3 Trends That Rewrote the Rules of Loyalty Marketing In 2017 (Part 2)

(This is the second in a three part series on shifts that occurred in 2017 that will have long term impact on the loyalty industry. Part 1: Liquid Currency covered the adoption of pay-with-points solutions.)

Shift #2: Loyalty Program Fraud Comes Out of the Shadow

Every sizable loyalty program was a victim of attempted fraud or hacking in 2017. Those who believe they weren’t, simply haven’t paid attention.

The fact that loyalty programs are at significant risk for hacking shouldn’t be a shock. Customer data breaches are predicted to cost business some $8 trillion over the next five years. In the ecommerce space specifically, fraud already exhausts 8% of the average merchant’s revenue stream, while fraud management accounts for 21% of operational costs.

Fraud and hacking are a daily reality in an increasingly connected consumer world. The loyalty industry, which manages vast amounts of consumer data and tens of billions of dollars in point value, is not immune. And innovations like point pooling, gifting and liquid currency, while bringing new choices for consumers, have also added new access points for fraud.

The overall loyalty industry’s risk of exposure on this topic is significant, as I explained in an interview with Kiplinger earlier this year:

“Loyalty managers have kept a low profile with regard to breaches that have occurred, but it’s just a matter of time until there’s a well-publicized breach of a large program—most likely in airline or hotel rewards because members accrue significant value in those programs.”

Thankfully, a major high-profile breach has yet to occur. But loyalty program fraud still became an unavoidable topic in 2017.

The Weak Link

This year, the loyalty space began to address the topic of fraud. Until very recently, program fraud was only discussed in hushed tones or dismissed as a non-issue. Now all major loyalty agencies proudly promote their fraud protection tools and process. Increased awareness has also inspired the launch of several new industry events dedicated solely to addressing fraud detection and prevention. The topic is also a frequent subject of mainstream media coverage.

Companies with programs now recognize that hackers and organized criminal networks have identified loyalty currencies as potentially easy targets for one simply reason: low consumer awareness. Unlike their bank and credit card accounts, few consumers closely monitor their earned point balances or update account passwords on a frequent basis.

However, consumer awareness may be shifting. According to new consumer research from a 2017 Maritz study:

  • 56% of consumers now indicate they are concerned about loyalty program fraud
  • While only 7% of consumers identify themselves as having been a victim of program fraud, of those who have experienced fraud, 58% say the event made them less trusting of the brand overall, and 45% said they are less likely to purchase from that brand in the future. *A previous version of this blog said that 17% of consumers reported fraud within a points-based loyalty program. The correct figure is 7%. 

What does this change mean for loyalty marketing?

As consumer awareness of loyalty point fraud rises, the risk to brands will be three-fold:

  • Breaches of member accounts pose a major PR risk, both to your program and to your brand, since more attention is likely to be paid when a breach does occur.
  • Breaches pose a financial risk as brands are responsible for reimbursing lost points or fraudulent redemptions.
  • Most importantly, a defrauded loyalty program member may become a lost program member.

But, there is an upside.  While the potential consequences are serious and could be costly, the sunlight now shining on the possibility of program fraud should reduce the risk of fraud occurring. Heightened awareness by brands should bring increased attention to fraud/hacking prevention best practices, with increased expectations that loyalty partners provide advance fraud detection tools. Similarly, consumers who realize their points could be attractive to criminals will likely monitor their accounts more closely and recognize the real dollar value of those points. Increased vigilance by both groups will be major win for loyalty marketing in 2018.

 

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