Digital Coupon Fraud Executive Overview

STRATEGIC
WHITE PAPER
CHALLENGES
Digital
Coupon • Fraud efforts
increasingly
Fraud sophisticated
by Jay Johnson • Costs US businesses
$500m
and Patrick Seaman
January 2013 TAKEAWAYS

• Learn scope & scale of
modern coupon fraud
• Learn how today’s
digital coupon providers
are combatting coupon
fraud

Topics in this White Paper
 Intro: Digital Coupon Fraud 3  Buying & Selling Coupons Online 24

 Organized Coupon Fraud Crime 5  Expired Coupons 25

 Individual & Employee Fraud 10  Redemption of Unused Coupons 26

 What Companies are Affected? 14  Fraud Prevention 27

 Fallout 15  Summary & Conclusions 30

 Fraud & Countermeasures 18  References 32

 Illegal Coupon Copying 20  About the Authors 33

 “Family-Code” Coupon Exploit 21  About Pepperwood Partners 35

 Personal Identification 22  About Pepperwood Partners 58

Pepperwood Partners© All Rights Reserved January 2013 Page 2

Intro: Digital Coupon Fraud

Coupon fraud costs U.S.
businesses over $500 million
each year

-- Retail Wire


Intro: Digital Coupon Fraud

With a focus on digital coupons,
this White Paper is intended to
provide an overview of the
problems brands and retailers
face from coupon fraud in general,
and the counter measures leading
digital coupon platforms are
employing to combat coupon fraud
and “misredemption.”

Coupons are a huge staple of life
in the United States, and,
increasingly, around the world1,
such as the 629% growth seen in
India in 2011.2 Online and mobile
coupons lead the growth.


Organized Coupon Fraud Crime

In July 2012, Arizona law enforcement discovered $25 million in
counterfeit coupons in what was described as “the largest counterfeit
coupon ring in the country.”6

"These aren't '50 cent off' coupons. These
are 'free item' coupons… you get this
coupon from her for $10 and you can get a
$70 item...If you can get an unlimited
number of those, think how this grows."
– Business Insider



In 2008, coupon clearinghouse International Outsourcing Services was
indicted for a scheme to dump large numbers of unused coupons into the
legitimate stream of incoming coupons, defrauding providers of more than
$250 million over 10 years.7

“IOS directed its employees in a Mexican
coupon processing plant to mix the
unredeemed coupons with the redeemed
ones. The brokers signed up stores that
would claim the coupons came from them
for a piece of the payback.”
– Frugal Confessions


The CIC is offering a
$100,000 reward
for information leading to the
arrest & conviction of top
coupon fraudsters.
-- Coupon Information center


Businesses and industry groups are very serious about the issue, as
evidenced by a recent $100,000 reward9 regarding the arrest and
conviction of sophisticated counterfeit coupon making individuals. See the
example counterfeit coupon:



These sophisticated counterfeit coupons, complete with watermarks,
barcodes and other information that would not appear on legitimate
coupons, are often posted on sites such as 4chan.com, (which is
infamous for file torrents, adult content, child pornography, anti-Semitic,
racist content – alongside innocuous material ranging from sports to
origami).

Note that Coupons, Inc. Coupons never have their logo on the face of
the coupon as is shown in the previous slide.


Individual & Employee Coupon Fraud

More common fraud involves individuals and store employees, such as
the Hanford California Walmart employees who defrauded their store
out of up to $25,000.10 Employees printed phony coupons from the
internet, including one that claimed $50-dollars off a $50-dollar
American Express gift card.

Police said the operation was sophisticated, involving cashiers who
would ring up the coupons and customer service managers who would
approve the transactions and barcodes that would successfully scan at
the cash register. It wasn't until Walmart received thousands of
coupons back from the manufacturers that they realized the coupons
were fakes.



Another example is a University Student who the FBI estimate
defrauded Procter & Gamble out of $200,00011. The student
counterfeited coupons designed to look like real coupons from the
website www.smartsource.com. The coupons ranged from lower priced
items like energy drinks and cosmetics to expensive items like XBOX's
and PlayStations.

