Consumers just spent an entire year locked up in their homes due to Coronavirus. Even though 2021 isn’t delivering on its promise of setting the clock back to ‘normal’ all at once, there is now light at the end of the tunnel. Assuming no unforeseen setbacks, the confinement and stress of the last 12+ months will gradually lessen over the course of the year.
Historically, the years after a period of abnormal social restriction are marked by huge increases in wealth generation and licentiousness. The Spanish Influenza in 1918 gave way to the twenties, fondly remembered with its ‘roaring’ moniker. But it’s commonly overlooked that the 1920’s also featured fraud on such a large scale that it that contributed to the great depression and, by extension, served as the catalyst for the creation of the Securities and Exchange Commission (SEC).
The past is prologue, and there is no reason to believe this pattern won’t repeat itself in our time. But it won’t be through chargebacks. There is one type of modern day fraud that thrives in a high-spending, low-moral environment: account takeovers of customer loyalty reward programs.
Why Account Takeover Loyalty Reward Fraud Is Poised to Explode
As consumers release an entire year’s worth of pent up demand, merchants seeking to capitalize on the boom will aggressively target them with customer loyalty reward schemes. The market for managing customer loyalty programs is expected to grow by 19.9% between now and 2027.
As loyalty account balances grow, so will the incentive to attack them.
On the other side of the equation, these accounts make a soft target in comparison to other options. While eCommerce fraud prevention solutions are becoming ever more sophisticated in the service of preventing chargebacks, merchants consistently fail to protect their customer account data. There were 63 billion attacks against retail, travel, and hospitality companies, with fraudsters successfully attacking companies as large as Marriott.
The combination of increased consumer spending, expanding customer loyalty reward programs, and ongoing lax customer account security measures is a ticking time bomb of account takeover fraud waiting to explode.
Although merchants are aware of the account takeover threat and the need to protect consumer data from theft, the focus remains largely on chargeback prevention. But as prevention strategies and tactics make card not present fraud more difficult, fraudsters will increasingly turn to the softer target of customer loyalty accounts.
Merchants must prepare for this right now.
What Needs to Be Done?
Loyalty reward fraud prevention strategies will be complex, as well as industry, vertical, and merchant specific. However, we see three pillars of a broad framework.
First, identity fraud prevention must be prioritized. Loyalty reward fraud begins with fraudsters successfully impersonating legitimate clients. Solving the problem at its source requires investment in technologies that can secure client accounts. One objective should be shoring up back-end technology to prevent traditional malware and hacking. But loyalty reward fraud is also enabled by customer-facing techniques like keylogging, which remains undetectable to 80% of anti-virus programs.
Second, merchants must invest in customer education about the scope and depth of the problem. Too many customers continue to underestimate the threat, either because they are unaware of the danger or believe it won’t happen to them. Loyalty program fraud costs consumers rewards with actual value, and they should be encouraged to recognize that and act accordingly to protect them. A good start is to remind customer to constantly changing passwords, never connect to public wifi, and remain vigilant about checking their loyalty rewards account balance.
Finally, preventing loyalty program fraud should be upgraded to a strategic priority on par with chargeback prevention. Despite not directly stealing money from merchants’ bank accounts, the financial impact of customer account breaches on merchants is huge. Research from Accenture showed that 43% of customers have abandoned a merchant after losing trust in the company.
New Challenges for a New Era
Preventing chargebacks in the face of increased order volumes challenged merchants throughout 2020. That felt natural to merchants. Chargebacks directly take top-line revenue from the business, feel like theft, and can be easily quantified.
Account takeover fraud of loyalty programs have none of these things to push it to the top of merchants’ agendas. Points represent corporate giveaways, they are given to consumers, and it’s impossible to know the full impact of a data breach on churn or subscriber rates.
For all these reasons, merchants must commit to taking a proactive view of the problem, and actively work to prevent it. Those that do not risk harming their bottom lines as economies open up consumers unleash pent-up demand.
~ The Editorial Board
