The Hidden Costs of Points Programs: Fraud, Abuse & Loyalty Inflation

Loyalty programs have become ubiquitous in modern commerce, with most consumers enrolled in numerous rewards schemes ranging from coffee shops to airlines. While these programs promise value and engagement, they harbor significant hidden costs that affect both businesses and consumers. Understanding loyalty program fraud, point inflation, and systemic abuse reveals a complex landscape where billions of dollars are at stake.

The Scope of Loyalty Program Fraud

Loyalty program fraud has emerged as a major threat to businesses and consumers alike. Research indicates that 72% of customer loyalty programs have experienced theft or fraud, representing a massive vulnerability in the retail and hospitality sectors.

The financial impact is staggering. The Loyalty Security Association estimates that $3.1 billion in redeemed loyalty points are fraudulent, leading to losses of around $1 billion every year. With the monetary value of loyalty program rewards in the US reaching $48 billion, the temptation for fraudsters continues to grow.

Why Loyalty Programs Are Vulnerable

Several factors make loyalty programs attractive targets for cybercriminals:

Inactive Accounts: Nearly half of all loyalty program accounts remain inactive or infrequently used, creating easy targets for unauthorized access. These dormant accounts often go unmonitored for months or years, giving fraudsters ample time to drain valuable points.

Weak Security: Many businesses don’t apply the same rigorous security measures to loyalty accounts that they do to financial accounts. Customers often use weaker passwords for rewards programs, assuming they’re less critical than banking credentials.

High Value, Low Monitoring: Loyalty points represent real monetary value, yet consumers rarely check their rewards accounts as frequently as their bank statements. This combination creates the perfect environment for fraud to flourish undetected.

Types of Loyalty Program Fraud

Understanding the various fraud methods helps illuminate the scope of this problem.

Account Takeover Attacks

Account takeover remains the most prevalent form of loyalty fraud. Fraudsters obtain customer credentials through phishing scams, data breaches, or purchasing stolen information on the dark web. Once inside an account, they can redeem points, transfer rewards, or steal personal information for further exploitation.

In 2018, a cybercriminal stole millions of frequent flyer miles from various global loyalty programs and sold them on the dark web, with miles bundled and sold in batches for $1,000 or more.

Fake Account Creation

Criminals create fraudulent accounts using stolen or synthetic identities to exploit welcome bonuses and promotional offers. These fake accounts can be used to accumulate points quickly, which are then redeemed for valuable rewards or sold for profit.

In 2024, a UK restaurant manager was convicted of defrauding his restaurant for £21,000 by creating fake email addresses and loyalty profiles to exploit an introductory offer giving customers £20 off their next visit.

Points Hacking and System Exploitation

Sophisticated fraudsters manipulate loyalty systems to increase reward balances through unauthorized means. This includes exploiting software vulnerabilities, using bots to generate artificial transactions, or finding loopholes in program rules.

In 2023, hacker Sam Curry discovered massive security flaws in Points.com, a platform that handles points transactions for many major airlines, demonstrating how systemic vulnerabilities can expose millions of accounts.

Internal Fraud

Sometimes the threat comes from within organizations. Employees with privileged access may claim unredeemed points for personal gain, manipulate reward systems, or create unauthorized accounts to exploit referral bonuses.

The Silent Tax: Point Inflation and Devaluation

Beyond fraud, loyalty programs face another hidden cost: the systematic devaluation of rewards through point inflation. This affects consumers who believe they’re accumulating valuable currency, only to find their points worth significantly less when they attempt redemption.

The Devaluation Crisis

Airline miles have been devaluing at a rate far outpacing regular inflation—around 15% annually. To put this in perspective, the average annual devaluation of miles is around 15%, compared to the U.S. inflation rate which hovers around 2-3% per year.

This represents a dramatic erosion of value that most consumers don’t recognize until they attempt to redeem their hard-earned rewards.

