Azmeen Ansar

Growth Marketing Manager | Oct 2, 2024

Meet Niki.

She banks with one of Singapore‘s leading digital banks that uses Perx as their loyalty engagement platform. Initially attracted by a voucher at her favorite brand, she now uses the bank’s credit card for her daily transactions.

Why the increase in love? A loyalty program powered by gamified, hyper-personalized campaigns.

For the bank, thousands of customers like Niki resulted in 67% MAU and a 33X drop in customer acquisition cost (CAC). The bank cracked the psychology behind customer loyalty by using advanced data analytics, machine learning, and AI to deliver personalized experiences.

This win-win effect of loyalty programs is what has made it an evergreen strategy for customer relationship building. To back this claim with hard numbers, the global loyalty management market size was valued at USD 11.71 billion in 2023 and is projected to grow from USD 13.31 billion in 2024 to USD 41.21 billion by 2032, exhibiting a CAGR of 15.2% during the forecast period. (Source)

But it is not devoid of its risks. Along with current and potential customers, fraudulent profiles also are on the lookout for attractive, high-reward-yielding loyalty programs. Often presumed to have the least security checks – both from the customers and brands, loyalty programs are becoming a breeding ground for phishers, fraudsters, and the like. According to a study by Ernst & Young, loyalty program fraud is a growing problem worldwide with the current financial losses estimated to be around $1 billion. And they present themselves in many ways.

Types of Fraud in Loyalty Programs

New Account Fraud

Also known as synthetic identity fraud, New Account Fraud entails a fraudulent customer account being created under a fake or stolen identity. This is done by using automated tools or bots that create multiple accounts within minutes, often collecting loyalty rewards right after the account creation. This is done through a method known as credential stuffing where large volumes of stolen identities and passwords are used to create new accounts.

New Account Frauds choke up the loyalty program system and also make it difficult for genuine users to create their profiles.

Account Takeover (ATO) Fraud

This is where an existing loyalty account is hacked and taken over. Apart from credential stuffing, phishing attacks, malware, and social media scams are the most common ways ATO happens.

This is damaging to both the brand and the customers. The business rakes losses from fake redemptions of points, cash-backs, and vouchers. The customers run the risk of their financial and personal information being stolen, in addition to losing the rewards, cash balance, etc they may have in their accounts.

Fake Qualifying Actions (earning & burning)

Often affecting the business more than the customers, fake qualifying actions like illegitimately earning and burning points undermine the integrity of loyalty programs.

Fraudsters create fake transactions or manipulate receipts to be eligible for higher points. Or creating fake new accounts using their referral codes making them eligible for higher discounts and special rewards. Redemption of these points and rewards leads to huge financial losses to the business. It also devalues the image of the loyalty program making it averse to genuine customers.

Policy Abuse & Exploitation

Be it through bots or human scammers, abuse of the loyalty program rules and policies is now a usual occurrence.

The most common form is sharing or using voucher codes meant for particular customer segments or promotion periods outside the intended scope. This can involve using codes multiple times or spreading them through unauthorized channels. Another form is abusing the business’s return policies on products purchased using loyalty points and demanding a cash refund or store credit. Some of the fraudulent actions we covered in the earlier sections like opening multiple accounts or faking qualifying actions for tier upgrades also fall into this category.

Fake Loyalty Programs

This is when fraudsters are thinking big! Why manipulate a single business when you can scam thousands of customers? These are fraudulent schemes that deceive customers into joining a loyalty program that is a front to steal personal information, financial details, or money from unsuspecting individuals.

The most common telltale is the promise of unrealistic rewards, discounts, or points. Emails, SMS, insecure websites (absence of HTTPS), and social media accounts are used to promote these fake loyalty programs, which on closer look reveal the anomalies in their brand names, logos, and email IDs. Some scams involve fake mobile apps that claim to offer loyalty points or rewards. These apps can collect personal information and even install malware on the user’s device.

Data Breaches

While this is often the result of the different fraudulent activities we discussed above, data breaches in themselves have become a huge concern even outside the loyalty program world. While individuals can take all the necessary precautions to secure their accounts, a lapse in security on the business side can undo all the efforts the consumers take.

In addition to the theft of identities, and personal monetary losses, the cost to the business can be more than financial. The damage to the brand image and the legal consequences can take years to reverse.

The global average cost of a data breach in 2023 was $4.45 million, marking a 2.3% increase from $4.35 million in 2022 and a 15.3% increase since 2020, when the average cost was $3.86 million. This upward trend underscores the escalating financial risks businesses face in the current digital landscape.

