Loyalty programs are everywhere these days, offering everything from free coffee to flights around the world just for sticking with your favorite brands. These programs are designed to build customer loyalty and trust, but while you’re busy racking up points and perks, fraudsters are lurking in the background, looking for ways to steal those rewards without putting in any effort.
Loyalty fraud has become a sneaky problem that many companies and customers don’t even realize is happening until it’s too late. Curious how it works and what can be done to stop it? Let’s dive into the nitty-gritty of loyalty fraud and see how scammers are gaming the system—sometimes without anyone even noticing.
What is Loyalty Program Fraud?
Loyalty program fraud happens when someone abuses a rewards or loyalty program, taking advantage of points, miles, or perks in ways that were never intended by the company. It can be as simple as a customer gaming the system to score extra points or as severe as a hacker stealing someone’s account information and cashing in their hard-earned rewards. What makes loyalty program fraud particularly tricky is how easily it can slip under the radar, especially if businesses aren’t paying close attention to their programs.
Unlike “friendly fraud,” which often involves a legitimate customer mistakenly or intentionally disputing a legitimate transaction (think a person asking for a refund on something they actually bought), loyalty fraud is more deliberate. It’s about finding and exploiting loopholes, whether through manipulation of the program itself or outright theft.
What are Examples of Loyalty Fraud?
Loyalty fraud can show up in different ways, whether it’s a customer exploiting loopholes in your program or a full-blown account takeover by a fraudster targeting customer accounts.
Sometimes, legitimate customers find clever (but shady) ways to game a loyalty system. These aren’t full-on scams, but they skirt the line between opportunism and fraud. Take the example of loyalty point farming, where people find loopholes in a program and exploit them repeatedly. For instance, some customers will create multiple accounts to refer themselves and rack up referral bonuses, or they might use bots to automate the earning of rewards.
One famous case is when Starbucks’ loyalty program faced this kind of gaming. Clever users found that by using specific payment methods or placing orders in particular sequences, they could maximize points way beyond what was intended. While these actions aren’t criminal, they certainly hurt businesses financially and expose holes in the program that real fraudsters could exploit more seriously.
Another example of loyalty fraud is account takeovers (ATO). These are on the more dangerous side of loyalty fraud. This happens when a fraudster hacks into someone’s account, takes control, and drains loyalty points, usually selling them or cashing them in for valuable rewards. The problem here is twofold: customers lose points, and fraudsters might gain access to sensitive data.
A well-known case involved British Airways. In 2018, their frequent flyer program, the Executive Club, was targeted in an ATO attack. Hackers got into accounts, stole miles, and used them for unauthorized bookings. Worse, they accessed personal information that could be used for further attacks. British Airways had to deal with a major public relations crisis and lost the trust of many of its loyal customers.
How do these takeovers happen? There are several ways:
- Data breaches: Fraudsters use login information leaked from other sites.
- Brute force attacks: They run programs to guess passwords until they get in.
- Phishing attacks: Fraudsters send fake emails or messages pretending to be from the company, tricking customers into giving up their passwords.
The biggest issue with ATOs is that even though the customer’s poor password security might be to blame, it’s the company that takes the hit. Customers often blame the brand, not the hackers, for not keeping their accounts safe. On top of that, if fraudsters gain access to payment information, businesses might also be faced with costly chargeback disputes when customers demand refunds for fraudulent transactions.
Other Schemes of Loyalty Fraud
- Point Reselling: Fraudsters will often steal points or rewards from loyalty accounts and then sell them on third-party websites for cash. This is a growing market, and points are often sold for much less than their true value, making them a tempting buy for deal-hunters—who may not even realize they’re part of a fraud ring.
- Fake Reviews for Points: Some companies reward customers for leaving reviews or engaging with their content. Fraudsters will create fake accounts or use bots to submit dozens (or hundreds) of fake reviews to earn loyalty points or perks. Not only does this distort the reviews system, but it also siphons off rewards that should be going to genuine customers.