The student also went so far as to give out advice to other people about
how to commit this kind of fraud on hacker-affiliated websites



Two men were arrested on Long Island for using expired coupons at
multiple stores. Target stores alone reported $570,000 in losses12.

The men would persuade cashiers to swipe the coupons four or five
times to build up the dollar amount. Target's internal security discovered
a pattern in the scam, fired several cashiers and alerted police.



Four Kroger cashiers were arrested for defrauding Kroger out of
$70,000 by using override keys to change coupon discount amounts13.
The cashiers claimed they were paid by the owners of a flea market to
override coupons that did not match the merchandise being checked
out.

The list goes on and on. Coupon fraud costs stores, brands,
manufacturers – and consumers.


What Companies are Affected?

Coupon fraud affects large and small
businesses alike. Counterfeit
manufacturer coupons target the full
spectrum of retail brands ranging from
Pepsi to Coke, Frito Lay to Nestle, from
Unilever to Hershey’s, Dunkin Donuts,
Kellog, Kimberly-Clark, Hasbro, Raovac,
Georgia Pacific, Energizer, Clorox,
ConAgra, Folgers, Reynolds, Pfizer,
Kraft, 3M, P&G, Butterball, Rain-X,
Palmolive, Del Monte, Ben & Jerry’s,
and on, and on, in a seemingly unending
list.14 Even brands that don’t issue
coupons are affected by counterfeit
coupons. Both brands and retailers
lose millions each year to coupon fraud.


Fallout

80% of retailers DON’T
KNOW what percentage of
coupons are fraudulent.
-- Loss Prevention Research Council


Fallout

For national brands, fraud losses could be a significant annual report
line item, along or combined with shrinkage, or lumped in with
chargebacks from vendors, cash loss, or markdowns. Smaller
businesses, using coupons to drive customers, don’t have deep
pockets and can be driven out of business by fraudulent coupon use or
even group discount sites, like Groupon.15

Historically, the coupon redemption process has not provided a great
deal of data to help measure fraud. The Loss Prevention Research
Council reports16 that, overall, 80% of retailers “don’t know” what
percentage of coupons received in their stores are fraudulent.


Fallout

It should come as no surprise, then, that there is something of an arms
race between those who issue coupons and those who (ab)use them.

Digital coupon services and platforms, such as Coupons.com, Coupon
Factory and Qples Coupons, have developed and employ many
strategies to combat coupon fraud and abuse.

This White Paper will review many of these, however, some specific
technologies, techniques and proprietary methods will not be discussed
in detail, to avoid providing ammunition to fraudsters.


Types of Fraud & Countermeasures

“Many cash registers can't scan a
coupon and tell whether the
customer even bought that item,
much less whether the coupon is
expired or not. Customers at some
stores could buy dog food using a
Pepsi coupon without raising a
red flag on the register. ”
– Tampa Bay Online


Types of Fraud & Countermeasures

Fraudsters look first for loopholes and weaknesses to exploit – such as
using a coupon intended for one product – for a different one, or using
expired coupons, etc. It doesn’t stop there. Like currency
counterfeiters, this is a technological arms race. Coupon counterfeiters
and legitimate coupon issuers are in an escalating war of measures
and countermeasures.

The following sections describe many of the forms of coupon fraud and
what is being done about it. The tables in each section describe
examples of exploits and problems, and, using publicly available
information, how the leading digital coupon providers approach each
issue.

Please note that coupon issuers usually state that they do not publicly
disclose all of their methods and strategies. So, the examples below
are not comprehensive, but provide a high level overview of the kinds
of issues digital coupon providers face.


Illegal Coupon Copying

Like taking a twenty-dollar bill and copying it on a photocopier, one of
the simplest forms of coupon fraud is the practice of printing duplicate
copies of genuine coupons that were intended for single use (such as
one per household or person), and redeeming multiple coupons at a
store or stores. Retail chains try to train checkout clerks to spot and
avoid redeeming copied coupons, but this is an uphill battle.

