How to outsmart referral fraud

Spreading true love for your product, not fake love

Referral marketing can be a great approach to acquiring new customers. It allows you to leverage the networks of your existing customer base to find more high-quality applicants through offering referral incentives. For example, Amex’s Member Get Member (MGM) program is a massive success and consistently brings in more super prime customers to the bank. For financial services companies, especially the neobanks, the stamp of approval from brand advocates can go a long way.

There’s just one little problem for financial institutions: fraudsters love referral bonuses too.

Like any other marketing initiative nowadays, more brand exposure can, unfortunately, open you up to more fraud. Referral fraud is when a person attempts to take advantage of a financial institution’s referral program to receive rewards under false pretenses.

There are four main types of referral fraud to look out for:

• Self-referral: This type of referral fraud occurs when a customer refers themselves to sign up for new accounts and earn referral bonuses multiple times.

• Exploitation: A type of referral fraud that occurs when a customer offers someone monetary gains to sign up for the referral program despite not being interested in using the product. For instance, if I use a neobank that pays out $100 for referring a friend and I could find someone online to sign up for an account in exchange for a portion of the referral bonus, it would be considered exploitation referral fraud.

• Account cycling: A type of referral fraud that occurs when someone signs up for an account, gets the reward, and then cancels their account.

• Broadcasting: Unfortunately, this type of referral fraud is where things can go downhill very quickly. It occurs when someone shares their referral code on websites or social media (such as Reddit, Twitter, or Facebook), encouraging anyone who sees it (whether they know the person or not) to use their code in order to receive numerous referral rewards.

How to run a referral program without opening yourself up to more fraud

With the right guardrails in place, you can make referral marketing programs less risky to referral fraud while still incentivizing your customers to spread their love for the product with their friends and family.

Here are Alloy’s suggestions for safeguarding your referral marketing program against referral fraud:

1. Limit the number of accounts each individual can apply for. Ensure that one customer can only apply for one account for each of your products. To achieve this, set up a new rule that looks to match the Social Security Number of an application with the existing customer database. If the SSN matches the SSN on an existing account, decline the application. This new rule will protect you from account cycling referral fraud.
   
   Alloy clients can use our new, free service named Identity Element Velocity (IEV). IEV allows the financial institution to look at an incoming application's personally identifiable information (PII) and compare it with their existing customer database. Alloy's clients can customize their rules using IEV and deny applications containing PII elements identical to the existing customer information.

2. Limit the number of times a customer can receive referral bonuses. Consider introducing a rule that caps the number of times a customer can receive a referral bonus over a twelve-month period. By restricting the number of times customers can receive a referral bonus, your existing customers are still incentivized to refer genuine applicants, but your financial institution will be sheltered from excessive losses.

3. Add a condition that each new customer needs to complete to receive their referral bonus. Fraudsters always choose the path of least resistance. Getting money in the bank by just signing up is easy. However, adding a condition, such as “you must spend $100 in the first 60 days to receive the welcome bonus,” will deter fraudsters because they usually go after lower-hanging fruit, and fraudsters do not intend to actually use your products.

4. Update the terms and conditions to state that you reserve the right to revoke the referral bonuses on abusers’ accounts. Include languages on “referring only family/friends/acquaintances,” “be aware of the third-party websites’ policies,” and “program violation or abuse may result in the forfeiture of the referral bonus.”

By implementing the suggestions above, you’ll be able to show gratitude to your customers who advocate for your brand without opening yourself up to fraudsters trying to take advantage of the referral bonuses. A good referral marketing program will bring in good prospects and reward the existing customers for being brand advocates — a winning situation for all parties involved.