Do Brands Explain Loyalty Programs to Address Relationship Expectations?

As loyalty programs have become an increasingly important part of companies’ customer retention strategies, the threat of loyalty fraud has risen, according to Bret Hydorn, VP of Marketing at CyberSource.

According to RFi Group, an estimated $238 billion in loyalty program rewards, earned by consumers through airlines, hotels and other programs, has never been redeemed.

Ernan Roman, president of ERDM Corp., told Loyalty360 that his company’s research shows that brands need to do a much better job of explaining their loyalty programs to members.

“The fact that massive amounts of loyalty rewards have not been redeemed is consistent with findings from our VoC research among customers of Fortune brands and luxury marketers,” Roman said. “These customers, especially Millennials, stated that companies are doing a poor job in structuring loyalty programs to address the relationship expectations these customers have with the brands. Instead, loyalty programs are structured and marketed as commoditized ways of accumulating points/credits/stars. These programs come across as having little to do with strengthening the relationship and loyalty with the brands.”

Across the board, Roman added, research findings indicate that companies are doing a very poor job in communicating the true value of these programs to customers.

“This point of view was also expressed among the highest levels of customers in loyalty programs,” he added.
CyberSource recently unveiled a Loyalty Fraud Management solution.

“Loyalty programs exist to enhance a merchant’s brand and customer retention, so ensuring the security of the program is critical,” Hydorn said. “If customers don’t trust the merchant, they are much less likely to be loyal. CyberSource’s Loyalty Fraud Management Solution helps protect merchants and their customers by accurately diagnosing fraudulent behaviors throughout the loyalty lifecycle—from account creation through points use and incremental points/rewards purchase. This lifecycle view is important because loyalty fraud is committed by exploiting vulnerabilities at each point in the loyalty program chain.”

For instance, here is one way loyalty fraud is committed and monetized:

1.          Fraudster creates a fake account
2.          Fraudster takes over several other valid accounts belonging to good customers
3.          Fraudster transfers points from valid accounts to the fake account
4.          Redeems points now in fake account for a flight/gift card/merchandise

“The assets gained through fraud are then monetized by things like selling gift cards for cash or using points and fake account to stay at hotels, raid rooms (steal TV, etc.), and sell the assets for cash,” Hydorn added. “The CyberSource solution includes tools to identify fraudulent behaviors associated with account creation and account activity (such as multiple different devices attempting to log into an account within a short period of time, multiple points transfers into an account, additions of persons to a loyalty account with new devices, etc.). Similarly, leveraging insights from the over $68B of transactions Visa and CyberSource process annually, our loyalty fraud solution accurately screens for fraudulent credit card or other payments used to purchase incremental points/rewards. In this way, our solution monitors all key points of loyalty program interaction and helps companies grow their loyalty programs to enhance customer engagement and drive retention, without fear of fraud, and thus protect relationships with their best customers.”

As companies seek to increase their volume of repeat customers, loyalty programs in travel and retail have become more important, Hydorn noted.

“Companies now offer more earning and redemption choices than ever, often through partnerships and rewards ecosystems,” he explained. “These programs can create significant value for consumers, but also come with risks as the loyalty earning and burning lifecycle has opened new avenues for fraud. These risks come in two flavors: Direct financial risk from the loss of valuable goods, services, and points/rewards, and potentially more worrisome, the risk of reputation damage. Consumers expect accounts with personal information to be secured to a high standard, and they recognize that loyalty points essentially translate to currency. When companies’ protections fail, consumers not only rethink their participation in the loyalty program, but many lose faith in the company itself. And, survey data bears this out. Some 81% of U.S. shoppers equate loyalty and rewards points with cash, and 26% say they would cancel their rewards program membership after an incident of loyalty fraud (“Loyalty Program Fraud: Customers Assume You’ve Got Them Covered.”, Connexions Loyalty Report, 2015.)

The digital world has opened up new and numerous doors for potential loyalty program fraud.
“What is universally true is that the digital economy has created tremendous opportunities for business and payment innovation, and the storage of digital credentials to facilitate card on file payments and redemption of points/rewards that underpin these experiential innovations has also created new opportunities for fraudsters,”
Hydorn added. “As businesses mature in their ability to manage fraud associated with the direct online purchase of goods and services, fraudsters are now seeking other areas of vulnerability such as loyalty programs, which typically do not have the same protections in place. As a result, the industry is seeing an overall rise in loyalty program fraud and the takeover of loyalty and card on file accounts.”

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