Fighting Fraud Among Loyalty and Gift Card Programs

Fraud is not limited to credit cards. With loyalty reward programs surging in popularity and the gift card business approaching $140 billion in revenue, retailers need to re-evaluate how to safeguard these particular programs as well as limit overall risk.

In terms of properly preventing fraud in this area, many retailers have let their guard down. While the instances are rare, loyalty fraud does happen. Check out these extreme, but very true, examples:

• An article on Mashable reported how a young man successfully added hundreds of dollars to gift cards without paying a dime. According to the accused, the act was done in the name of research as he planned to use the data to counteract gift card theft.

• In London, an IT tech confessed to rigging loyalty card accounts with points that would have required more than $10 million in purchases to accumulate. He cashed in $13,000 before being brought to court.

A recent survey among loyalty program operators revealed that 72 percent of respondents admitted to having experienced fraud issues. Of those respondents, almost half said loyalty fraud was growing fast. Respondents believe that “the ability to turn points/miles into merchandise” is the main factor that drives fraud.

The best way for retailers to protect their loyalty program includes guidelines, controls and a rigid monitoring process. Exception reporting will highlight unusual activity, uncommon updates to customer profiles, a barrage of unsuccessful login attempts to the rewards website and a variance in redemption activities. Internally, retailers should commit to ongoing audits and security reviews and opt for user-defined roles that enable limited or restricted access.

To reduce fraud in your gift card business, use scratch off labels to protect the gift card account numbers. This will prevent dishonest employees from obtaining inactivated card numbers, selling them and then immediately using their code. Gift cards should be activated at the end of the sales transaction to prevent any “laundering” of gift cards. Most importantly, understand how your POS system handles gift card transactions and processes for a voided sale.

While no system or process is going to be forever fraud proof, the retailers who build strong programs with check and balances to protect their investment will be least affected.