- Insider Fraud: Employees with access to loyalty systems can sometimes manipulate point balances or redeem rewards themselves. There have been cases where employees add points to accounts they control and then use or sell them.
Which Industries are at Risk of Loyalty Fraud?
E-Commerce and Online Retail
Online retail is a magnet for loyalty fraud, mostly because of the sheer number of transactions happening every second. Think about it: you’re buying clothes, gadgets, and even groceries online, and many of these retailers offer points or rewards. Fraudsters know that, and they’re ready to pounce on weak spots like account logins or unmonitored redemptions. They can hack into a customer’s account, steal points, or even place fraudulent orders using stolen rewards. With such easy access and high rewards, fraud can slip through unnoticed unless retailers are actively looking for it, ultimately harming customer relationships.
Airlines and Travel Agencies
Ever heard of people selling airline miles? That’s where loyalty fraud shows up big time in the travel industry. Frequent flyer programs and travel rewards are pure gold for fraudsters, who target loyalty rewards for their value. Points and miles are easy to steal and even easier to resell. Imagine you’re a frequent traveler, saving miles for that dream vacation, only to find out your points have been cashed in by someone else. For airlines and travel agencies, the stakes are high—not just because the rewards are valuable, but because fraud can really shake customer trust.
SaaS Companies
SaaS companies—those that provide subscription-based software—often run loyalty or referral programs to keep customers around. But fraudsters are clever and can game the system by creating fake accounts, racking up referral bonuses, or manipulating loyalty points. The "refer a friend and get free credits" approach is great for growth, but it’s also a playground for people setting up multiple bogus accounts just to snag the freebies. Fraud here doesn’t just hurt the bottom line; it can mess up your customer base metrics and affect how you run your business.
Ride-Sharing Platforms
If you’ve ever used a ride-sharing app, you know they offer all sorts of perks—discounts, loyalty points, and free rides. But here’s the problem: fraudsters are not only after free rides, but they’ll create fake passenger or driver accounts to exploit these reward systems. Even worse, account takeovers are common, where someone hacks into a real user’s account and uses their credits or points. For companies, this kind of fraud isn’t just a money problem—it affects the trust riders and drivers have in the platform. To mitigate this, companies should encourage customers to participate in loyalty programs that offer non-monetary rewards, fostering a valuable relationship that enhances account security and loyalty.
iGaming and Online Betting
In the world of online gaming and betting, loyalty programs are designed to keep players engaged with free bets, bonuses, and VIP rewards. But where there are rewards, there are fraudsters. They create multiple accounts to game the system or hack into high-value player accounts to steal bonuses. Since many iGaming platforms offer real-money rewards, fraud can lead to significant losses for the company and also bring a ton of legal headaches. Plus, once fraud seeps into a gaming community, it can be hard to win back the trust of legitimate loyalty program members.
Fintech and Financial Services
Loyalty programs in financial services—whether it’s a cashback offer or points that convert into cash—are particularly appealing to fraudsters. Why? Because they’re tied directly to money. Fraudsters may attempt to take over accounts or manipulate referral programs to score rewards they didn’t earn, highlighting the risk of account takeover fraud. With financial accounts already being such a sensitive area, loyalty fraud in this space adds another layer of risk. If customers feel their loyalty points or cashback bonuses aren’t safe, they might take their business elsewhere.
Loyalty Fraud and Chargebacks
Loyalty fraud isn’t just a headache for merchants—it’s a full-blown nightmare that can wreak havoc on your chargeback rate. Here’s how the two are connected with one another:
- Unauthorized Purchases: Fraudsters might use stolen loyalty points to make purchases. When the real account holder spots these charges, they often dispute them, claiming they didn’t approve the transactions.
- Account Takeover: As mentioned previously, ATOs are extremely dangerous–fraudsters gain access to a customer’s loyalty account and can make purchases or redeem rewards without the customer’s knowledge. Once the customer finds out their account has been compromised, they’re likely to request a chargeback for any fraudulent transactions.
