Referral Fraud: What Is It and How to Prevent It

The popularity of referral programs has been on a steady rise for quite some time. These programs have repeatedly proven to be a good strategy for e-commerce businesses to turn genuine customer advocacy into growth and create a deeper, more meaningful connection with their customers.

However, the popularity of referral programs brought a rather unwilling counterpart into play – referral fraud.

Referral fraud is a term that refers to the manipulation and exploitation of referral programs. This exploitation is almost always done for personal gain and at the expense of store owners and referral program participants.

To prevent this from happening, store owners implement fraud prevention solutions that help them tackle fraudulent activities before they start to undermine the credibility of their referral program.

Understanding referral fraud

To understand referral fraud, first, we need to understand the legitimate interest behind the referrals and how they differ from fraudulent referrals.

Legitimate referrals

• When a real customer refers their friend or family member to your business, you get a legitimate referral.

Fraudulent referrals

• Unlike legitimate referrals, fraudulent referrals come from customers who are not genuinely interested in your product or service, or from fake accounts created specifically to commit fraudulent activities.

But why do people engage in fraudulent activities?

One of the most common reasons for referral fraud is personal gain. Customers who commit fraudulent activities, often referred to as fraudsters, create multiple fake accounts to benefit from referral programs. Along with personal gain, fake accounts can be used to exploit reward systems by manipulating referral codes or collaborating with others to create a wider and less suspicious web of deceit.

One of the less common reasons for referral fraud is damaging brand reputation by compromising the integrity of the referral program. Besides referral fraud, this type of scam usually involves fake accounts engaging with the customer base for additional integrity damage.

Common referral fraud schemes

Referral fraud schemes have become a significant concern in the e-commerce industry. These schemes are done by individuals or small groups of people, usually with the goal of exploiting referral programs for personal gain.

Some of the most common types of referral fraud schemes include the following:

Self-referrals

Individuals who engage in self-referral fraud schemes do so by creating multiple (duplicate) accounts within a single store. They use those accounts to trigger different rewards and/or incentives by referring themselves. If needed, they will make a purchase to get as many benefits as possible, but the purchase is often made with stolen payment information.

This type of referral fraud is similar to promo and bonus fraud schemes, which are common to iGaming and other industries.

Account cycling

Just as the name suggests, the account cycling scheme has individuals reaching out to program participants and/or random people they come across online in an attempt to sign up using their referral code or referral link. Once they claim their rewards all accounts are abandoned.

This particular fraudulent activity is hard to detect in stores with high referral traffic, which means the process can be repeated. However, if fraudsters are not careful, such behavior can form a pattern and expose the fraud scheme.

Return abuse

A minimum of two people is required for the return abuse scheme to work. For example, person A refers person B to a store, where person B buys a product. Once the purchase is completed, person A gets their referral reward, but person B returns their product and gets a refund. This means that the store has provided a referral reward without making a new sale.

Return abuse scheme can be done with a larger ‘chain’ of people, as well, but it is not as efficient as a two-person return abuse scheme.

Repeat referrals

Sometimes referral programs don’t have strict guidelines on eligibility or how many times a customer can participate in the program. Fraudsters often use this loophole as an advantage to make repeat referrals and get multiple rewards, causing financial loss for the store.

Discount broadcasting

Another fraud that uses loopholes in referral programs is discount broadcasting. Some stores don’t stipulate clearly how many referral rewards a customer can receive, which means that an individual can get an infinite number of rewards.

To engage in discount broadcasting fraud, fraudsters may share their referral codes or links through multiple channels to reach a wider audience and receive more rewards.

This is the scheme Blake Jared used to earn $50,000 in Uber credits.

General exploitation

Fraudsters often go through random stores to try and find an exploit within the referral program. If an exploit is found, they are able to receive rewards without going through the entire referral process.

Consequences of referral fraud

Fraudulent activity can have a detrimental effect on the viability of referral programs. Such activity can wreak havoc on marketing strategies, bring financial loss, compromise customer trust and loyalty, and cause collateral damage to genuine program participants who are left empty-handed due to the fraudulent activities of others.

Below are the most common consequences of referral fraud.

Referral program numbers become inflated

When fraudulent referrals enter your referral program, the number of total referrals becomes inflated. This means that the value of information coming from your actual program participants is undermined – and the data you get out of it is not correct.

Not only that, but your statistics such as referral traffic, referral revenue, average referral order, average conversion rate, and lifetime referral order value are all wrong. Inflated numbers make it hard for you to determine just how profitable your program is.

If your program is plagued with fraudulent referrals, you should consider stopping any marketing-related activities until the issue is resolved.

Reward costs become inflated

The math is simple here – the more fraudulent referrals your program gets, the more referral rewards you are giving out. Ideally, you would want to have an inflated cost of your referral rewards because that means the costs are rising along with the number of successful referrals.

However, when your referral program is suffering from fraudulent referrals, it is not bringing in revenue and your business is at a loss.

Your customers become collateral damage

Your customer base is what powers your business. 

