the most popular methods of phishing for rewards in loyalty programs. Often, loyalty programs already offer attractive benefits just for joining – a discount on the first purchase or free coffee. Instant access to a reward at the start acts as a magnet for scammers. Customers take a few minutes to join the program and can even create new accounts every day, just to receive a freebie.

Another equally common situation of data falsification is giving a false date of birth in order to have faster access to a special birthday offer. This problem can particularly affect companies that have already expanded their loyalty program to include a birthday benefit. Then it turns out that a disturbingly large number of registered customers edit their date of birth, or many new customers join the program with a close birthday, just to get the benefit as quickly as possible.

One way to counteract the mass creation of false accounts is to change the way people register. More and more companies are moving away from identifying themselves with an e-mail address to providing a phone number, which is theoretically assigned to a specific person. It turns out that it is possible to find some workarounds in this case as well – on the Internet you can find services that “rent” a phone number for minutes, which allows the customer to register for the program and appropriate the reward. Companies are trying to deal with such scams, using solutions like reCAPTCHA, among others. Additional authentication improves the security of customer accounts. At the same time, however, requiring customers to go through additional steps can be annoying and affect the program experience.

Above all, monitoring, reporting and well-written rules and regulations outlining actions to be taken in case of fraud are essential. Companies need to be constantly on the lookout for any anomalies – the closer you get to winning an award, the more vigilant you need to be.

2. Impersonation of other users

With increasing customer expectations, loyalty programs are becoming increasingly personalized, with offers in them limited and assigned to a specific user. At the same time, brands are striving to simplify the use of the loyalty program, so more and more often, in order to take advantage of available offers, all you have to do is give the seller your phone number. It is no longer necessary to search through your wallet to scan a plastic card. Unfortunately, this allows fraudsters to impersonate other people and take advantage of other people’s offers in the program by using someone else’s phone number.

Protection against fraud is to create additional security mechanisms. One way to do this is to require the offer to be activated in the app in advance. However, loyalty program organizers must take care to maintain a healthy balance between security and a good experience for the average, honest user.

3. Rewards for returned purchases

In some cases, the occurrence of a loophole may depend on business decisions. This includes the reward of a cashback for purchases of a certain amount – a typical mechanism for a 10% refund on subsequent purchases for spending $500 or $1,000. If cashback is charged immediately, dishonest customers return the purchased products and thus shell out a free shopping discount. Customers expect an immediate reward, so postponing the accrual of cashback over time will not necessarily be a favorable solution. The solution to this problem may include charging the discount immediately after the transaction, but reserving the use of the cashback after the deadline for returning the products has passed. Unfortunately, this involves a certain limitation for honest customers who do not intend to return products and would like to use the discount as soon as possible.

Often cashback and customer service systems do not integrate all information regarding at least the product purchased, the return made, the rewards given in one place. The system may not have access to the information that a benefit was attached to the product, so a customer making a return is left with an available reward. Fortunately, fewer and fewer companies in the market allow such a loophole, but unfortunately there are still some organizations for which the implementation of advanced solutions in this regard remains a challenge.

4. Employee fraud

Sometimes the problem of fraud occurs directly within the company. This mainly concerns cashiers who do not ask customers for loyalty cards and instead use their own accounts to record transactions made. In this way they illegally gain points or other benefits. Employees deliberately register the purchases of others on their accounts in order to have faster access to rewards and more favorable benefits.

In such a situation, the solution is to prepare a report analyzing the number of transactions registered is one day on individual accounts. If we notice a clear anomaly – on one account we see dozens or hundreds of transactions registered in one day surely something is wrong. Although this is a seemingly small and simple to identify fraud, some companies continue to ignore the problem, risking customer dissatisfaction when they realize that their points are being appropriated by a store employee.

Sometimes fraud also occurs among those employed on the system side. The foundation of security in the use of tools by employees is to link each operation performed like granting discounts, adding points or extending the validity of a reward with a specific person. The organizer must ensure accountability, so that each operation in the system is assigned to a specific employee (manager, developer, analyst), so that they too do not abuse their powers. To nullify any temptation for fraud from the loyalty program tool, employees should be constantly made aware of the security systems used in the company.

