Avoiding Promo Abuse Fraud

The world of ecommerce is highly competitive, and consumers have lots of choices to make about where to spend their money. Many merchants find that special deals and offers can give shoppers the added push they need to commit to a purchase, especially if it's their first time buying from that merchant.

New customers are frequently incentivized and rewarded with gifts, vouchers, and discount codes that encourage sign-ups and increase loyalty. For subscription-based merchants, free trials and introductory pricing schemes are very common and may even be a de facto requirement in some industry sectors.

Retaining existing customers is easier than making new ones, so it makes sense to extend your most generous offers in the customer acquisition phase.

When fraudsters (some of whom surely imagine themselves to be merely "smart shoppers," not fraudsters or thieves) try to game the system by taking advantage of promos that aren't intended for them, the purpose of these special offers is defeated and they can even dip into negative ROI territory.

This puts merchants in a catch-22 situation: they can eliminate promo abuse entirely by shutting down their promotional deals, but that penalizes honest customers and can cause merchants to lose out on future sales revenue and repeat business.

In order to continue attracting and rewarding new customers, merchants must find ways to minimize the threat of promo abuse and fraud.

What is Promo Abuse Fraud?

Merchants often limit special offers to customers in a particular category—first time customers, for example, or members of a loyalty rewards program. When customers who do not meet the criteria for a particular offer attempt to take advantage of it anyway by misrepresenting themselves or otherwise deceiving the merchant, it would be considered promo abuse or fraud, although it may not meet the legal standards for fraudulent activity.

Some cases fall into gray areas, such as customers correctly guessing coupon codes that haven’t been publicized. However, merchants who offer free merchandise at sign-up or valuable referral rewards may find themselves targeted by organized cybercriminals.

Referral program abuse can be extremely costly for merchants, and it often involves actual fraud as the perpetrators send out dozens or even hundreds of referral invites, then create new accounts using stolen or synthetic identities in order to cash in on the referral rewards.

Free trial offers may be exploited too, especially if the free trial includes full use of the product or service. Fraudsters may simply create a series of fake accounts in order to ensure that their free trial never ends.

Even customers who might otherwise be considered good and loyal will engage in promo abuse at times. A customer might have a particularly expensive purchase in mind, and wait until the merchant releases a big discount code for first-time customers. They’ll create a new account, make the expensive purchase using the code, and then go right back to using their regular account for other purchases. 

How Can Merchants Prevent Promo Abuse Fraud?

The worst forms of promo abuse depend on new account creation. The fraudster must be able to create new accounts in order to take advantage of referral bonuses, free trials, or first-time customer discounts.

With that in mind, promo abuse can be cut down dramatically when merchants follow Know Your Customer guidelines and require new account creators to verify their identities when they sign up.

This will stop opportunistic abuse from customers who sign up for new accounts using their kids’ or pets’ names, but the KYC protocols that can stop sophisticated identity thieves may cause too much sign-up friction for actual customers.

For the more technically advanced fraudsters, the methods used to prevent account takeover fraud and similar attacks may be helpful—especially behavioral analytics.

Accounts created to boost somebody’s referral count, for instance, will rarely browse and shop the way a normal account holder would.

Merchants who find that their coupon codes are being used prematurely or by the wrong types of customers should take care to create less predictable codes, avoiding obvious keywords, sequential numbering, and guessable patterns.

How Does Promo Abuse Fraud Impact Chargebacks?

Promo abuse can cost merchants revenue and harm customer relationships, but they rarely result in chargebacks because credit card fraud is not a necessary element of these schemes. After all, why would a fraudster bother using a coupon to save money on a purchase made with somebody else’s stolen card?

It should be noted that the same logic may be applied by fraudsters who want to make themselves look more like normal customers. When setting up fraud filters or manually reviewing suspicious transactions, don’t automatically assume that the use of a coupon code means the order is legitimate—it might just be part of a fraudster’s cover.

Conclusion

To some customers, promo abuse may feel like a form of “extreme couponing.” To fraudsters, it may seem like a jackpot of endless free trials and lucrative referral programs.

There’s no one-size-fits-all solution for promo abuse and fraud, and for customers who engage in milder forms of it, it may make more sense for merchants to educate them (and close up the loopholes in their programs) instead of blocking them.

The more severe and fraudulent forms of this practice, on the other hand, can be very damaging to merchants who don’t take adequate steps to protect themselves. While promo abuse fraud may be an entirely different animal than credit card fraud, merchants should consider it as part of their overall fraud prevention strategy.

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