This means that any damage done to your customer base will reflect poorly on your business. Since your program is entangled in referral fraud and your rewards are not distributed properly, your customers can become collateral damage in several different ways, such as:

• majority of the rewards are diverted to fraudsters
• your customers receive fewer or smaller rewards
• they receive less incentives to participate in your program

Combined, these things will lead to lower engagement in your referral program, even among your most loyal customers.

Damaged brand reputation & compromised trust

Besides the financial losses, referral fraud can lead to fraudulent activities that can significantly damage the reputation of your business. If word gets out that your referral program is the breeding ground for fraudsters, your customer base will experience a significant drop.

Unfortunately, this makes perfect sense. 

When customers lose trust in the referral program or become affected by the referral fraud scheme, businesses usually experience an effect known as negative word-of-mouth. This can become detrimental to your business and hurt your brand reputation beyond recovery.

Complete waste of time (and money)

Dealing with referral fraud can become time-consuming very fast. Whether you (or someone on your team) are taking care of it, people are taken away from their everyday jobs and a good chunk of valuable time is spent on manual checks – which is a tedious process.

Anyone who has been a victim of a referral fraud scheme has done one of these two things:

1. They introduced a complex system of manual checks to help prevent any additional fraud
2. They introduced a WooCommerce referral plugin with an advanced fraud prevention system

In our opinion, the latter is the better option because referral plugins with advanced fraud prevention systems can be customized according to your business needs, whereas manual checks are prone to human error and will end up costing you more in terms of time and resources.

How to prevent referral fraud

The backbone of every referral program should be the fraud prevention system. Such systems are crucial for businesses as they help maintain the integrity of the referral programs, reduce the risk of compromising the reputation of the brand, and deter fraudsters from engaging with your store.

We will share a few examples of effective strategies that can help you prevent referral fraud.

Implement robust verification processes

One of the first steps to preventing referral fraud attempts is to introduce a verification process that helps you determine the authenticity of referred accounts. This process can be achieved through different forms of verification, such as email verification or phone number verification. 

You could also introduce identity checks or MFA (multi-factor authentication) for the verification process. However, while this adds a good layer of security to your store, you should consider the overall customer experience.

Your customers expect their shopping to be quick and secure, but if they are faced with a multi-step verification process, it could increase the cart abandonment rate. That’s why it is important to find the right balance between a seamless customer experience and a good fraud prevention system.

Monitor referral patterns

Regular program monitoring will help you identify any suspicious activity within your referral program. This can be achieved through referral plugins that help you detect and track unusual referral patterns via data analytics.

Some referral plugins offer advanced fraud prevention systems that can help you identify fraud patterns, such as identical emails, fake account referrals, referrals from the same IP address, etc.

Set up self-referral rules

You can use the referral program’s fraud prevention rules to further discourage fraudsters from engaging with your store. For example, if you would like to stop program participants from self-referring, you should do the following:

• Disable similar emails – program participant emails can’t be similar to one another, which means [email protected] is not able to use [email protected] to make self-referrals
• Disable temporary emails – program participants can’t use temporary email services to engage with your program
• Disable referrals from the same IP address – your program doesn’t allow program participants to make referrals from the same IP address

Set default system rules and program limitations

Besides the self-referral rules, every referral program should have a set of default rules that must be ON at all times to prevent referral fraud. These rules should allow you to do the following:

• Disable identical emails – program participant emails can’t be identical, which means [email protected] can’t refer [email protected] 
• Limit brand advocate (referrer) rewards – only give out rewards to advocates who refer customers without previous orders
• Limit friend (referee) rewards –  only give out rewards to friends (referees) once, even if they are using different referral links

Educate program participants

Every referral program comes with its own set of rules and guidelines, so why not use them to educate program participants?

This type of awareness can help discourage participants from engaging in fraudulent behavior. The best way to do this is to be clear about what constitutes a legitimate referral and what actions are strictly prohibited in your referral program.

Few more things to consider

While everything mentioned above should help you protect your referral program from fraudulent activities, there are a few more things to consider when monitoring your store.

Use coupon codes for rewards: It may not seem relevant at first, but using referral codes for rewards helps you track them and allows you to impose even more restrictions. You can add expiration dates to them, set a minimum order value, or restrict the number of uses.

Track transaction intervals: If you notice that a customer or a group of customers are performing a certain set of transactions, such as creating a number of accounts with similar names or from the same IP address, you could be facing fraudulent activity.

Use bot detection tools: It is always good to invest some time in learning how to catch and prevent bot scams. One of the ways of doing that is to introduce a reCAPTCHA on your store or implement a web application firewall that protects you from a variety of application layer attacks.

Conclusion

Referral fraud is a growing concern for e-commerce businesses, which is why safeguarding your referral program is no longer a choice – it’s a necessity.

By investing in referral plugins with advanced fraud prevention systems, you are not only protecting your business from financial losses but maintaining the integrity of your referral program, as well.

Additionally, preventing referral fraud preserves the trust your customers place in your brand and allows you to use your program for what it was intended – as a powerful tool that allows you to tap into the power of referral marketing.

So don’t let your referral program become a victim of fraudulent activities and start taking action ahead of time by prioritizing referral fraud prevention.