5. Organized hacking attacks

In extreme cases, fraud in loyalty programs can take the form of organized hacking attacks. Hackers may look for security vulnerabilities in loyalty programs, such as software bugs, poor server configurations or out-of-date software, thereby gaining unauthorized access to the system. A cybercriminal can falsify transaction information, accrue additional points or add fake purchase confirmations to obtain additional discounts.

The main safeguard against hacking attacks is to schedule systematic reporting. Monitoring activity related to suspicious logins or attempts to access unauthorized functions can help detect an attack early enough. It’s also a good idea to develop an incident response plan that outlines action steps – how to respond quickly, how to notify customers and how to restore normal system operation.

How to protect against fraud?

Frauds can actually occur in any loyalty program. Increasingly, even an objectively low-value benefit is already becoming a temptation for fraudsters. The basis for protection against fraud is, first of all, an experienced partner in the operation of loyalty programs, who, based on many years of operation in the market, knows in what situations threats can occur and how to effectively counteract them. One equally important security element is a good loyalty program’s rules and regulations, which specify actions to be taken against those who do not comply with them.

Countering fraud is a continuous and ongoing effort, so managers need to monitor any deviations from the norm on an ongoing basis. Current CRM systems are equipped with technologies that allow the creation of rules for identifying fraud, thus minimizing the degree of threat. This ensures that the manager is notified of any suspicious activity. Fraud detection should take a proactive turn in the company – loyalty program organizers should be aware of possible fraud and react to suspicious activity and any deviations from the norm.

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5 reasons to investin loyalty programs during the crisis

Loyalty is at a premium and its role will grow. First it was forced by the pandemic, and now by the crisis and inflation. Developing loyalty is becoming crucial, and companies are doing their best to build it in such a way as to earn the customer’s attention. LoyaltyOne’s “Loyalty Big Picture” report indicates that nearly 70% of managers have increased loyalty investments in the past two years. Companies are recognizing the value of using customer data: from product development to price optimization to sales network development. In fact, why are loyalty programs so effective in times of crisis?

1. Effective communication

These days, it’s not just consumers who are looking to save money. Businesses are doing it too, watching every budgeted coin twice before deciding to invest it in something. Brands are abandoning some activities altogether, and cutting spending on others. Unfortunately, the unstable economic situation and shaky supply chains mean that the need to be able to contact customers quickly is growing, so brands in this field are primarily looking for efficiency and a quick return on their investment.

Of the marketer’s available palette of tools, the budget spent on communications
in a loyalty program gives, in many cases, the greatest return on
on investment in a short period of time. Experience shows that the investment
in loyalty program communication generates up to 4-5 times higher ROI relative to other activities carried out in offline and online channels. The advantage of communication in the loyalty program is its measurability. It is relatively easy, even with the help of Excel only, to verify whether the actions taken have brought the results we assumed.

2. Responding to the consumer need to save money

UCE Research’s study “Inflationary Dilemmas of Poles. What do we save on in stores?” indicates that more than 78% of respondents look for cheaper products on store shelves. With inflation on the rise, Poles are scrutinizing their spending, and participating in a loyalty program helps save specific amounts.

Most loyalty programs are based on access to special offers, promotions or cashback. This directly translates into savings in the wallet of the club member. The perception that one can save money thanks to a loyalty program is already well entrenched in the consciousness of consumers. As a result, marketers are becoming bolder and more intensively emphasize the role of loyalty programs in everyday savings, if only by providing a special summary of the money saved on a receipt or in a mobile app. Sending periodic push notifications to customers, informing them how much they have saved so far, causes an additional increase in club members’ activity – boosts perception and strengthens interest in further offers in the loyalty program on the part of participants.

3. More effective management of promotions

Marketers with price offers attract customers. There are companies on the market that offer products at a price lower than the market price for a while as part of promotional activities. However, an attractive promotion that will be widely available and unlimited raises many challenges for the organizer.

If a store offers an assortment at an extremely competitive price without systemically imposing limits on the unique customer and securing the availability of the product, it will not be able to manage the cost of such a promotion and will not secure purchase opportunities for the majority of interested parties.

