Blockchain Technology Can End a Multimillion Dollar Financial Fraud

We live in an increasingly digital world, where technology helps us complete tasks of all kinds throughout the day. With this in mind, it would be easy to think that the procedure of scanning and processing coupons in grocery stores, restaurants, department stores and other retail outlets would be one that's streamlined with technology. Surprisingly, this isn't quite the case.

It's still far too easy to create, purchase, trade and use counterfeit coupons. In recent years, there have been multiple high-profile counterfeit coupon busts orchestrated by the FBI and state police departments. Last year, a movie named "Queenpins" starring Kristen Bell and Vince Vaughn was released, retelling the story of a counterfeit coupon operation that was broken up by the FBI and which saw investigators uncover more than $25 million worth of bogus coupons, 22 assault weapons, 21 vehicles, and a 40-foot boat. The scam that the movie is based on is one that snared a roster of 40 major manufacturers, including Procter & Gamble, PepsiCo, and Hershey. Police estimated that hundreds of millions of dollars were lost in profits — the majority of which was through counterfeit coupons.

Though this shocking story caught the attention of Hollywood directors, it’s not exactly a rarity. There have been other large-scale coupon fraud busts in recent months, including an incident that saw a Virginia man sentenced to more than seven years in prison. In addition to the prison sentence, he was ordered to pay $31 million in restitution in connection to what prosecutors described as “what may be one of the biggest counterfeit coupon schemes in history.”

The Problem With Existing Technology

Looking at the scale of the crimes mentioned above, it’s clear that the existing technology used to process coupons and verify their authenticity simply doesn't cut it. Even with the shift to online shopping and increased use of digital coupons as a result of the pandemic, fraud has remained a huge issue.

In fact, digital coupons may even be contributing to a rise in the number of people overusing coupons, as online retailers extend discount codes to attract new shoppers and encourage customer loyalty. While it’s an effective marketing tactic, the distribution of digital coupons has a level of risk involved, particularly if shoppers abuse referral schemes to proliferate coupons or reuse them.

In 2020, a fraud detection report published by Forter highlighted a significant increase in coupon abuse, which grew 133 percent between H2 2018-H2 2019. This was attributed to the oversharing of coupon codes by users and merchants that are not able to put precautions in place to deter this kind of abusive behavior. At the time of the report, it was estimated that coupon fraud costs businesses between $300 million and $600 million each year.

One of the problems fueling coupon abuse is the migration to mobile devices. Across the industry, the technology and standards implemented for coupon redemption haven't been uniform. The result here is that there's a fragmented and siloed coupon distribution landscape. This can be — and has been — exploited. The legacy coupon format, AI (8110), has experienced substantial levels of fraud due to the fact that it's not possible for retailers and brands to exchange real-time data.

Another one of the reasons why coupon abuse has proven to be so easy for criminals is because the existing process for verifying coupons is both time consuming and labor intensive. Annually, there are more than 1.7 billion coupons redeemed in the U.S., with the annual consumer packaged goods (CPG) industry spending $225 billion on promotional activities such as the distribution of coupons. Most of the coupons scanned in stores and used in the U.S. are shipped to Mexico for painstaking hand reconciliation, creating a process that's ripe for fraud.

To bring this process into the 21st century, we've turned to distributed ledger technology (DLT), more commonly known as blockchain technology. Put simply, DLT is a decentralized database for information and assets to be stored and shared securely and in real time, rather than being controlled by one centralized authority. With a decentralized blockchain ledger, the blockchain protocol remains secure even when some of the computers on the network act maliciously. The result? The records of information recorded on the blockchain are virtually tamperproof and hence anyone can verify information recorded in it.

Solving the Problem With Blockchain

Given the severity of losses and criminal activity within the coupon sector, stakeholders have begun to take action. Groups such as the Association of Coupon Professionals, the Joint Industry Coupon Council, the Consumer Brands Association, the Food Marketing Institution, and GS1 have worked with The Coupon Bureau to establish a Universal Digital Coupon for the retail industry to enhance coupon security and reduce fraud. The Universal Digital Coupon leverages Hedera Hashgraph’s DLT technology and the Hedera Consensus Service to phase out legacy coupons and replace them with a more secure alternative.

Using this next-generation DLT means having a decentralized ledger, updated in real time, to instantly verify the authenticity of coupons, which can be completely trusted. In more detail, at the center of this universal coupon standard is a single source of truth or a “Master Offer File” created by manufacturers. All stakeholders can access the file in order to perform their specific functions — from distribution and validation to clearing. All data associated with this process can be accessed through a set of standardized APIs, enabling retailers to connect, validate and retrieve offer details, while reporting to all stakeholders involved with each coupon. By the end of 2021, this technology is expected to be integrated with more than 75 percent of grocery retailers.

This new coupon standard is expected to reduce coupon fraud by millions of dollars a year. This will have a material impact on consumers, as retailers will no longer have to find other ways to make up for the business lost through coupon misuse. Of course, the universal coupon standard also has a range of benefits for stakeholders within the coupon industry, including increased efficiency, increased accuracy, a material reduction of fraud risk, and a reduction of invoicing and settlement disputes. Overall, it’s a meaningful step forward for retailers and manufacturers that have long been looking for ways to eliminate coupon fraud.

Christian Hasker is the chief marketing officer at Hedera Hashgraph, a distributed ledger technology.