Fraud comes in many forms. When a criminal seizes control of another person’s legitimate account, that’s called account takeover (ATO) fraud. Then there’s synthetic identity fraud, which is when a criminal combines real and fake information to make an account. That’s in contrast to regular identity fraud, when a criminal steals a person’s real information to make a fraudulent account. While these types of fraud often get attention, there is one fraud vector that frequently flies under the radar: loyalty program fraud.

Loyalty program fraud—or reward points fraud—refers to when someone abuses or exploits a company’s rewards program for criminal purposes. Oftentimes, the criminal will utilize ATO or identity fraud to carry out loyalty program fraud. With over $140 billion in unspent loyalty points in the United States, according to data from Gartner, this fraud vector can be very lucrative for criminals. LSA estimates that $3.1 billion in redeemed points are fraudulent, a clear indication of the amount of money at stake.

To better understand loyalty program fraud and what solutions exist to address it, PaymentsJournal sat down with Daniel Shkedi, Senior Product Marketing Manager at Forter, and Tim Sloane, VP of Payments Innovation at Mercator Advisory Group. During the conversation, Shkedi and Sloane discussed the impact of this fraud vector, why companies struggle to catch it, and how Forter is working to stop loyalty program fraud.

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“Loyalty program fraud is skyrocketing”

As the statistics in the introduction reveal, loyalty program fraud is a considerable problem. “I have to begin by saying that loyalty program fraud is skyrocketing,” said Shkedi. He added that direct and indirect losses from loyalty and reward points fraud are an estimated $1 billion, based off data from iApp. When you combine that with the estimated $3.1 in fraudulently redeemed points, the size of the problem comes further into focus.

There are four main reasons why this fraud vector is expanding. First, loyalty programs have evolved considerably in the last decade, with many now providing a variety of redemption options. As loyalty programs have become more complex, the value and liquidity of points has gone up. This makes loyalty programs an attractive target for fraudsters.

Second, while loyalty programs have become more complex, these programs’ fraud protections have often lagged behind other financial services, such as the security behind credit cards. As a result, “loyalty programs are an easy target for fraudsters,” explained Shkedi. Sloane agreed,