Fraud Detection in Loyalty Programs: Technology Explained

Avoid losing millions of dollars in loyalty program rewards by spotting exploiters and insider threats through state-of-the-art fraud detection.

Antavo’s cover image for its article about fraud detection in loyalty programs

Did you know that in recent years, loyalty program fraud has risen by 89%? Besides the obvious monetary loss that comes with this, leaving your reward program vulnerable to fraud also jeopardizes customers’ trust in your brand. If their data is stolen (which could also be used later in a ransomware attack), or they are punished after unknowingly stumbling into an exploit, they might turn their backs on your brand. For these reasons, deploying state-of-the-art fraud detection measures is a must for any business running a loyalty program.

Everything You Need to Know About Fraud Detection in Loyalty Programs

Loyalty fraud or loyalty program fraud is when someone abuses the framework or rules of a reward program for their benefit. It can range from customers finding a way to redeem single-use coupons multiple times to employees illegally handing out points to their acquaintances. And because loyalty points and rewards hold real monetary value, exploiting the system can cause serious harm to program owners.

Fraud in loyalty programs can be categorized in a number of ways:

  • Knowing vs unknowing fraud: Sometimes members just stumble into an exploit, not knowing that they’re using the program in an unintended way. Others go out of their way to identify loopholes and vulnerabilities.
  • Internal vs external fraud: Customers and hackers aren’t the only ones who can commit fraud. Sometimes your own employees might break the rules, handing out free rewards to family and friends.
  • Small scale vs large scale: Loyalty fraud doesn’t necessarily have to be committed by a crowd of members in order to be financially damaging. Sometimes a lone actor or a small group is behind it, racking up hundreds of dollars in rewards and discounts.
POS device in the store processing loyalty program data.
Staff members tasked with enrolling and managing loyalty program members in-store can be a liability, and you should factor in this risk during the concept-building phase.

Common Types of Fraud in Loyalty Programs

Loyalty program exploits can take thousands of forms, and they’re often easy to overlook. A single person might go under your radar, but if they start posting their discoveries on forums, others may start gaming the system, too. But by then, the damage is already done.

Your first step toward fraud prevention should be to explore your options. Knowing what kind of loyalty fraud types are out there will help you iron out potential loopholes and vulnerabilities during implementation. Here are a few of the most common loyalty fraud examples:

  • Customers create proxy accounts to get an unlimited number of welcome coupons
  • Cashiers enter their own account information during the checkout instead of the customer’s
  • Customers return products after spending the points they earned with the purchase
  • Members frequently change their date of birth on the membership page to take advantage of birthday discounts
  • Members have a large number of points on their account, despite not having made any purchases
  • There’s a large influx of loyalty points from one of your stores outside of opening hours
  • Resellers join the program and quickly reach the highest tier because they buy products in large quantities and frequencies, only to start abusing the service-based benefits, like free shipping
Mockup loyalty program image showcasing ways to earn points without spending money.
If you reward customers for non-transactional activities, such as sharing social media posts or writing product reviews, make sure to limit how many times they can earn points with that action each month.

Employee Fraud Is a Rising Threat

As you can see from the previous examples, sometimes employees cause more harm than hackers or exploiters. According to Forrester’s research, internal incidents were the third most common cause of breaches in 2020. Not all of these start maliciously, though. During rush hour, some cashiers may not want to spend the extra time asking customers for their loyalty cards — a process that may involve unprepared customers digging through their wallets, or searching through their phones looking for their cards — and instead use their own account info, just to keep the line moving.

Though they may not realize it, this is stealing, both from the brand and customers. It can also cause customers to lose trust in your brand once they remember that they are a loyalty program member and that they should have been given the opportunity to use their card. Some staff members may even grow bolder and start directly siphoning points from buyers, so they can claim rewards for themselves.

Icon for the "Infoblock" section of Antavo's article.

When it comes to preventing loyalty program fraud, your first line of defense should be your managers. Monitoring the program should involve more than just looking at enrollment numbers and counting the reward redemptions; they should be actively searching for irregularities.

A live screenshot of how Antavo’s platform allows the creation of custom reporting screens.
Antavo’s platform offers a wide range of reporting capabilities to stay up-to-date about the purchase history of all members, which is invaluable for spotting discrepancies and fraudulent acts.

