Loyalty Fraud: What It Is, How It Happens, and Effective Ways to Detect It in 2025

As consumers, loyalty programs have become a major part of our financial lives. Whether it's airline miles, hotel points, or credit card rewards, these programs offer valuable incentives, but they also attract fraudsters eager to exploit their value.

Not only that, loyalty programs have also grown from simple marketing tools into valuable assets, but what many people don’t realize is that those same programs are gold mines for fraudsters.

As professionals working in the financial industry, loyalty fraud is now a major issue, especially for banks, card issuers, and other financial institutions. If you're a financial professional, you need to know how these scams happen, who they target, and how they link to bigger crimes like money laundering. Loyalty program fraud is part of a larger web of financial crime, and it's growing fast.

What is Loyalty Fraud?

Loyalty fraud, also known as loyalty points fraud or rewards fraud, involves the theft or misuse of loyalty points, rewards, or miles. Fraudsters target these rewards because they can be converted into cash or valuable goods. This type of fraud can happen in various ways, from account takeovers to insider threats.

In other words, loyalty fraudsters usually steal, manipulate, or abuse loyalty programs to gain financial benefits. And, since loyalty points often go unnoticed, they’re ripe for exploitation.

When people find out that someone is breaking into their loyalty account, draining their points, and redeeming them for a flight or a luxury hotel stay, they might think it’s just a loss of points, but for financial institutions, it’s a much bigger issue. Loyalty fraud can directly damage customer trust and drain financial resources. In some cases, criminals use these points to hide or launder money. That makes loyalty fraud a growing challenge for AML teams.

Why is Loyalty Fraud Rising?

Loyalty fraud is rising for a few reasons, which are:

• First, more companies now offer loyalty programs, making the pool bigger for criminals. Points and rewards have turned into a sort of "soft currency," and they’re easier to trade or sell online than ever before.

• Second, digitalization has opened new doors for fraud. People manage accounts online, which gives hackers and fraudsters easier access. Data breaches are also a big problem. One breach can expose millions of customer details, including loyalty program information.

• Finally, loyalty programs don’t always have strong fraud controls. Financial institutions focus on credit card fraud or bank account theft, while loyalty points fly under the radar. Criminals know this. They take advantage of weak security measures to strike fast, redeem points, and disappear before anyone catches on.

Types of Loyalty Fraud

Loyalty fraud can happen at any point of the customer journey and hence has several types:

1. Account Takeover

When someone gains control of a customer’s account without permission, it is called account takeover fraud. Fraudsters use stolen credentials, often obtained through phishing or data breaches, to access and misuse loyalty points. They might buy high-value items or transfer points to other accounts.

2. Point Theft and Redemption Fraud

This occurs when fraudsters steal points and redeem them for goods or services. They might use stolen credentials or exploit system vulnerabilities. This type of fraud can result in significant losses for both businesses and their customers.

3. Synthetic Identity Fraud

Here, fraudsters create fake identities to accumulate and exploit loyalty points. They use these synthetic identities to build up rewards and then redeem them fraudulently. This can be difficult to detect because the identities appear legitimate at first glance.

4. Friendly Fraud

Not all fraud comes from outsiders. Sometimes, customers themselves commit fraud. This could involve falsely claiming rewards or disputing legitimate transactions. It’s a challenging area because it involves dealing with genuine customers who abuse the system.

5. Insider Threats

Employees can also be a source of fraud, as they might bypass security measures and manipulate loyalty points or exploit their position to steal rewards.

6. Cross-Border Syndicates

Organized crime groups are increasingly involved in loyalty fraud. These syndicates operate across borders, using sophisticated methods to exploit loyalty programs. They often have extensive networks and resources, making their activities particularly challenging to combat.

Industries at Risk of Loyalty Fraud

Certain industries face a heightened risk of loyalty fraud because of the high value associated with reward points, which are often redeemed for upgrades in hotels, first-class flight bookings, and other premium services.

1. Airlines

Frequent flyer miles are one of the biggest targets. Hackers often steal accounts, use miles to book flights, and then resell those tickets online. For example, the British Airways breach in 2018 exposed nearly 400,000 loyalty accounts.

