5 Best Ways to Protect Your Business From Loyalty Fraud

Posted on 31st March 2023

Many of you are now beginning to arrange your long-awaited holiday getaways and vacations. Intending to redeem your unused air miles or accumulated hotel points in your reward programs. Imagine your shock if you discover that fraudsters have scammed or hacked your loyalty accounts and siphoned off your reward points.

Loyalty point schemes have been around for some time and are a terrific tool for attracting and retaining consumers. Still, we’re now witnessing more criminals attempting to hack accounts through these programs. What’s the reason? There are many unused loyalty points in circulation: According to the Loyalty Security Association, $3.1 billion in redeemed loyalty points are fraudulent. The ignored points are simple to attack and monetize for personal benefit.

What exactly is loyalty fraud?

Companies worldwide spend money on programs they hope encourages their most loyal consumers to return. The most common users of this method are:

Retail
Aviation
Hotel companies

Fraudsters are attracted to loyalty points because they’re useful for financial transactions, making them similar to cash. They redeem reward points excessively or fraudulently for unfair gain, which constitutes loyalty fraud.

Why criminals target loyalty programs?

Loyalty point accounts are hacked easily. Fraudsters can target loyalty programs easily because most people don’t check these accounts as diligently as bank accounts. As many users reuse passwords, scammers using stolen credentials use automated bot attacks to credential details loyalty accounts with simple username/password pairs. Criminals cash out points, trade them for gift cards, or sell them on the dark web with little risk in an attempt to gain short-term cash benefits.

Types of loyalty fraud

Unsurprising for such a prevalent problem, loyalty fraud takes on various forms. Below is a summary of the four most common cons.

Account takeover (ATO) or pirating

ATO loyalty fraud happens when a criminal gains unauthorized access to a customer’s rewards account using stolen credentials. They could also use a combination of actual and fraudulent information (synthetic identity fraud). The fraudster gains access to the account and is then able to redeem the member’s rewards points, often for cash or gift cards that are spent or sold. Moreover, they even sell stolen information.

Transactional loyalty and fake accounts fraud

In this scheme, the criminal uses stolen personal information, including the payment information of a loyalty program member. Instead of using the information to access a legitimate account, the criminal creates one or more fraudulent loyalty accounts. They are then able to conduct transactions and collect loyalty points by purchasing items for free using stolen payment information.

Fraudulent internal loyalty

Internal, or staff, loyalty fraud occurs when a store staff enters their reward details during a transaction if the consumer:

doesn’t have one
doesn’t offer it
credit the expenditure to the loyalty account of a family member or close friend

If an employee having access to client accounts fraudulently adds or alters a customer’s points or unlawfully transfer points across accounts, it’s employee loyalty fraud. Ultimately, the employee accumulates points they haven’t earned but have been stolen from a client.

Fraud by members

Reward redemption fraud takes several forms to game the system for points. Someone tries to register many loyalty accounts under various identities to collect sign-up bonus points and transfer them to a single account.

The member makes a significant purchase, earns and redeems points, and then cancels the transaction or ask friends to pay back to accumulate points. A second method of member loyalty fraud involves members conducting acts that earn points yet are unethical like:

5 best techniques for preventing fraud in your loyalty program

Loyalty programs reward and strengthen connections with your best consumers. It’s more crucial than ever to keep these systems safe, along with the consumer rewards they provide, as they’re becoming targets of cyberattacks. These five tips help you zero in on the most prevalent attacks without making it difficult for legitimate users to track or cash in their points.

Prevent account opening fraud

New account fraud occurs when a fraudster creates many new loyalty accounts using

Stolen
Manufactured
Other fraudulent identities

Fraudsters acquire and resell points and misuse redemption schemes with these bogus accounts. Ensure that your cyber defense system identifies attacker attempts to establish several phony accounts using automated technologies or advanced manual tactics.

Reduce ATO attempts

Verify that your defenses identify ATO efforts by fraudsters trying to steal points or abuse stored consumer personal information in real-time. Monitor their input patterns using telemetry signals to identify between malicious bots or actual people.

Safeguard cash-out transactions for rewards

Determine each transaction’s dependability and customer identification to verify loyalty rewards redemptions and credit card payments from the account. Use adaptive authentication, which chooses the right authentication step depending on the risk offered by the login attempt. Also, you can employ other technologies that use artificial intelligence and machine learning to keep an eye on user behaviour during financial transactions to protect your application.

Observe for policy violations
Assess trust at every contact to minimize financial losses from
Coupon and promotion abuse
Discounts
Referral benefits

Recognize internal dangers

Loyalty systems are subject to insider attacks. Track and assess site staff activity to detect abnormalities and restrict employee access to loyalty program information.

How do consumers aid in the prevention of loyalty program fraud?

Members, like employees, play a significant role in preventing loyalty fraud. Use the following methods to urge members to safeguard their incentives.

Educating members about the scams’ methods and the importance of taking precautions to prevent loyalty fraud is essential
Ensure members use lengthy, complicated passwords and ask them to change them regularly
Provide members status updates on their points and incentives regularly so they maintain track often
Use incentives, such as tied-in promotions, to encourage users to access their accounts more regularly
Caution members against visiting your loyalty microsite via links from suspicious sources, such as those found in unsolicited emails, texts, or messages on social media.

Loyalty fraud is conducts using advanced fraudulent methods

Businesses are investing in customer loyalty programs to improve the online purchasing experience for their most valuable consumers. But Loyalty program fraud is a rising issue that harms customer relations and your financial performance. The above suggestions help turn the tide, protecting your organization and the client connections that provide long-term income.