How Devaluation Happens

Airlines, hotels, and retailers adjust their programs in several ways:

Increasing Redemption Costs: Programs suddenly require more points for the same rewards. A flight that once cost 25,000 miles might jump to 30,000 or 35,000 miles with little warning.

Dynamic Pricing Models: Many programs have shifted from fixed award charts to variable pricing based on demand. This makes the value of points less predictable and generally reduces transparency in the redemption process.

Eliminating Award Availability: Even when customers have sufficient points, finding available seats or rooms at standard award rates becomes increasingly difficult.

Recent Devaluation Examples

The past few years have seen numerous significant devaluations:

• Starbucks doubled the minimum redemption requirement from 50 to 100 stars for free coffee or snacks
• Dunkin’ raised spending requirements from $40 to $50 to earn a free cup of coffee
• Marriott increased maximum award night prices from 100,000 points to 150,000 points
• Delta SkyMiles required members to spend an average of 33% more to maintain elite status
• Alaska Airlines implemented a 40% increase for certain economy flights within the U.S.

The Balance Sheet Problem

Why do programs devalue so frequently? The answer lies in corporate finance. Unredeemed loyalty points represent liabilities on company balance sheets. When billions of dollars in outstanding points accumulate, businesses face pressure to reduce this risk.

With an abundance of travel rewards issued during the pandemic, airlines and hotels are eager to eliminate these points off their balance sheets to reduce their risk. Devaluation becomes a tool for managing these liabilities without directly paying out cash.

Loyalty Program Abuse and Policy Exploitation

Not all problematic activity rises to the level of criminal fraud. A gray area exists where opportunistic customers exploit program loopholes for personal gain—behavior that costs businesses significantly while technically staying within program rules.

Common Abuse Tactics

Multiple Account Creation: Customers create numerous accounts to repeatedly claim welcome bonuses or introductory offers, violating the spirit if not always the letter of program terms.

Return Fraud: Some customers make large purchases solely to earn points, then return the items for refunds while keeping the accumulated rewards.

Referral Gaming: Exploiting referral programs by creating fake referrals or referring people who make minimal qualifying purchases just to trigger bonuses. While authentic referral marketing drives genuine customer acquisition through trusted recommendations, abuse of these systems undermines their effectiveness.

Promotional Exploitation: Finding and exploiting poorly designed promotions or technical glitches to accumulate points far beyond intended limits.

The Cost of Abuse

While individual instances of abuse may seem minor, the aggregate impact is substantial. Businesses lose money on fraudulently obtained rewards, experience increased operational costs investigating suspicious activity, and may implement restrictions that frustrate legitimate customers.

According to Forter, 42% of retailers admit to insufficient fraud prevention capabilities and 50% mention loyalty fraud as a low organizational priority, suggesting many businesses remain unprepared to address these challenges effectively.

The Consumer Impact

The hidden costs of loyalty programs don’t just affect businesses—consumers bear significant consequences as well.

Lost Trust and Damaged Relationships

When fraudsters steal points from customer accounts, the victim’s relationship with the brand suffers. Even if the company restores stolen points, the breach of trust lingers. According to loyalty executives, 69% report that fraud has a negative impact on brand perception.

This erosion of trust is particularly damaging because loyalty programs are meant to strengthen customer relationships and encourage positive word-of-mouth marketing. When fraud and devaluation undermine that trust, brands lose not just the affected customer but potentially their entire network of influence.

Diminished Value Proposition

As programs implement stricter security measures and devalue points to combat fraud and manage liabilities, legitimate customers face increased friction and reduced rewards. The value proposition that attracted them to the program erodes over time.

Privacy Concerns

Loyalty programs collect vast amounts of personal data. When breaches occur, customers’ information—including email addresses, payment details, and travel patterns—may be exposed or sold on the dark web, leading to identity theft and financial fraud beyond the loyalty program itself.