4 Loyalty Technologies That Aid in Fraud Detection & Fraud Prevention

Stopping fraudsters in their tracks is only possible if your loyalty technology is sophisticated enough to allow customized anti-fraud use cases. This list showcases how Antavo’s Loyalty Management Platform enables users (marketers, CRM executives, and program managers who are tasked with running the rewards program) to detect and prevent fraudulent activities.

1. Customizable Fraud Detection Workflows

Antavo’s Back-office comes with a no-code Workflows editor. Using Workflows, users can create custom rules and campaigns with build-in counterbalances against fraudsters. Moreover, program managers can always modify the rules that determine when the system flags customers as fraudulent and set up custom notification triggers. This allows companies to fully customize the logic behind their loyalty program to counter newfound fraud scenarios.

Backend image from Antavo’s platform showcasing how Workflows accommodate fraud detection.
This particular workflow creates a rule that validates certain purchases for brick-and-mortars, flagging orders made outside of opening hours.

2. Detailed Redemption Requirements

Though the Workflows editor offers the most freedom when it comes to preventing and detecting loyalty fraud, other capabilities help to push protection to the next level. For instance, being able to set customer redemption criteria for reward redemption prevents fraudsters from misusing coupons and exploiting the system.

In the case of a welcome coupon, users are able to specify that the reward can only be used after making a full-price purchase so that customers won’t take advantage of the incentive with duplicate accounts.

Backend image from Antavo’s platform showcasing how to create multi-use coupons.
Nowadays there are better ways to grant customers multi-use coupons than a static coupon code. Thanks to Antavo’s Aggregated coupons feature, loyalty program managers are able to, for instance, assign 10 parking discount tickets to a customer using a single code that’s unique to each customer. To learn more about this feature, download our Jade Green Product Release.

3. Pending Events and Return Policies

The best way to prevent members from abusing points awarded is to introduce a pending period on the loyalty platform. In other words, customers won’t receive their points until the possible return period is over. Doing so eliminates any headaches involving product returns, not to mention that your team will have a time window to monitor the pending list and identify quantities of points issued by fraudsters.

Backend image from Antavo’s platform showcasing how to set up a pending points event.
Antavo’s Pending Events module lets you confirm the completion of a customer activity before crediting points to the customer’s account.

4. Access Management & User Groups

If you seek to minimize the chances of employee fraud, the best thing you can do is look for a loyalty platform that offers access management. Antavo’s Loyalty Management Platform allows businesses to set up user group hierarchies and access privileges for platform users.

In other words, you can decide which employees have access to which features, preventing untrustworthy or low-ranking users from performing critical actions, such as adding points to a customer’s point balance, without their supervisor’s knowledge.

Backend image from Antavo’s platform showcasing how to set up different User Groups.
In addition to the extended access management, the User Groups functionality also gives you the ability to change the record-level visibility for certain groups. For example, if your program is available in multiple geographies, you can ensure that managers from one country are not able to see settings, rules, or campaigns of another country. To learn more about this feature, download our Velvet Blue Product Release.

Protect Your Reward System With a Next-Gen Loyalty Cloud

Detecting and preventing loyalty fraud is an ongoing effort. As your technology and reward system evolves, so does the potential for fraud. That’s why you should always be on the top of your game, and use a flexible yet sophisticated technology that can be modified to cover a wide range of scenarios, so you can stay one step ahead of fraudsters.

This Technology Explained article only explores a small segment of what Antavo’s Loyalty Management Platform is capable of. If you are interested in a full tour of our technology tailored to your unique business KPIs, book a demo with our top loyalty experts, or send us your loyalty RFP.

Ready to put your ideas into action? Don’t start scoping without a solid concept plan! Our battle-tested concept worksheet guides you through the essential steps.

Headshot of Tamas Oszi Senior Loyalty Program Specialist at Antavo

Tamas Oszi

Tamas is the Head of Content at Antavo and a Certified Loyalty Marketing Professional - CLMP. Tamas is known for having a keen eye for loyalty and customer retention strategies and trends. Tamas is also a true gamer at heart and has an impressive collection of cyberpunk books.

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