Dishonestly taking advantage of false membership in a group to score a discount sounds like something most people wouldn't dare do, but it's enough of a threat to retailers that investors see future returns in technologies that guard against it.
"In the old system, the only option was to have the actual cashier or staff at the site ask the veteran to produce his or her discharge papers to prove status. As you can imagine that's rife with issues," said Eric Byunn, a partner at Centana Growth Partners, a New York-based technology investment firm.
Centana just made an $18 million investment in SheerID, a technology company whose specialization includes discount fraud, in which someone unfairly claims a discount for a status they do not have (student, veteran, senior, etc.). Centana will join Voyager Partners, an earlier investor in SheerID, on SheerID's board.
"They're able to ID in real time at the point of sale, on or offline, membership in a group...to understand the level of identity needed in a frictionless way," Byunn said.
SheerID has more than 170 clients, and signed up several big names in the past year, helping it draw Centana's attention. It added Lowe's, Target, Microsoft, Adobe, Sprint and TOMS to a client base that also includes Spotify, Foot Locker, Costco and Amazon.
The company will use the investment to increase marketing to relatively new verticals, such as travel and hospitality, entertainment, streaming contend and subscription. It also provides verification tools for AARP and ride-sharing services.
SheerID's software platform integrates into a retailers' regular checkout workflow for point of sale terminals, websites and mobile apps. The platform verifies the consumer is an active duty military veteran, a first responder, or any group that a retailer offers discounts to as a "thank you" loyalty program.
"The tech rounds out a customer's record further," said Jake Weatherly, CEO of the Eugene, Ore.-based SheerID. "Often there is information in an ID that's inaccurate."
The investment in SheerID also serves Centana's investment strategy of locating segments of the payments chain that are "under automated" and need to catch up with the rest of the market in terms of innovation. Centana's portfolio also includes Jumio, another identity automation company that provides technology designed to speed onboarding and improve biometric authentication.
Discount fraud can mean a couple of things—it can also refer to fraudulent investment terms. In the retail world, it can be a particularly tough type of fraud to stop because many people have identifiers for dormant relationships that can still work in some circumstances at a store. Discount and other coupon-related fraud costs U.S. retailers about $600 million per year.
"A lot of us still have an .edu address form our schools, that's the kind of gap that permits this type of fraud," Byunn said.
One of the more famous cases of discount fraud involved Microsoft, said Shirley Inscoe, a senior analyst at Aite. Microsoft offers discounts for educational use, and won a suit against a company that obtained $30 million in product at a discount, then sold the products to a for-profit business instead of schools and universities.
"These crimes take place on all levels," Inscoe said, adding in some cases organized rings run the scams if the discount is substantial enough to acquire products and sell at a profit. "Retailers create these discounts to entice a particular customer segment or for goodwill purposes, and when they are taken advantage of on a large scale, it can negatively impact the company. Retailers are sometimes hesitant to require proof."
If a product can determine eligibility in a transparent way, that would be beneficial, but the company would still have to determine how to handle situations in which people are not eligible.