Loyalty Fraud: The Threat That Could Affect Your Company’s Bottom Line

WM Circle Logo

By: Wise Marketer Staff |

Posted on August 11, 2017

loyalty fraudThe topic of fraud is not a new phenomenon. In fact, it’s something we hear about on a near constant basis from our email providers, banks, credit card companies and airlines. Banks in particular are cracking down on fraud and putting sophisticated anti-fraud programs in place to keep their customers’ privacy secure. Companies may be getting smarter, but fraudsters are too, and they are beginning to shift their focus to a different, more inconspicuous target – loyalty programs.

By: Laura Hurdelbrink

Loyalty Programs by the Numbers
Loyalty programs have been around since the 18th century and have evolved from retailers giving out copper coins that encouraged repeat customers, to mobile apps that track a customer’s spending and reward them for frequent purchases. According to the 2017 COLLOQUY Loyalty Census, there are 3.8 billion loyalty program members in the United States alone1. Whether they collect miles, points towards a free hotel stay, or cash rewards, an impressive 83 percent of consumers belong to a loyalty program2 – in fact, an average household belongs to 29 programs3. The value of points and miles currently stored in all U.S. loyalty programs comes to $48 billion4. Although the number of loyalty members is high, it turns out that customer engagement is low. In fact, RFi Group reported that an estimated $238 billion in loyalty program rewards earned by consumers have never been redeemed5. To further the case, a survey by Connexions Loyalty and Ipsos revealed that at least 44 percent of customers don’t actively monitor their accounts, leaving them extra vulnerable to hackers6. With these numbers, it’s no surprise why loyalty programs are hot on a fraudster’s radar.

Where the Money Is
While loyalty programs typically do not carry a “cash” value, fraudsters are still able to make a profit by stealing points or miles that can be exchanged for gift cards, travel or other rewards. These criminals take advantage of loopholes in the system and target loyalty programs across all business types. As an example, a hacker may use a phishing scheme to gain access to a valid loyalty customer’s credentials and then take over their account to redeem their points; some may even sell the rewards on the black market.

While outside hackers are the most common fraud criminals, employees are often to blame as well. Insiders have been known to take advantage of their access to loyalty programs to scam the program, rigging accounts to reallocate more points or miles in their favor. Additionally, customers themselves may cheat the system by double dipping between multiple frequent flyer programs or by selling their miles or points, which is against the program’s policy.

Regardless of the source of fraud, it not only affects the customer, but it also puts the company in jeopardy.

The Real Cost of Fraud
When calculating the cost of fraud, you must take into account the loss of both direct (current) and indirect (non-customers) impact on customer lifetime values. One way to calculate customer lifetime value is to multiply the average purchase value by the number of repeat sales by the average retention time. Customer lifetime value varies greatly by industry and company, but let’s look at an example. Let’s conservatively assume that the estimated customer lifetime value is around $8,000. Combining that with the indirect Customer lifetime value loss of an additional $8000, the reimbursement value of stolen points and miles ($850 on average), the expenses associated with a fraud investigation ($50), and the cost related to the apology and added customer service ($100) and just one fraud occurrence for one member can cost a company as much as $17,000. In addition, Juniper Research estimates that the cost of data breaches is likely to hit $2.1 trillion globally by 20196. The numbers may be high, but calculating the true cost of loyalty fraud goes far beyond the cost of investigations or reimbursement of stolen points and miles. After an instance of loyalty program fraud, a brand risks losing its most valuable asset – loyal customers and the lifetime value they bring to a brand.

According to a consumer survey conducted by Connexions Loyalty and Ipsos, 26 percent of loyalty program members would cancel their membership if their account was affected by fraud. Additionally, 17 percent admitted that they would stop doing business with that company all together8. To make matters worse, members often take to Facebook or Twitter to share their experience, causing a social media storm that spreads the negativity even further. The result is a decline in both existing and potential customers.

Protecting Your Customers
Three in four loyalty program managers have experienced an instance of fraud firsthand, which has led to many companies increasing their protection. Loyalty programs have a growing set of sophisticated tools at their disposal – like Connexions Loyalty’s Rewards Shield℠ – that are largely invisible to their customers and yet are adept at both identifying and preventing fraud. No one can prevent fraudsters from attempting to breach loyalty programs; however; the security measures that are in place today make it much more difficult to get away with it. There are those who may continue to attempt to illegally tap into the billions of points and miles that have been accumulated, but they will now face an array of cutting-edge protections designed to thwart their efforts at every turn.

On Thursday, August 3, 2017 at 1pm EDT, Laura Hurdelbrink, Loyalty Fraud Product Manager at Connexions Loyalty, is hosting a webinar where she will walk through a methodology to help brands understand the potential costs of this threat.  Register here.



  1. Fruend, M. (2017, June). 2017 COLLOQUY LOYALTY CENSUS (Rep.). Retrieved July 14, 2017, from COLLOQUY website: https://www.colloquy.com/resources/pdf/reports/COLLOQUY_2017_Loyalty%20Census.pdf
  2. Loyalty Programs Appeal to All Ages. (2014, November 5). Retrieved July 14, 2017, from https://www.warc.com/NewsAndOpinion/News/33530
  3. Berry, J. (2015, February 10). The 2015 COLLOQUY Loyalty Census: Big Numbers, Big Hurdles (Rep.). Retrieved July 14, 2017, from COLLOQUY website: https://www.colloquy.com/resources/pdf/reports/2015-loyalty-census.pdf
  4. Sullivan, J., & Hlavinka, K. (2011, April 18). The Billion Member March: The 2011 COLLOQUY Loyalty Census (Rep.). Retrieved July 14, 2017, from COLLOQUY website: https://www.colloquy.com/resources/pdf/reports/20110418-COLLOQUY-Loyalty-Census-rep.pdf
  5. Yuzon, R. (2015, April 30). Loyalty points fraud: A real risk for a virtual currency. Retrieved July 14, 2017, from https://www.rfigroup.com/global-retail-banker/news/loyalty-points-fraud-real-risk-virtual-currency
  6. Http://info.cxloyalty.com/protect-your-customers-from-loyalty-fraud (Rep.). (2017, June 2). Retrieved July 14, 2017, from Connexions Loyalty website: http://info.cxloyalty.com/protect-your-customers-from-loyalty-fraud
  7. Cybercrime Will Cost Businesses Over $2 Trillion by 2019. (2015, May 12). Retrieved July 14, 2017, from https://www.juniperresearch.com/press/press-releases/cybercrime-cost-businesses-over-2trillion
  8. Http://info.cxloyalty.com/protect-your-customers-from-loyalty-fraud (Rep.). (2017, June 2). Retrieved July 14, 2017, from Connexions Loyalty website: http://info.cxloyalty.com/protect-your-customers-from-loyalty-fraud