- False Claims: Some scammers use loyalty points to make legitimate purchases and then falsely claim they never received the items or services. This leads to chargebacks as they dispute the transactions.
- Reputation Damage: Frequent chargebacks from loyalty fraud can harm your reputation, leading to closer scrutiny from payment processors and higher fees. Over time, this can result in being categorized as a high-risk merchant, which increases costs even more.
Understanding the connection between loyalty fraud and chargebacks is crucial for preventing loyalty fraud.
How to Detect Loyalty Fraud
Monitor Customer Behavior
It’s important to keep a close eye on redemption behaviors. If a customer who typically redeems small amounts suddenly cashes in large quantities of points or does so more frequently than usual, this could be a red flag. Use data analytics tools to spot these inconsistencies quickly, as they might indicate someone has hacked into the account and is draining the rewards.
Analyze Account Access Frequency
Frequent account logins that don’t match the user’s usual pattern could suggest fraud. For instance, if you notice multiple logins in a short timeframe from different locations or devices, it’s a good idea to investigate further. Fraudsters often access compromised accounts repeatedly to test the waters before making significant changes or redemptions.
Set Up Alerts
Fraudsters often take over accounts by changing key details, like the email address or phone number. You can catch a breach early by setting up automated alerts that flag sudden changes in these details. If a loyal customer suddenly changes their email and immediately redeems points, this could indicate their account was compromised.
Audit Employee Access Logs
Sometimes, fraud happens within the company. Internal fraud is sometimes overlooked, but it’s just as important to monitor. Make sure that employees who have access to loyalty program data only view accounts they are authorized to access. Auditing logs regularly will help you catch any suspicious activity, like unauthorized changes to customer balances or points redemptions initiated by employees.
How to Prevent Loyalty Fraud
Loyalty fraud can significantly impact both businesses and customers, often going unnoticed until substantial damage is done to loyalty rewards.
To tackle this issue, companies need to be vigilant in identifying and stopping fraud before it escalates. Below are effective loyalty fraud prevention tips merchants and business owners should take note of.
Implement Multi-Factor Authentication
One of the simplest and most effective ways to protect loyalty accounts against fraud is by requiring multi-factor authentication (MFA). This adds an extra step for account access—usually a one-time code sent to the user’s phone or email. Even if someone steals login credentials, they won’t be able to access the account without the second factor, significantly reducing the risk of fraud.
Educate Customers About Loyalty Program Accounts
Make it easy for your customers to keep their customer accounts secure by sharing simple, practical tips. Encourage them to use strong, unique passwords and be cautious of phishing scams or suspicious messages. Not all customers are techies, so provide resources on how to enable extra security features, like two-factor authentication, and remind them never to share account details.
It’s important to help customers secure their customer accounts because it keeps their personal information and hard-earned rewards safe. When accounts are compromised, it can lead to frustration, lost points, and even a lack of trust in your program.
Limit Point Transfers and Redemptions
Setting caps on how many points a user can redeem or transfer in a day or week creates a natural barrier to large-scale fraud. If an account is compromised, limiting the number of points a fraudster can redeem at once buys you time to detect the breach before significant damage is done. It’s a simple way to minimize potential losses.
Use Strong Data Encryption Tools
Loyalty programs store valuable information, including personal data and points balances. Encrypting this data ensures that even if cybercriminals gain access to the database, they won’t be able to read or misuse the information. Encryption adds a layer of protection to make sure customer data is secure, even during a breach.
Conduct Regular Testing
Hire cybersecurity experts to perform penetration tests on your loyalty program's infrastructure. Identifying and fixing vulnerabilities before they are exploited can prevent potential fraud attempts.
The Bottom Line
Loyalty fraud might seem like a distant concern, but it’s a real issue that affects businesses and customers alike. As you’ve seen, it can range from sneaky tricks by opportunistic customers to serious hacks that compromise personal information. The key is to stay vigilant and proactive—regularly check for suspicious activities, strengthen security measures, and educate everyone involved.
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