In this article, learn about what promo abuse fraud is and the steps you can take to prevent it from hurting your company’s bottom line.

According to the most recent Association of Certified Fraud Examiners (ACFE) report, U.S. businesses lose approximately 5% of their gross revenue to fraud each year. Small businesses are hit the hardest due to a lack of internal controls.

One tried and true method of growing your customer base is to offer discounts and/or free products and services to your target market. However, unless proper measures are taken to protect a business from fraud attacks, these “special offers” can create significant financial losses in the form of promo abuse fraud.

Before launching a promotion, it’s important to know how criminals take advantage of weaknesses in promotional systems in order to take more than their fair share of promotional offers. Keep reading to learn how promo abuse fraud works, and what you can do to protect your business from it.

Promo Abuse Fraud: What is it?

Promo abuse fraud is defined as any illegal way to obtain special offers and discounts from a company. In order to cash in big on special promotions, clever fraudsters will create thousands of fake accounts and claim the promotion for each, or they may take advantage of lenient coupon and return policies to obtain products for free.

How does Promo Abuse Fraud Work?

Businesses that operate 100% online are particularly vulnerable to eCommerce promo abuse fraud. Let’s take a look at a hypothetical promotion to illustrate how this type of fraud works. An online clothing retailer that sells leather coats decides to offer gift cards of $25 when a new customer signs up for an account and purchases $100 or more from the online store.

Because these accounts are almost always free to create, it costs the fraudster nothing to create an account using illegally obtained credit card credentials. Often referred to as “carding”, criminals will use such promos to “cash-out” their stolen credit card numbers. The gift cards they receive from their illegal purchases are then sold online or used to obtain more merchandise for free.

Referral Incentive Fraud

Word of mouth advertising is one of the most powerful ways to market products and services. Existing customers are given incentives in form of discounts on purchases, free services or products, or even cash for referring new customers to the company.

One example of a well-known highly successful referral program was Tesla’s referral incentive program. The incentive is simple: A new customer that buys a Tesla is encouraged to have friends and family do the same and report to TESLA their referral code.

Whenever someone buys a Tesla with their referral code, they are entered into raffles for prizes. In one such promotion, the new customer received a $1,000 discount off the purchase of a TESLA and the customer that referred them would receive a $1,000 credit to their Tesla account which could be applied to future car purchases, service charges, or accessories the company sells.

The Tesla Referral Program was massively successful, yet Elon Musk was forced to crack down on referral code abuse after massive pay-per-click campaigns and social media influencers marketing their promotion codes violated the company’s “fair use clause”.

Avoiding Promo Abuse Fraud

Eliminating promo fraud completely and still offering attractive deals to potential customers is a tricky balancing act. In order to reduce promo fraud, it is best to sacrifice the new customer’s convenience by properly vetting requests for new accounts. Sending an activation code to emails and/or phones is a common way to add a layer of protection. A web beacon can be used to identify when a user’s opening a second account under the same IP address or device that was used to open the first account.

Look for ways your promotion could be targeted and put in prevention measures in the structure of the campaign. Putting limitations and conditions on the promotion will make committing fraud more difficult. A well-structured promotion can be a great tool to build customer loyalty and help make your brand stand out, but it’s important you bolster the security measures surrounding your promotions to prevent fraudsters from using fake accounts to take advantage of your business.

First appeared on Vesta’s Blog on eCommerce Fraud.