Businesses reward customers for their brand loyalty, i.e., repeat purchases and continued engagement. Loyalty or rewards programs are designed to encourage long-term relationships and attract new customers by offering points, benefits, or incentives for ongoing use of products and services.

While some loyalty points can be directly converted to money, others can be exchanged for benefits like discounts, products, or services. Therefore, attackers try to steal or misuse them through cyberattacks and fraud.

What is Loyalty Fraud?

Loyalty fraud is the malicious targeting of loyalty programs, points systems, or membership benefits by attackers. This includes stealing accumulated points, creating fake accounts to harvest rewards, exploiting program rules, and using compromised credentials to drain customer accounts. Loyalty frauds are not taken seriously because of the perceived notion that points and rewards are not real money.

We must understand that loyalty points represent monetary value. Criminals can trade stolen points on dark web marketplaces, convert them to gift cards, or redeem them for merchandise. Businesses end up issuing more points than those generated by genuine purchases. This causes financial loss and reputational damage.

How Does Loyalty Fraud Happen?

Fraudsters use different methods to break into loyalty programs. 

Credential stuffing is the most common method. Attackers use stolen usernames and passwords to log into loyalty accounts. It is common to have the same username and password for multiple apps, so attackers can access many loyalty accounts with a single set of credentials. 

Fraudsters also use sophisticated tools to create large numbers of fake accounts to collect large volumes of sign-up bonuses.

The access of loyalty programs through mobile applications have added an additional risk of loyalty fraud. Weak or exposed APIs may allow attackers to directly interfere with backend systems. Attackers can reverse engineer apps to manipulate how points are calculated. They can also change how the app behaves while it is running to generate rewards to which they are not entitled.

What are the Most Common Types of Loyalty Fraud?

Account-Based Fraud

  • Account Takeover (ATO): Attackers get unauthorized access to user accounts to use their points and rewards.
  • Fake Account Creation: Fraudsters use sophisticated tools to create large numbers of fake accounts to collect large volumes of sign-up bonuses or referral bonuses.
  • Phishing and Social Engineering: Attackers use deceptive communication or imitate officials to make customers redeem their loyalty points for fraudulent transactions.

Program and Policy Abuse

  • Program Exploitation: Fraudsters find weaknesses in program rules which they exploit to earn more points by manipulating purchase thresholds or exploiting bonus multipliers.
  • Referral Abuse: Creating multiple fake accounts to claim referral bonuses repeatedly. Sophisticated operations use device farms to stop their operations from being detected.
  • Returns and Refund Abuse: Customers buy products and then return them. In this way they get points without spending money.

System and Operational Fraud

  • Data Breaches: Attackers use stolen customer credentials and account information from hacked databases to execute full account takeover operations.
  • Insider Fraud: Employees with system access may give more points or rewards to themselves or their accomplices.
  • Stolen Credit Card Usage: Fraudsters use compromised payment cards for purchases that earn points. They then redeem these points before the purchase gets reversed.

Why is Loyalty Fraud a Real and Immediate Threat Today?

Growing Value of Loyalty Programs

The global loyalty market is increasing as more businesses are investing in loyalty programs to keep the customers engaged. With the increase in loyalty programs, the chances of loyalty frauds are increasing.

Inadequate Security Measures

Businesses as well as customers treat loyalty programs like marketing techniques rather than a monetary system. The security of loyalty programs is not given much attention. This leads to loyalty frauds.

Sophisticated Attack Tools

Tools that help criminals carry out loyalty fraud are now easy to access. Bot networks and automated software allow attackers to abuse loyalty programs at large scale.

Real-World Examples of Loyalty Fraud Attacks

British Airways experienced loyalty fraud between 2015-2018. The victims were British Airways Executive Club members. Their accounts were accessed with stolen credentials, and their loyalty points were redeemed for purchasing flight tickets and travel vouchers. A similar loyalty fraud happened with the members of United Airlines MileagePlus users.

Similarly, thousands of Dunkin’ Donuts’ DD perks loyalty accounts were accessed and used for fraudulent purchases. Dunkin’ group had to settle the case by paying $650,000 as penalties and cost.

Loyalty frauds have increased by 89% year-on-year with almost $1 billion in value of rewards lost or illegitimately redeemed.

Which Industries Are Most Vulnerable to Loyalty Fraud?

OTT and Streaming Platforms

OTT and streaming platforms with trial periods, referral bonuses, and premium tier rewards face continuous abuse. The practice of sharing credentials between users makes it challenging to identify when users access their accounts from different devices versus when their accounts have been compromised.

Mobile Gaming

The in-game currency system along with reward programs operate as highly accessible targets for attackers. The system allows fraudsters to use automated play, exploit system bugs and leaderboards for obtaining valuable game items. The real-money trading system enables users to convert their stolen assets into actual money at the time of their theft.

