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How to Scam-Proof Your Loyalty Program and Prevent Rewards Fraud

Is your rewards program screaming to be scammed?

While not intentional, a significant number of loyalty programs are structured in ways that make them ultra-vulnerable to fraud. Even worse, the way rewards programs are often designed may even invite scammers to game the system and result in consequences that cost merchants both in face and financially.

So how do you know if your loyalty program is at risk?

More importantly, how can you ensure your program is scam-proof?

Before we show you exactly how to scam-proof your loyalty program and know for sure your program isn’t susceptible to rewards fraud, it’s crucial that you better acquaint yourself with the dark underbelly of rewards fraud.

It’s a crime often committed anonymously…

And one that can instantly scale and derail even the fastest growing ecommerce merchants.

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Your Choice

In the world of loyalty…

There are only two types of campaigns designed to incent customer behavior a merchant deems valuable:

Rewards Campaign Type #1

These campaigns require customers to make a purchase before they can redeem points. Program members may earn points for a variety of behaviors but must make a purchase before they are able to redeem points for discounts at the checkout or for a free product.

These campaigns are particularly high-security. Merchants that require a purchase before a customer can redeem can’t be scammed in the traditional sense.

Rewards Campaign Type #2

The second type of rewards campaign allows program members to earn and redeem points without first making a purchase. These campaigns are often characterized by a heavy reliance on social media oriented behavior in which members may earn and redeem points without ever purchasing an item from the merchant rewarding them.

Programs featuring this second type of campaign are much more likely to cause problems for ecommerce businesses. The open ended structure of these programs are structured that make them susceptible to being scammed.

The Scam

Screen Shot 2017-11-02 at 10.22.49 PMYou’re likely using a version of the same prescription for success Mark Zuckerberg used to grow Facebook and Instagram:

  • Build an audience by being generous and offering a great user experience
  • Only after you’ve achieved this at scale will you attempt to monetize the audience

One way some of the highest performing merchants build their audiences rapidly is by offering rewards to members willing to like or follow their social media profiles. While there’s nothing inherently wrong with rewarding members for liking or following your brand’s social media profiles, offering members these incentives blindly- without regard to how your products are priced– is akin to advertising your program to scammers.

Having difficulty seeing the connection?

Instead of viewing loyalty as a merchant I need you to put your fraudster hat on and start seeing loyalty through the eyes of a scam artist. Below is a common rewards program structure:

How customers earn points:

  • 1 point per $1 spent
  • 500 points for each referred friend who buys something from the store
  • 50 points for creating an account
  • 25 points for a Facebook like
  • 25 points for a Twitter Follow
  • 25 points for an Instagram Follow
  • 10 points for a Facebook share, up to 5 total shares

Here are the rewards they get in return:

  • $10 off for 200 points
  • $20 off for 350 points
  • $40 off for 600 points
  • $200 off for 2,000 points

Remember, you’re assuming the role of scam artist right now. Do you see where the program is vulnerable?

The program is structured in a manner that allows a user to instantly earn 200 points by creating an account and engaging in each of the social media related behaviors outlined above. Those 200 points may then be immediately redeemed for a $10 discount. If the merchant sells products priced at $10 or below, the fraudster can potentially redeem the points they’ve “earned” for a free item priced at $10 or less without ever making a purchase.

It means you’re giving away products to people who have no intention of ever becoming customers…

Unfortunately, an even worse doomsday scenario exists that could put you out of business.

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Scaling the Scam

But you don’t sell $10 items…

I know that’s what many of you are thinking. However, scam artists following the formula outlined above are opening multiple rewards program accounts, earning points in each of them by engaging in all of the prescribed social media related incented behaviors, and obtaining discount codes or gift cards that may be pooled at the checkout to get higher priced products absolutely free.

While the above scenario is hypothetical, it’s based on a true story. In fact, merchants are being scammed on a daily basis by fraudsters who open 10-12 rewards accounts, earn hundreds of points, and steal from merchants offering free products as a redemption option.

It’s costly but it’s also just the tip of the iceberg…

While enrolling in a rewards program a dozen times or so to steal from generous merchants is reprehensible, it’s also reserved for amateur or low-level thieves.

The professionals do it at scale.

Specifically, scaling the rewards scam takes only a bit of development knowledge. With a few lines of code a modern day digital scam artist can create bots that are capable of opening an unlimited number of rewards program accounts and take advantage of your generosity on a grand scale. The impact of just one of these scams can be devastating, exposing businesses to potentially giving away unlimited free merchandise.

Taken one step further, rewards fraud executed at scale can also negatively impact a merchant’s existing customer base. For instance, scam artists who have redeemed their ill gotten rewards for products can cause merchants to run out of inventory leaving legitimate customers wanting to purchase those items unable to do so.

Preventing Rewards Fraud

If a loyalty program is scammed…

It’s because it wasn’t designed with fraud prevention in mind. Designing a rewards program in which fraud is prevented can be done one of two ways: manually or programmatically.

Method #1: Manual Fraud Prevention

Besides tailoring loyalty programs to achieve specific business objectives, increase sales, and to offer customers one-of-a-kind rewards experiences, Swell conducts a kickoff call with clients on their premium plans to design a program that can’t be scammed. Having a comprehensive discussion with regard to structuring a fraud-proof rewards program includes two components:

  • Identifying How Customers Earn Points- the key is to incent behavior that is valuable to the merchant in ways the customer will also find valuable

BONUS: Discover the unique way Rhone rewards customers for taking a “lifestyle quiz” that yields mission critical insight that positions the company to personalize its marketing and lift sales.

  • Identify How Customers Can Redeem Points- each dollar may result in a point earned, bonus points may be earned for larger purchases, or merchants may choose to allow enrollees to redeem rewards for products

BONUS #2: Find out exactly how Cairn scaled rapidly by rewarding customers who make valuable referrals

Regardless of how merchants allow customers to earn and redeem points, manually preventing fraud hinges on a simple premise; crunching the numbers in a way that requires a purchase or some other ROI-generating behavior before points can be redeemed.

In other words, do the math:

  • If you offer 25 points to follow you on Twitter and 25 for liking your Facebook page (a total of 50 points available)
  • Ensure customers cannot redeem points until they have at least 60 points

To earn the additional points necessary for redemption, tie the next reward you offer to a desired behavior that generates a return.

Image via Fanchest

Image via Fanchest

Method #2: Programmatic Fraud Prevention

Sophisticated programmatic rewards campaigns can now attribute value to specific customer behavior a merchant seeks to increase. For instance, if a merchant places a higher value on referrals, the campaign can automatically take that into account and categorize program members into segments for future targeting.

Importantly, programmatic campaigns can also be built in a manner that helps merchants combat fraud. Specifically, programmatic campaigns can automatically require a member who has earned points to take another action- think purchase or referral–  before being allowed to redeem the points they’ve earned at the checkout.

Reward Yourself

High growth merchants fight fires constantly…

Since rewards fraud is preventable, it’s not a fire merchants should waste any time fighting. Your time is precious and spending any of it on rewards fraud- especially after scammers have already struck– is a distraction and impediment to future growth.

If you haven’t had a frank conversation with your rewards partner about scam-proofing your program or put on your fraudster hat to discover whether it’s vulnerable yourself, don’t leave anything to chance. Today a merchant somewhere will open their analytics dashboard and discover they’ve been scammed.

Reward yourself and don’t let it happen to you.

Nikhil Naidu • November 3, 2017


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