The Regulatory Response

Growing concerns about loyalty program practices have attracted government attention. The US Department of Transportation has launched an investigation into major airlines’ reward devaluation and dynamic pricing practices, focusing on how airlines often devalue points, increase redemption costs, and limit seat availability.

This regulatory scrutiny could force greater transparency in how programs manage and value their loyalty currencies, potentially offering some protection for consumers who have invested significant time and spending into accumulating rewards.

Protection Strategies for Consumers

Understanding these risks enables consumers to protect themselves and maximize the value they receive from loyalty programs.

Earn and Burn Strategy

The most effective protection against devaluation is simple: use your points quickly. The longer you hold onto rewards, the more likely they’ll lose value through program changes or fraud. This principle applies equally to loyalty programs and referral rewards—understanding what constitutes good conversion rates helps you evaluate whether your participation is delivering real value.

Diversify Your Rewards

Don’t put all your loyalty eggs in one basket. Earning transferable points from credit cards provides flexibility to shift between programs and take advantage of each program’s best redemption opportunities.

Strong Security Practices

Protect your loyalty accounts with unique, strong passwords and enable multi-factor authentication whenever available. Monitor accounts regularly for suspicious activity, just as you would a financial account.

Stay Informed

Pay attention to program announcements and industry news about devaluations. Being aware of upcoming changes allows you to redeem points before they lose value.

Business Prevention Strategies

For companies operating loyalty programs, preventing fraud and abuse requires a multi-layered approach.

Implement Robust Security

Modern fraud prevention demands advanced tools including machine learning algorithms that detect unusual patterns, bot detection systems to prevent automated attacks, and risk-based authentication that adjusts security requirements based on the risk level of each transaction.

Clear Terms and Explicit Limits

Well-crafted program terms and conditions that clearly define acceptable behavior and the consequences of fraud serve as both a legal foundation and a deterrent. Implementing velocity limits on point earning and redemption can prevent rapid exploitation.

Continuous Monitoring

Regular audits of program activity help identify both external fraud and internal abuse. Monitoring for unusual patterns—such as multiple accounts from the same IP address, sudden spikes in point accumulation, or redemptions from unusual locations—enables early detection.

Customer Education

Many consumers don’t realize the value of their loyalty points or the importance of securing their accounts. Programs that educate members about security best practices and fraud risks create a more secure ecosystem.

The Future of Loyalty Programs

The loyalty landscape continues evolving as businesses balance customer engagement with fraud prevention and financial sustainability. Several trends are emerging:

Blockchain Technology: Some programs are exploring blockchain to create more secure, transparent loyalty currencies that are harder to counterfeit or manipulate.

AI-Powered Fraud Detection: Machine learning systems that can identify fraudulent patterns in real-time offer hope for staying ahead of increasingly sophisticated attackers.

Flexible Redemption Options: Programs offering diverse redemption options beyond traditional rewards may reduce the appeal to fraudsters while increasing value for legitimate members.

Regulatory Frameworks: Increased government oversight may force standardization of security practices and transparency requirements, potentially reducing both fraud and arbitrary devaluation.

Conclusion

Loyalty programs promise mutual benefit—businesses gain customer retention and data insights while consumers earn valuable rewards. However, the hidden costs of fraud, abuse, and systematic devaluation reveal a more complex reality.

With billions of dollars lost annually to fraudulent activity and legitimate customers seeing their rewards devalue at rates far exceeding normal inflation, the loyalty landscape faces significant challenges. Both businesses and consumers must remain vigilant, implementing robust security measures and making informed decisions about how they participate in these programs.

Understanding these hidden costs doesn’t necessarily mean abandoning loyalty programs—they can still provide genuine value when used strategically. However, awareness of the risks enables both companies and consumers to better protect their interests and make more informed choices about where to invest their loyalty.

The most successful approach treats loyalty points not as savings to be hoarded, but as currency to be used thoughtfully and relatively quickly. In an environment where devaluation is constant and fraud is rampant, the old advice holds true: a point redeemed today is worth more than a promise for tomorrow.