Put a group of B2C marketing experts into a room and task them with building brand recognition and loyalty and one of them is bound to suggest promotions. While the average consumer might not jump on every cash back or BOGO offer that comes their way, coupons and other promotional offers have real value for consumers who reap discounts, cash back and other benefits from promotions. They are also valuable to retailers who can see a boost in sales from coupons and rebates, as well as the brands that use them to engage with their customers. In 2024, the digital coupon market was estimated at $8.96 billion worldwide, and with nearly 90% of U.S. consumers claiming they have used coupons, they are ubiquitous.
Big money is attracting big fraud – and the use of artificial intelligence
Fraudsters hoping to get a piece of that action have long been a concern, but due to generative AI (artificial intelligence), the type of fraud that was already a big focus for criminals is even easier to execute, which requires more resources to combat.
The sole purpose of coupon and rebate fraud is, of course, financial. Coupons, real or fake, can be sold. Fraudsters can manipulate the system to redeem coupons for a discount or cash in on a rebate without making a purchase. Barcodes can be modified to offer fraudulent discounts. These are not victimless crimes.
Coupons, rebates, and other incentives should be looked at as a form of currency. Bad actors manipulating the system to their advantage cause real financial harm to brands and retailers, making them less inclined to run promotions, ultimately hurting consumers. Mitigating AI-generated fraud forces brands to require consumers to jump through more hoops to validate their purchase, including asking consumers to submit more private data, which might prompt some consumers to simply walk away.
For brands, phony submissions also create bad data. A brand has no idea if its promotion was successful if it can’t verify the actual number of purchases made during the promotion, or where those purchases were made. This is particularly vexing for CPGs that might be testing a new product. Not only are they losing out on purchases if fraudsters can redeem phony rebate without purchase, the fake identities generated by these scams also skew demographic information, so brands no longer can confirm who their customers are.
How technology powers AI fraud prevention – and enables new threats
For more than 40-years, Arrowhead has been at the forefront of fraud mitigation for our clients. We know that true fraud protection and digital marketing security requires multiple layers of security, starting with a well-trained staff that can spot inconsistencies – including physical abnormalities of the coupons themselves, errors, phony accounts, and spotting known bad actors attempting to redeem coupons or rebates.
New technologies can help track redemption rates and other data that can trigger further investigation if something falls out of the norm. This can detect unusual patterns, force tighter controls on single-use coupons, even determine if the user or IP address of the user has been involved in previous fraud.
But technology can work both ways. AI is helping bad actors take a quantum leap by simplifying the means to commit fraud and flood the system. One way to do that is to create multiple accounts to claim discounts or rebates. In the past, fraudsters had to rely on third party bots or scripts to create those accounts. Now, AI provides the means by which anyone can create code used to quickly generate fake accounts, and often for free.
These tools not only can be used to create fake identities, but AI also helps criminals create more realistic submissions coded with fraudulent discounts that are much harder to detect. More worrisome, it can do it at scale. Before AI became so readily available, our team at Arrowhead might have seen a couple hundred fraudulent submissions for a promotional offer. Now we are seeing thousands utilizing various sources and methods.
What can be done about AI fraud?
The Association of Coupons and Promotions (ACP) has been working to roll out a universal coupon. Arrowhead serves on the board of directors and has been a part of these efforts. The universal coupon provides a new format that offers a data string, or digital footprint, that is immediately validated upon use – a critical advancement in coupon validation technology. Once the coupon is validated and redeemed, it can’t be re-used. The code makes it impossible to duplicate a coupon or create a counterfeit version that can be redeemed. ACP is working to bring more retailers on board to speed up adoption.
The promotions industry is laser-focused on using every tool at our disposal to combat this new front of criminality that was ushered in by AI. This includes creating new means of validation utilizing larger sets of data points that will also help streamline the process so as not to inconvenience consumers or retailers. We are studying and writing new industry best practices that are evolving as we see methods of fraud evolve.
Fraud has become extremely sophisticated and requires expert attention to mitigate. Few brands have the resources to handle that alone. Arrowhead brings decades of experience as well as our industry connections to our partners to work as a team to not just mitigate fraud, but also stay ahead of it.
Elected leaders need to play a bigger role
It is also important to work with lawmakers to ensure crimes involving coupon and rebate fraud are addressed by our legal system in a way that recognizes the seriousness of these crimes. In the age of artificial intelligence, the harm caused by this type of fraud is growing exponentially. While AI is providing businesses and individuals with new tools to increase productivity, we can’t lose sight of the fact AI is also being used for illegitimate purposes. Combating it will require a multi-pronged approach so brands can continue to offer promotions that benefit consumers and retailers.
Brands should continue working with their promotional partners to ensure they are not just taking the problem seriously but also offering the latest technology to allow them to keep pace and even ahead of this growing threat. And while most brands are loathe to call out problem areas in the industry, it is time to quantify the damage caused by AI-generated fraud, and make sure our elected leaders understand it is a problem that must be addressed through laws as well as improved coupon fraud prevention efforts on the part of the promotions industry.