To combat coupon copying, several methods are commonly used,
including forms of watermarks, micro-printing, special color features,
and technology that prevents or makes it difficult to print more than one
coupon on a computer. Digital coupon providers often do not display
the actual coupon on the computer screen, to prevent screen grabs.
They will sometimes also prevent the redirection of a print to, for
example, “Print to PDF” or other feature that would save a local digital
image.


“Family-Code” Coupon Exploit

Another coupon exploit is to use a coupon for a different product than it
was intended for. In some cases, the barcode on a coupon can be
“matched” at a store register with another product from the same
manufacturer. This practice received media attention when the reality
TV series “Extreme Couponing” appears to have shown17 a couponer
having “decoded” barcodes and constructing a list matching those
codes with products other than the intended ones. The industry has
made changes to the barcode technology to attempt to block this
exploit.


Personal Identification

Some digital coupon providers now add some level of personal
information to the coupon, such as a name, email address and even
some level of address information such as city and state and zip code.
One method used is to simply ask the user to type in their information.
A common method for doing this is via Facebook.

Companies ask you to “Like” them, granting them permission to pull the
users information. The practice is growing fast, and businesses like the
idea of being able to learn more about their customers. Not surprisingly
some couponers advocate18 creating fake Facebook and email
accounts to avoid having their information printed on the coupons.


Personal Identification

In addition to legacy barcodes, many coupons have now added a new
barcode standard “GS1 DataBar Barcode”19 that significantly increases
the amount of data stored in the code. Instead of 12 digits, the DataBar
can store up to 74 characters.

The new standard provides minimal human-readable text, making
coupon “decoding” much more difficult. Phase-in of the new standard
is ongoing as older point-of-sale systems need to be updated to
support the new standard.


Buying & Selling Coupons Online

Sites like couponsthingsbydede.com and thecouponmaster.com/ not
only aggregate coupons, but charge handling fees to consumers.
Coupons often say on the coupon itself that any transfer makes the
coupon void. Purchasing coupons is a transfer.

“We're not a fan of that… The
way they acquire those coupons
is not always legal."
-- Curtis Tingle, senior vice president at Valassis, publisher the
RedPlum circular that reaches more than 60 million households 42
times a year…20


Expired Coupons

Some point of sale systems may not
recognize whether a coupon is expired
or not. The use of expired coupons is
fraud. Of course, expired coupons
cannot be redeemed by the retailer,
creating a direct loss for the retailer
itself – instead of for the brand.


Fraudulent Redemption of Unused Coupons

In 2008, coupon clearinghouse International Outsourcing Services was
indicted for a scheme to dump large numbers of unused coupons into
the legitimate stream of incoming coupons, defrauding providers of
more than $250 million over 10 years.21

“IOS directed its employees in a
Mexican coupon processing plant to
mix the unredeemed coupons with the
redeemed ones. The brokers signed
up stores that would claim the
coupons came from them for a piece
of the payback.”22
-- Frugal Confessions


Fraud Prevention
As with the above table comparing general features, the table that
follows lists various fraud prevention features that the example
companies list or describe on their websites, press releases or are
described elsewhere.

The availability of information varies from company to company.
Some features may be substantially the same, but are described
with different terminology between companies.

If an answer was not found, it is left blank and does not imply a yes
or a no.


Fraud Prevention (part 1)

Figure 1: Fraud prevention feature comparison of 4 digital coupon platform providers


Fraud Prevention (part 2)

Figure 12: Part 2: Fraud prevention feature comparison of 4 digital coupon platform providers


Summary & Conclusions
Like many areas of the economy that have radically
changed due to the pressure of rapidly evolving
technology, the coupon industry is typical. Institutional
inertia keeps many long-standing industry processes and
practices intact. Not surprising given the 330 billion
coupons issued annually in the USA alone23.

Early pioneers in change, especially industry giant
coupons.com, founded in 1998, fought long battles of
industry acceptance and the negative press of early
fraudsters giving “printable coupons” a bad name.

With newspaper circulations in a long-term decline (see list
of defunct newspapers24), there is much hope for the
rapidly growing online and mobile space – which includes
the online editions of many newspapers and magazines.

