Channel Marketer Report


Channel Loyalty Fraud: The Dark Side Of Loyalty Programs

By Lincoln Smith, Chief Strategy Officer, HMI Performance Incentives

Designing channel incentive programs is a genuine passion of mine. I have been fortunate to work with leading manufacturers and wholesalers to help drive customer loyalty and share-of-wallet spend initiatives. Unfortunately, there can be a dark side to these programs that any good program operator must be willing to address — fraud and fraud prevention. While it would be easy to pretend that programs aren’t susceptible to fraudulent behavior, or that this behavior can be easily policed away, the hard truth is that it’s an ongoing, major issue. Accounting for it is one of the most important parts of strategizing a program.

Lincoln Smith, Chief Strategy Officer, HMI Performance Incentives

This has been particularly true as programs have become digital, and bad actors have begun to shift their attention to the more “low-hanging fruit” of loyalty points versus the more protected cash, credit, and debit card accounts. In fact, according to the fraud prevention firm Forter, in the first quarter of 2019 loyalty fraud attacks were up 89% year over year.

While many of the reports on loyalty fraud focus on consumer programs, the trend is also one that sales and B2B customer program administrators need to be aware of. With fraud everywhere on the rise, it’s startling to consider the dollar value of this type of criminal activity: it’s estimated that roughly $1 billion in losses are due to fraud in the past year alone.

What Is Loyalty Fraud, And What Are the Risks?

Boiled down, loyalty fraud is a crime in which some party takes advantage of a loyalty program’s vulnerabilities to benefit themselves. While a common perception is that it is less severe than, say, stealing money from someone’s wallet, the truth is that companies hit with fraud can lose tens of thousands of dollars on average.

The risks also go beyond revenue loss, as fraud can deteriorate a firm’s credibility in its space and cripple confidence in the program as a whole. Damage to a firm’s (and its program’s) reputation can lead to decreased sales and gaps in communication with important audiences. Additionally, fraud can end up demotivating those pivotal audiences, whether it’s because you have to pause your program or because your customers have lost something themselves.

Loyalty Fraud: How and Why

So, how does this happen? There are a few avenues through which fraudulent behavior can occur. To start, individuals can falsify sales, falsify who they are, and utilize weaknesses in program oversight to gain access to data, rules, insights to the program, and most importantly, siphon off program currency to themselves. Often times, these individuals may be direct channel partners, but they can also be part of a third-party organization that, though indirect, is still one part of your channel.

Part of the problem is that as these programs become more and more complex, often spanning the globe with dozens, if not hundreds of third-party entities involved, natural loopholes can develop that enterprising and morally questionable individuals may seek to exploit.

Another challenge with loyalty programs is the perception of (and lack of attention given to) the points system. While nearly 66% of Americans check their bank accounts daily or weekly, most don’t regularly check their loyalty account balances. What’s more, it would appear that up to 45% of loyalty accounts are inactive, with the points in many of these accounts going unredeemed. Of course, it doesn’t help that the typical person is enrolled in more than a dozen loyalty programs in both the B2C and B2B spaces, making it difficult to keep track of each of these on a regular basis. All of this is to say that loyalty fraud can often go unnoticed—and therefore unreported—by participants for extended periods of time, making it hard to trace and root out.

Yet another challenge is that loyalty programs include a variety of touch points, and each has its own unique vulnerabilities that must be consistently monitored and addressed, from the sign-up process to the redemption of rewards. Those programs where sales are being “claimed” can be the most susceptible to fraud, versus strategies that are tracked based upon system-captured sales performance such as enterprise resource planning (ERP), partner relationship management (PRM), or customer relationship management (CRM) systems.

What Can Be Done?

First, a key is a well-designed program that allows you to identify how sales or purchasing performances are tracked and validated. Will a claims process be used, or will system-to-system reporting be used? Claims processes have more touchpoints, thus approval processes and cross-checks need to be determined in advance.

Fortunately, there are existing best practices that can improve the efficacy of fraud prevention. For example, at HMI we are deploying a Fraud Indicator Reporting Service that looks for and flags suspicious behaviors relating to irregularities, such as inconsistent program profiles and redemption behaviors.

In addition, as technology advances make programs more susceptible to fraud, so too can they help program administrators fight fraud. A.I. and machine learning are two examples where the possibilities for prevention are promising.


From the perspective of criminology, criminal behavior relies on three key elements: skill, intent, and opportunity. While there’s not much program managers can do to prevent the first two of these elements, the third—opportunity—is where awareness and vigilance can truly make a difference. The catch, though, is that heightened opportunity can also lead to higher intent.

However, by anticipating vulnerabilities, actively discouraging fraudulent behavior, utilizing cutting-edge technology, and putting protocols into place that identify not only this behavior but the opportunities that enable it, we can continue to make our programs safer and more protected. Ultimately, taking a few steps in the beginning can save you and your company a lot of pain in the long run.

HMI Performance Incentives is a global leader in designing and operating effective incentive solutions, offering programs that help clients boost profit margin, increase partner, employee or customer engagement and capture new market share.