Key Challenges of Loyalty Program Fraud | Loyalty360 Q&A with Comarch

Comarch, a technology solutions company with more than 25 years of industry experience, just released its latest whitepaper addressing the complexities and negative impacts surrounding loyalty fraud – and how marketers can deal with this growing concern. Loyalty360 had the chance to speak with Maciej Tyczyński, Data Science and AI/ML Team Manager at Comarch, to take a deeper dive into the technology supplier's perspective on loyalty fraud and potential solutions for brands.

In its newly released white paper "Loyalty Fraud: 5 Key Challenges," Comarch makes it clear that they are steadfastly working to solve the threats to loyalty programs and their respective IT systems. Comarch understands that companies must find a balance between sufficient security and an engaging, easy-to-use loyalty platform, one without a friction-filled customer experience. However, when it comes to combating loyalty fraud, many marketers are still at square one trying to wrap their heads around what loyalty fraud is and how it is defined.

How is Loyalty Fraud Defined?

The threat of fraud is nothing new, but fraud specific to loyalty programs has been on the rise and marketing teams are trying to tackle this challenge as their loyalty programs have become targets for those looking for easy gains. According to industry research, brands experienced an 89 percent increase in loyalty fraud between mid-2018 and 2019 and based on conservative estimates, over $1 billion a year is lost to crime related to loyalty programs.

The definition of loyalty fraud can vary depending on how a loyalty program is structured and how customers are rewarded, but Comarch says there are three common types: internal, external, and "gaming." Tyczyński shared that confusion around the definition of loyalty fraud is "definitely a key challenge." Fraud is a complex topic that has become increasingly relevant, however, as shared in the Loyalty360 Top 4 Trends/Topics for 2020, members of Loyalty360 have expressed a need for more succinct definitions of many topics around customer experience and customer loyalty.

Comarch's Maciej Tyczyński continued that "We asked our clients 'What kind of fraud have you experienced with your program?' and we had different answers from every single customer we talked to," he said. "This shows how unclear and vague the whole area is. Everyone experiences fraud differently and there is no formula around the subject. As there are different industries, there will be disparate manners by which fraud could be committed."

While different brands may see fraud in different lights – for example, a retailer may not classify certain customer actions as gaming or fraud, but a bank may consider those actions a serious issue – Tyczyński suggests taking a broad approach to fraud and then narrowing focus on customer actions that the brand defines as harmful. "What a brand defines as loyalty fraud depends on the program. With this in mind, we understand fraud very broadly. We understand it as any action committed by platform users that lead to any type of damage to the program owner. If our customers define actions as fraud, we consider that fraud as well."
Prioritizing Loyalty Fraud Prevention?

While a staggering number of brands have experienced some type of fraud or gaming, many still struggle to fight program fraud due to a variety of reasons. Based on industry research, 50 percent of brands felt they had insufficient resources and account fraud prevention is considered a low priority for many organizations. This is likely due to several factors. First, it is difficult to quantify losses from loyalty program fraud. Additionally, since there is not a common definition of fraud across industries along with the highly confidential and sensitive nature of fraud, there are no shared metrics to measure fraud. Finally, many internal marketing teams struggle to keep up with new technology as-is, and loyalty fraud is a convoluted issue that brands and technology suppliers alike are still trying to better understand.

However, if brands want to protect themselves from becoming the next big data breach making headlines, there are a few ways they can better understand their programs and protect against fraud.

Tyczyński shared that "Brands can try and quantify parts of their program, especially if they have formalized billing mechanisms or if they understand their program's price per point, but when there is no clear translation between the point value and monetary value, it is difficult to say what the actual damage of fraud is or could be. If organizations cannot prove that fraud caused serious financial damage, it is hard to get senior-management buy-in." A starting place for brands looking to assign a monetary value to losses from fraud would be to estimate average lifetime customer value for loyalty members, understand program costs, and estimate member acquisition costs.

How Can Brands Balance Customer Experience and Security?

Brands have come to realize that today's customers are looking for quick, relevant, and seamless cross-channel experiences. However, implementing additional security measures, as shared in the recent Loyalty360 Industry Report on CCPA, can have the exact opposite impact. Creating additional hurdles for users to jump through such as forcing users to create complicated passwords, multi-factor authentication or asking for answers to multiple security questions has the effect of scaring users away from the program and towards another program that is easier to use.

However, when brands "know" their best customers, those customers will reward the brand with their business. Brands can serve up personalized offers, create frictionless experiences, and then recognize their loyal members with rewards and exclusive benefits. How can brands strike a balance between keeping their systems secure while not hindering customer experience? Tyczyński says that it is a delicate balance. "The biggest challenge around loyalty fraud is creating a compromise between a frictionless customer experience while, at the same time, making sure your program is secure." Comarch suggests that brands test new security initiatives before rolling it out to all users. Feedback from A/B testing can include powerful insights on how customers will react to new security measures. "A brand should only introduce the new change to all program members after they are sure the proposed procedures do not negatively impact the user experience."

While loyalty fraud as a topic is still in its infancy, in both the brands' willingness to acknowledge it and the ability to understand and act against it, one thing is for certain: it is not going away anytime soon. Fraud is a complicated topic, not only due to the issues mentioned above but also because marketers are extremely hesitant to discuss instances of fraud. As Tyczyński stated, "There is a dialogue and communication issue around loyalty fraud. In this case, it is complex because it is highly confidential, and organizations are hesitant to share details on fraud issues." By starting a dialogue and taking the proper steps toward securing data, understanding customer behavior and properly monitoring programs, brands can gradually strengthen their defenses against loyalty fraud.

"Loyalty Fraud is complex, and often overlooked, especially by senior managers. By providing them with the proper definitions, historical cases, and hard numbers that prove loyalty fraud can lead to major financial losses, is it possible to get enough attention and organizational buy-in and adopt measures to protect the brand's program and its customers."

For more information on Comarch and the report, Loyalty Fraud: 5 Key Challenges, click here to download the complete whitepaper.

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