Summary & Conclusions

Next-generation digital coupon platforms fully embrace
both traditional distribution models as well as the emerging
markets generated from social media and, increasingly,
mobile.

Control over the lifecycle of a coupon, with real time
redemption, advanced analytics, and direct connections
with the actual consumer via social distribution significantly
increase the value of a single legitimate coupon
redemption.

At the same time, these advances in digital coupon
sophistication raises the stakes in the continuing conflict
with counterfeiters.


References
1. http://www.plunkettresearch.com/retailing-stores-market-research/industry-trends
2. http://www.onlinemarketing-trends.com/2012/02/online-coupons-see-629-growth-in-india.html
3. http://www.ftc.gov/bcp/edu/pubs/consumer/invest/inv06.shtm
4. http://abcnews.go.com/Business/fake-doritos-coupons-cost-frito-lay-millions/story?id=10971564#.UI7kMRjrkZ0
5. http://www.retailwire.com/discussion/15950/cpgmatters-increased-coupon-fraud-underscores-need-for-better-security-measures
6. http://www.businessinsider.com/massive-counterfeit-coupon-ring-busted-in-arizona-2012-7
7. http://online.wsj.com/article/SB120312119025572943.html
8. http://www.frugalconfessions.com/coupons/coupon-fraud-part-ii.php
9. http://www.couponinformationcenter.com/doc/$100,000-Reward.pdf
10. http://www.couponinformationcenter.com/psa-list.php
11. http://www.cnbc.com/id/49092709/Bice_Groupon_Isn_t_a_Good_Deal_for_Businesses
12. http://www.prologicredemption.com/whitepapers.php
13. http://www.jillcataldo.com/node/16258
14. http://moneysavingqueen.com/August-2011/Couponing-101-How-to-Print-Coupons-on-Facebook-Without-Sharing-
Your-Information/
15. http://www.databar-barcode.info/
16. http://www2.pascopress.com/business/pasco-press-news/2012/apr/29/bznewso1-the-high-stakes-game-of-saving-ar-
397513/
19. http://www2.pascopress.com/business/pasco-press-news/2012/apr/29/bznewso1-the-high-stakes-game-of-saving-ar-
397513/


About the Authors

Jay Johnson is CTO of Qples.com, a next-
generation digital coupon platform with
industry leading security and analytics. Mr.
Johnson founded Thunderduck Social
Hatchery in 2000 as a web development and
web marketing company. Thunderduck was
rebranded as Qples – “Coupons People
Share” and expanded operations to include
both the USA and India. Contact Jay at
jay@qples.com, and
www.linkedin.com/in/jayjohnsonqples.


About the Authors

Patrick Seaman is Chief Technology
Advisor to Pepperwood Partners and COO
of the social publishing platform company
WhichBox Media. Seaman is the former
COO of the video eCommerce company
Cinsay, and former Director of Technology at
Broadcast.com. Patrick serves on the
Advisory Board of Kraftwurx Inc, and Qples,
Inc. and on the UT Dallas School of Natural
Sciences & Mathematics Advisory Council,
and is an IEEE member. Contact Patrick at
patrick@pepperwoodpartners.com,
patrick@patrickseaman.com and
www.linkedin.com/in/patrickseaman/.

About Pepperwood Partners

Pepperwood Partners is a boutique
investment banking advisory firm
headquartered in Dallas, Texas.
Pepperwood provides a suite of
investment banking advisory
services to businesses in the Two Lincoln Centre
technology, media, telecom, 5420 LBJ Freeway, Suite 535
nanotechnology, energy and Dallas, Texas 75240 USA
+1 214.442.6056
alternative asset sectors. With a info@pepperwoodpartners.com
strong focus on institutional
relationships in the Russian, Learn more at:
European, and CIS regions, www.PepperwoodPartners.com
Pepperwood works with businesses
to achieve capitalization and growth
objectives.


Digital Coupon Fraud Executive Overview

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Digital Coupon Fraud Executive Overview

Similar to Digital Coupon Fraud Executive Overview (20)

Recently uploaded

Recently uploaded (20)

Digital Coupon Fraud Executive Overview