How Perx and AWS Protect Your Loyalty Programs

At Perx, our commitment to client success extends beyond driving customer engagement; we are equally invested in safeguarding that engagement from fraudulent activities. Our loyalty management platform, integrated with AWS Fraud Detector, offers a robust defense against the evolving threats of loyalty fraud. Here’s how:

Machine Learning Integration for Adaptive Fraud Detection

No matter your industry, market, or the type of fraud you face, Perx has you covered. Our platform leverages AWS’s machine learning models, built on over 20 years of expertise, to ensure fraud detection systems are adaptive and constantly evolving. This means your business and customers are protected both now and in the future.

Real-Time Fraud Detection for Immediate Response

In today’s fast-paced digital world, timing is everything. Perx’s integration with AWS Fraud Detector provides real-time fraud detection, allowing you to respond instantly to suspicious activities. For example, if a customer’s account in Singapore records a transaction from another location, our system flags the activity immediately, potentially suspending the account pending investigation. This rapid response capability is crucial in preventing significant losses and maintaining customer trust.

Seamless Integration with Existing Systems

We understand that businesses rely on their existing infrastructure. That’s why the Perx fraud management architecture is designed for seamless integration with your current systems. Whether you’re using legacy systems or modern cloud-based platforms, our solution enhances your fraud detection capabilities without requiring an overhaul of your IT environment. Plus, being a part of the AWS ecosystem, our platform integrates effortlessly with other AWS services like Amazon S3 and AWS Lambda, simplifying deployment and management.

Automated Risk Scoring for Prioritized Fraud Prevention

Perx’s platform assigns risk scores to transactions and user activities, enabling your business to focus on high-risk events. This automated risk scoring not only prioritizes investigations but also improves the efficiency of your fraud prevention efforts. By filtering out low-risk activities, your team can concentrate on what truly matters—protecting your most valuable assets.

Customizable Models Tailored to Your Needs

Every business is unique, and so are its challenges. Perx’s platform allows you to create custom fraud detection models tailored to your specific industry and organizational needs. By incorporating unique business rules and patterns, our system can effectively detect and mitigate loyalty fraud that might be specific to your sector.

Scalability and Flexibility to Grow with Your Business

As your business grows, so too do your fraud detection needs. Perx and AWS Fraud Detector are built to scale, handling large volumes of transactions and adapting to various use cases—from e-commerce to financial services. This flexibility ensures that your fraud detection systems grow with you, protecting your business at every stage of its evolution.

Loyalty Program Fraud in Telecom, Banking and Retail

Telecommunications

According to the Communications Fraud Control Association (CFCA), global telecom fraud, including loyalty fraud, costs the industry around $28.3 billion annually. And 42% of the top ten fraud methods are related to telecommunication account manipulation.

As we’ve discussed here, the most common way fraudsters abuse a telecom loyalty program is through synthetic identity fraud. Fraudsters create multiple new accounts to take advantage of introductory offers on phones and services, leading to significant losses for telecom companies. To the customers, unauthorized access to telecom accounts can result in fraudulent charges, international calls, or the purchase of expensive devices.

Governments across the world are coming down hard on these telecommunication giants to secure their systems to protect the unsuspecting customers.

BFSI

According to a report by Bain & Company, financial institutions face increasing risks from loyalty fraud, with some estimates suggesting that fraud could account for up to 5% of all loyalty program redemptions. This translates to significant financial losses across the industry. In another report, a major bank reported losses of over $2 million in a single year due to loyalty program fraud. This included both direct financial losses and the costs associated with compensating affected customers

Synthetic identities are used to open new bank accounts, which are then used for money laundering or other illegal activities. These accounts can also be used to obtain credit cards and loans fraudulently. Attackers gain access to online banking accounts to transfer funds, apply for loans, or make unauthorized transactions. This escalates the cost of losses to both the bank and the customers.

Retail

Data breaches and other forms of loyalty fraud are rampant in the retail industry. 90% of online merchants believe policy abuse is a significant problem for their bottom lines. Losses from policy abuse have increased year-over-year (YoY) with promotional code and loyalty program abuse having a 38% YoY increase.

Fraudsters create multiple accounts to claim new customer discounts repeatedly, undermining the effectiveness of promotional campaigns and increasing costs for retailers. They also hijack accounts to make purchases using stored payment information or to redeem loyalty points and rewards.

Protect Your Customers and Business With Better Loyalty Program Anti-Fraud Practices

Loyalty fraud is a pervasive issue that requires advanced technological solutions to mitigate. AWS Fraud Detector provides a powerful toolset leveraging ML and AI to detect and prevent loyalty fraud. Perx’s Loyalty Management Platform together with AWS Fraud Detector secure loyalty programs, reduce financial losses, and maintain customer trust.

Get an in-depth demo of how Perx and AWS can secure your loyalty programs and keep your customers and business growing.

Keen on knowing how Perx Fraud Detection system can weed out any existing and future possibility of fraud? Reach out to us for a demo today.