Fintech and Wallet Apps

Digital wallets which provide cashback rewards, referral bonuses and transaction rewards enable users to access financial services while earning loyalty benefits. The combination of these factors makes them highly vulnerable to attacks from complex fraud schemes.

E-Commerce Apps

Online retailers that operate points programs, tiered membership systems and promotional reward programs become targets for both external security threats and policy violations. The combination of loyalty features with checkout systems produces various security vulnerabilities which attackers can exploit.

How Loyalty Fraud Damages Business Revenue, Trust, and Growth

The losses that businesses face due to loyalty fraud far exceeds the actual worth of the stolen reward points.

Businesses must refund the loyalty points to the genuine users, pay fines, and bear the cost of investigation. They must also go through legal and compliance audits that put a strain on the operations, at the same time dealing with ailing customers.

Customers’ trust can be damaged beyond repair when unauthorized parties access their account information. Users who lose their accumulated rewards will typically blame the brand rather than the attackers. Negative experiences spread through customer reviews and social media platforms which deter new customers. 

Frauds like these curb growth initiatives and delay the promotional campaigns of the business. Legitimate users may sometimes face friction with increased security measures implemented against the attacks. Therefore, loyalty fraud hinders the fundamental purpose of loyalty programs.

Loyalty Fraud Detection: How to Detect and Prevent Loyalty Fraud?

Behavioral Analytics

Organizations need to deploy security systems that understand normal user behavior and identify irregular system activities for loyalty fraud detection. The system monitors all user login activities like login location, redemption velocity and point accumulation rate. Machine learning models establish reference points which enable them to detect abnormal data patterns.

Real-Time Monitoring

Batch processing reveals fraudulent activities only after organizations have experienced damage. Security teams should analyse loyalty point transactions in real-time for quick response against fraudulent activities. For loyalty fraud prevention automated rules must be set up which block high-risk redemption until it is reviewed.

Device and Environment Verification

For loyalty program fraud prevention, organizations must ensure that their apps operate within secure environments. The detection of rooted devices, emulators and tampering attempts enables security systems to detect automated attack activities. Device binding enables users to access their accounts from specific devices to ensure loyalty fraud prevention.

Strong Authentication

The deployment of multi-factor authentication results in a major reduction of account takeover attempts. Step-up authentication for high-value financial transactions provides security measures which do not interfere with normal user operations.

Best Practices to Protect Mobile Apps from Loyalty Fraud

  • Application hardening process protects mobile applications from reverse engineering attacks and runtime tampering incidents
  • Secure APIs with strong authentication systems together with rate limiting mechanisms to stop automated abuse
  • Encryption of sensitive loyalty information at transit and rest to minimize data accessibility
  • Loyalty rule design which fights fraud by setting velocity limits and cooling-off periods.
  • Track all loyalty transactions through complete audit trails
  • The organization needs to develop loyalty fraud specific incident management plans
  • Provide training for loyalty fraud detection and loyalty fraud prevention
  • Perform scheduled assessments of fraud control systems

DoveRunner’s Complete End-to-End Defense Against Loyalty Fraud

DoveRunner provides mobile application security protection at an enterprise level. It defends applications from loyalty fraud attacks without slowing down development. DoveRunner provides zero-coding security which protects applications through codeless operations and zero-day threat protection which defends against newly discovered cyber threats. 

Runtime Application Self Protection (RASP) protects applications from real-time attacks which include tampering, debugging, and network-based abuse. Code obfuscation and device trust checks protect loyalty logic from reverse engineering and automated abuse. 

DoveRunner’s built-in security features which include multi-factor authentication, behavioral anomaly detection, and secure in-app checkout protection to protect against account takeover attempts and reward misuse. 

FAQs about Loyalty Fraud

1. What is Reward Fraud?

Reward fraud is when attackers illegitimately obtain, harvest or redeem loyalty points, rewards, or program benefits from genuine users or by using sophisticated tools.

2. What is an Example of Loyalty Program Fraud?

Loyalty points of British Airways Executive Club members were fraudulently redeemed for flight tickets and travel vouchers.

3. How Do Loyalty and Rewards Programs Increase Fraud Risk?

Loyalty programs give points and rewards that can be used on purchases or converted into gift cards that can be later redeemed elsewhere. Loyalty programs aid transactions without banking details making it a simpler target for attackers.

4. Why is Loyalty Fraud on the Rise?

Loyalty fraud is on the rise due to increase in the number of loyalty programs, insufficient security attention to loyalty programs and easy availability of tools and software that aid this abuse.

5. How Does Loyalty Fraud Create Issues for Businesses?

Loyalty fraud causes direct financial losses through fraudulent redemption of loyalty points. It also affects the customer trust and the brand reputation.