I’ve been around several ‘loyalty fraud’ discussions recently amongst airline and hotel loyalty program executives. Fraud by members is a huge topic of conversation for loyalty programs these days.
And I’ve figured out that there are really four kinds of loyalty program fraud. And programs are focusing on the wrong ones.
- Hacking. This is the greatest threat to loyalty programs because of scale and cost, and because it’s usually done by people who aren’t even the program’s customers. It’s true fraud, not taking advantage of rules, and is done on thousands, tens of thousands, or even hundreds of thousands of accounts at a time.
The Priority Club shopping toolbar vulnerability that let members script their browsers to earn hundreds or thousands (or more) points over a weekend could be thought about in a similar way (although at a smaller scale).
All of these are essentially stealing large numbers of points from the program. The points are usually cashed out quickly, for rewards that cannot be clawed back (like electronic gift cards that are immediately redeemed).
In general hacking isn’t a great concern for members, because the programs ‘make good’ on the points taken from accounts and because anti-hacking measures often involve inconveniences to members (like changes of passwords, captcha, two factor authentication, etc).
But it’s where the real costs are. And programs are only waking up to it, and only slightly.
- Selling awards. This increases program costs. It reduces breakage (points going unused, and eventually expiring). Rewards claimed tend to be of higher value than otherwise. And often purchased awards displace revenue tickets (although not always from the same airline whose awards are claimed) — people buy awards instead of tickets. Here’s why airlines and hotels won’t let you sell your points.
Attacking this is programs trying to manage costs by maintaining a monopoly over and restrictions on use of their currency.
- People who benefit too much. Members may follow the rules, to the letter, but still benefit disproportionately from a program. That’s probably a large number of readers of this blog… using points for the highest-valued awards, getting more than our fair share of upgrades. Or – in the words of one loyalty executive, “Not using the program as intended.”
Programs write the rules, and if they don’t like any given sort of activity they could change the rules. Yet they would love to fire customers they believe are unprofitable under their own rules.
In some sense, if Delta would only be transparent about what they’re doing, then Delta would be the most honest here. They can avoid providing much value to their members by simply changing the program itself.
Many programs – though not all – like suckers who accumulate expensively and redeem cheaply. The answer there of course is to design a program like that… not to blame the customers when you failed to design what you wanted. (At least British Airways changed their program to align with this, and provided three months’ notice.)
Air France KLM’s Flying Blue may be the most aggressive in this area right now, shutting down accounts that follow the programs terms and conditions and putting roadblocks in the way of new members transferring in points from partners like American Express from redeeming their points. I’ve heard Flying Blue representatives say they believe members redeeming their points for others – even though allowed by the program terms – are committing fraud.
Not only is this unfair — they write the rules, so the actions that follow within those rules are entirely on their hands, not the members’ — but it’s against the interests of the program. There’s a reason why high value awards are offered and it’s because that’s a motivator for consumers to act irrationally, to over-invest in search of those awards, to install Hawaii or Bali imagery as the background for their computer and dream. Some members benefit more than others, and when dealing with large numbers you take a portfolio approach and determine whether your program is profitable overall rather than in every instance. Killing off the long tail has implications for the value proposition as a whole that your program does benefit from.
- Programs commit fraud on members. Program changes without notice, especially to award types and award charts, is fraud. It may not legally be fraud because program terms and conditions say they can do it, and the Airline Deregulation Act has been interpreted to preempt traditional common law contract rules that require reasonable terms (especially in adhesion contracts).
Members are offered a value proposition – save up your miles over time, perhaps over a period of years, and there’s a free trip at the end of the rainbow. Members do their part, buy tickets or transact with partners and credit their miles and as they get close, the terms change and cost goes up.
Or worse yet a specific award they’re after is simply eliminated. American offered ‘distance-based’ oneworld awards up through April 8 of last year. I heard from several readers that were saving miles for their honeymoon or a special anniversary and planned to use this award. Then one day it was simply gone, the years of effort planning for it was down the drain and while award redemption was still possible making more stops or routing in a preferred way became much more expensive.
Loyalty programs make a promise of value and pull the rug out via short or no notice devaluations. This is the most common fraud affecting the most members .
Selling awards is against program rules, members have plenty of notice, so it’s not unreasonable to enforce this. All things equal it’s not a huge problem, and in some programs it may be a higher strategic priority than warranted, but that’s a matter of emphasis.
In some programs selling awards (legitimately) and members getting ‘too much benefit’ (far less legitimate) get higher priority than hacking, which is perverse.
Fraud working groups think their members are out to get them. Their members are the enemy and using the program to gain ‘Ousized value’ is equated with fraud.
Yet it’s bizarre for programs to talk about fraud while feeling no obligation to treat members honorably when those members follow the rules.
Since American’s April 8, 2014 changes they’ve given plenty of notice and transparency in moves they’ve made, especially as their US Airways merger has proceeded, but American specifically says they have no duty of good faith or fair dealing towards members though of course the Supreme Court ruled that no airline frequent flyer program does.
This is especially vexing because authenticity and fair dealing matter most to members. While United says in court they don’t have to keep their promises to members.
There’s no sense of irony whatsoever on the part of loyalty executives taking part in fraud discussions and expressing moral indignation that – hacking aside – they’re most often the ones perpetrating the fraud, and their fraud impacts the greatest number of members.