For many retailers, loyalty fraud is a rude awakening

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Retailers have raised the bar in how they attract customers through rewards and loyalty programs, but not all are well-versed in how their technology also lures fraudsters.

Some verticals such as grocery stores, movie theaters, fuel stations and even airlines are just now enduring a crash course in risks of digital rewards programs.

"What we are seeing is companies using their apps in order to add cards to the app and collect loyalty points," said Rich Stuppy, chief customer experience officer at fraud prevention provider Kount. "And both of those are hot targets for fraud right now."
Because of that trend, Boise, Idaho-based Kount has spent much of the past year focusing on educating retailers about the growing loyalty-program fraud problem. It secured a partnership last week with mobile grocery rewards provider Fetch Rewards, as Kount plans to screen loyalty program applicants with its artificial intelligence-driven security platform and pinpoint troublesome transactions in real time.

"These new players are having to learn about digital fraud in a matter of weeks or months, and it is a big deal to them," Stuppy said.

Like most fraud issues, hacks into loyalty accounts are becoming a global problem. Last month, Mastercard Inc.'s European unit notified Belgian and German data security regulators of a significant breach of the Specials loyalty program in Germany.

Under Kount's digital security, Fetch Rewards clients will receive machine learning and human interaction screening for fraud in assessing risk scores on those applying for programs and also protecting retailers and their customers from fraudulent transactions within specific loyalty accounts.

Many factors come into play when fraudsters try breaking into loyalty programs, from fake account creation, to using stolen credentials to get into accounts, steal points and resell them in online marketplaces. Another option is to acquire products through stolen points, then resell those products.

No retailer, no matter how small, is immune from rewards/loyalty fraud actions, Stuppy added. What may have seemed like unlikely retail targets just a few years ago are quickly becoming prime targets.

"I get funny looks when I say that pizza restaurants, gas stations or quick-serve restaurants are in danger, because no one thinks a fraudster is interested in stealing hamburgers," Stuppy said. "But what they are doing is accessing those rewards accounts, or setting up accounts and pulling in stolen points, or doing account takeovers."

In many ways, loyalty and rewards programs represent an "unexpected risk" for retail businesses seeking to expand customer engagement and revenue opportunities, said Julie Conroy, research director and fraud expert with Boston-based Aite Group.

Fetch Rewards says it is the only retailer-agnostic loyalty program on the market, establishing direct partnerships with consumer packaged-goods companies like Unilever, Kraft/Heinz, Miller/Coors, and PepsiCo. Shoppers generally earns points every time they purchase brands owned by those companies and redeem them for gift cards to hundreds of retailers and restaurants.

"Loyalty is absolutely a risk because of the ability to convert points into fungible goods, or even better gift cards, that have resale value," Conroy said. "A lot of merchants are expanding into gift cards and that puts a great big target on their back because organized crime rings love to convert stolen card numbers into gift cards that are hard to track once issued."

In that regard, Fetch Rewards is making a wise move in seeking fraud security help for its programs, Conroy added.

"The move to digital for traditional brick-and-mortar business presents a great deal of opportunity for fraud mitigation vendors who can help these businesses effectively manage risk," she said.

Fetch Rewards founder Wes Schroll acknowledges that need.

"With our growth goals in the next year, the level of transparency Kount provides is key," he said. "We can't make a risk analysis with blinders on, and Kount's detailed data allows us to make confident, efficient decisions without being bogged down by rules."

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Loyalty and rewards Payment fraud Security risk Retailers