2. Hotels

Loyalty points for free stays, upgrades, and perks? They’re prime targets, too. The Marriott breach in 2018 compromised over 300 million accounts, leaving loyalty points vulnerable to exploitation.

3. Retail

Many retailers offer rewards programs to keep customers loyal. Hackers can break into these accounts, steal points, and redeem them for goods. Often, they’ll use stolen points to buy high-value items, which they then sell.

4. Financial Services

Banks offer loyalty programs tied to credit cards, and these are especially attractive because points can be easily converted to cash-like rewards, such as gift cards or direct cashback.

Tools and Techniques Used in Loyalty Fraud

Fraudsters use various tools to commit loyalty fraud, and the most common are:

• Social Engineering

• Credential Stuffing & Automated Attacks

• Dark Web Marketplaces

• Malware and Spyware

Loyalty Fraud Impact on Financial Institutions

Loyalty fraud can be costly for financial institutions. The immediate financial losses from stolen points can be significant. Beyond that, there are costs related to fraud detection, customer compensation, and system upgrades. Reputation damage is another serious concern. If customers lose trust, they may take their business elsewhere.

If fraud occurs, a thorough investigation is essential. The concerned staff in the financial institution should look for red flags such as unusual transaction patterns or rapid point redemptions. They should also follow a structured approach to gather evidence and collaborate with law enforcement when necessary. Document all findings carefully to support any regulatory reporting or legal actions.

Loyalty Fraud Detection and Prevention Strategies

Yes, rewards fraud is on the rise, especially in certain industries, but if you utilize loyalty fraud prevention strategies and best practices, you will be able to protect your financial institution against it. Below are 6 strategies for loyalty program fraud prevention:

1. Two-Factor Authentication (2FA)

A simple but effective strategy is adding an extra layer of security which can stop fraudsters even if they have the customer’s password. To utilize it to the max, banks, and other institutions should make 2FA mandatory for all loyalty programs.

2. Use Data Analytics and Machine Learning

Fraud prevention and machine learning come hand in hand, wherever there are attempts to prevent fraud, machine learning is your friend. Advanced analytics and machine learning can spot anomalies and thus help detect unusual patterns in loyalty transactions.

3. Educate Customers

One of the best practices that banks should follow is informing customers about safe practices; even if they sound basic, they’re useful, like using strong, unique passwords and recognizing phishing attempts.

4. Implement Internal Controls

Bank employees might be a main source of loyalty program fraud, as they might access customer accounts to steal or use points for themselves. Sometimes, they exploit weaknesses in the system to get around rules and make unauthorized redemptions.

They might also be money mules and team up with outside fraudsters, giving them access to customer accounts or helping them carry out fraud.

Creating fake accounts to gather points or changing records to hide their actions is another method. They might also misuse special discounts or offers meant for regular customers.

But, to prevent this, banks should tighten access controls, regularly check transactions, separate roles so no one person has too much control, and make certain the staff are aware of regulatory consequences.

5. Monitor Account Activity

Financial institutions need to use advanced fraud monitoring tools to detect unusual behavior. If you notice multiple redemptions in a short period or points being transferred to new accounts, those should raise red flags immediately.

6. Limit Redemptions

Set caps on how many points can be redeemed at once or within a certain period because this can slow down fraudsters and give banks time to detect and stop the fraud.

Read more: Best Fraud Detection Software: 6 Companies Compared in 2025

Conclusion

We live in a world where loyalty points are a valuable asset, so getting informed and being prepared is your best defense against loyalty fraud.

Loyalty program fraud is no longer a side issue; it’s, on the contrary, a significant threat that can lead to financial loss, reputational damage, and regulatory challenges. Points and rewards may seem trivial, but they’re turning into one of the most valuable assets and, hence, a serious risk that needs recognition.

Also, advanced loyalty fraud detection systems, powered by AI and machine learning, are becoming critical tools in loyalty program fraud prevention, enabling businesses to identify suspicious activities in real time and protect customer rewards.