Analyzing data on club members allows you to control price promotions effectively. A loyalty program allows you to reduce the price in a quantifiable way, so that the maximum cost of implementing the promotion is known before it takes off. As a result, we are able to distribute special offers accordingly. You can achieve this, for example, by limiting the purchase of a product per consumer, whom we identify by card in the loyalty program. Effective management of promotions, especially in inflationary times, is responsible for brand success.

4. Benchmark performance and develop point-of-sale capabilities

Some companies inadequately assess the potential of stores and treat them against top-down characteristics. As a result, they fail to use their full potential in terms of their ability to influence consumers’ purchasing decisions. Examples of such outlets are, for example, stores that were established a dozen years ago in places where there was no highly developed infrastructure, and modern housing estates were just being built. Due to “urban sprawl,” these can now be places with high expansion potential, and brands do not always identify this.

Loyalty program data can be used to evaluate the performance of a selected area, or a specific region. When combined with sales data and external data (age, CSO, disposable income, etc.) give a complete picture. This mix of data makes it possible to determine how much the assumed differences between stores are true. If it turns out that the discrepancies are not justified, and customers have similar characteristics and similar disposable income, it may turn out that by putting lower-priced or lower-margin products at the forefront, we are depriving ourselves of higher revenues. Without customer data from the loyalty program and external data, we will not get the full context of the information. Benchmarking, using different types of data from different databases, makes it possible to make key decisions, such as pricing policies and promoting specific assortment groups more effectively and in a way that matches the potential of the target group.

5. Higher efficiency of the entire business

The knowledge that loyalty program data guarantees access to improves the efficiency of the entire business – from supply management, team planning, demand forecasting and personalizing communications, to supporting and optimizing media operations.

According to the Mckinsey report – Next in Personalization, the use of consumer data to personalize offers leads to revenue growth of about 10% to 15%. Recommendation engines are hugely popular and no one needs to be convinced of their effectiveness. Amazon attributes 35% of all consumer transactions just to the use of a recommendation system. However, data from a loyalty program can also be used effectively outside of one’s own website and beyond communicating only with one’s own club member base.

Loyalty program data is changing the process of planning and executing advertising campaigns because of its ability to effectively reach new audiences. Using hundreds of variables related to with club members, their behavior on the website, mailings, transactions or demographics, we build scoring models and combine them with DMP systems. In DMP, we look for new audiences – “look a like”, that is, potential customers most similar to our club members with certain characteristics, which allows us to scale the reach of the campaign.

In this way, we reach new audiences with high potential for conversion to purchase with a targeted offer. Thanks to the fact that we identify clubbers’ needs and our knowledge of them is very detailed, we can tailor many of the elements used in the campaign such as product and benefit language, which translates into a 150% impact compared to previous activities without the use of data from CRM. In addition, thanks to our ability to match the intensity of activities to the segment and control the deactivation of the campaign if the customer makes a purchase, we achieve a 60% reduction in costs compared to traditional campaigns.

Bonus: a painless transition to a cookie-free world

An additional reason for implementing a loyalty program, regardless of a pandemic, war, inflation or any other crisis, is the impending end of third-party cookies, on which most advertising efforts have so far been based. In the coming reality, only proprietary (first-party) data will provide the ability to accurately reach customers with advertising messages.

Retailers should adjust to the likelihood of having less visibility on their target audiences, as most advertising platforms will have a reduced ability to target based on audience intent and behavior. Implementing in-house data acquisition systems will prove necessary, instead of relying solely on external information. An informed customer in return for sharing data, expects clear benefits. Engaging, benefit-packed loyalty programs will address both the consumer need for rewards and the corporate need to build their own databases with high marketing consent coverage.


In light of the increasing unpredictability and, at the same time, the growing advantage of companies that accurately identify customer needs through loyalty programs, every day of postponing the decision to implement a program can prove critical. Of course, you have to reckon with the fact that the effects will not be visible the day after the loss of the project, but the loyalty program is an investment that in the long term will translate into increased efficiency of the organization and better business decisions
in every area of its operations.

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If you are interested in our offer, have a brief for us or you want to know how we can support your business, write to us.
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