. How to Prevent Fraud in Loyalty Programs | Northstar Meetings Group

How to Prevent Fraud in Loyalty Programs

Why fraud protection may be the best reward you can give loyalty members

Connexions Loyalty Fraud

Loyalty and rewards programs are a major component of brands' and organizations' efforts to gain and retain loyal customers and talented employees. Organizations use loyalty programs to generate additional revenue and reward loyal customers and top performers with gift cards, merchandise, and travel.

But could your rewards program be having the opposite effect? Could it be discouraging employees from using the program or turning customers away from the brands they love? A single instance of loyalty fraud just might. 

Rewards points and miles are worth an estimated $48 billion in the U.S. alone, making loyalty programs an attractive target to hackers and thieves. Historically, loyalty and rewards programs have lacked the security controls typically seen with credit or bank transactions, such as multiple authentication steps and complex password requirements. This vulnerability presents both an opportunity for hackers and a real problem for the organizations managing the loyalty programs. 

For years, Michael Smith, industry analyst and managing partner of Airline Information, says he's been telling anyone who will listen to "think of their points and miles as money." And many consumers agree. 

Loyalty program members see rewards as more than points earned or miles traveled. Americans place a high value on the points and miles accumulated in their rewards "banks." In fact, an overwhelming majority (81 percent) equate loyalty and rewards points with cash, according to a recent national survey of loyalty program members that was commissioned by Connexions Loyalty and conducted through IPSOS Public Affairs. 

And yet, while most look at loyalty points as if they were cash, they put the onus on protecting those points on the company running the program. One in four loyalty program members said they'd leave the program if there were a breach of their account, and another 17 percent said they would stop doing business with the organization altogether. 

What should program managers do? 

Survey results revealed that one in three (34 percent) program members log into their accounts no more than once every few months, with 10 percent saying they never access their account balances. This lack of attention decreases the likelihood of detecting fraudulent activity soon after it occurs, if ever. 

But there are steps program managers can take to help prevent program fraud. 

1. Monitor account activity. This includes monitoring registration, login and transactions throughout the customer or user lifecycle. Any activity that happens in the account - an email, phone number or IP address change - should be reviewed to determine if something is out of the ordinary. 

2. Go further with identity verification. A multifactor authentication process should be used that requires, for example, identification of a code image in addition to inputting a password and temporary key. Try to strike a balance between increased security and making users feel it's too difficult to access their accounts.  

3. Boost internal communication about fraud and get buy-in for increased protection. Educate others in your organization about the threat of loyalty fraud and the need to protect your rewards members by having increased program security. After all, nine in 10 (93 percent) survey respondents said they would prefer that rewards programs have fraud protections in place. 

4. Educate program members about loyalty fraud. Many program users don't monitor their accounts until it's time to redeem an award, giving thieves time to track patterns, log in, and steal points or miles. Educate members about breaches and the importance of using strong passwords, changing them regularly, and logging in more frequently. 

Organizations and rewards program members must work together to make loyalty programs less desirable targets for hackers and fraudsters. Prevention is the key to staying ahead of the damaging effects of loyalty and rewards fraud. Waiting to fight fraud until accounts already have been compromised will cost money, a damaged reputation and ultimately the loss of customers and members. Loyalty and rewards members expect to be shielded from fraud before it happens - and they should be. After all, aren't rewards members among an organization's most valuable assets?

As the group vice president of product at Connexions Loyalty, Mike McDonnell is responsible for leading, developing and managing Connexions' loyalty and rewards offerings. This article is part of a larger report conducted by Connexions. Go here to view the full study.