Blockchain technology can end a multi-million dollar financial scam

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We live in an increasingly digital world where technology helps us accomplish all kinds of tasks throughout the day. With this in mind, one could easily imagine that the scanning and processing of coupons in grocery stores, restaurants, department stores, and other retail outlets would be technically streamlined. Surprisingly, this is not entirely the case.

It is still far too easy to create, buy, trade and use fake coupons. In recent years there have been several high profile counterfeit coupon busts orchestrated by the FBI and state police agencies. A movie called Queenpins was released last year, starring Kristen Bell and Vince Vaughn, which retells the story of a counterfeit coupon operation cut short by the FBI, in which investigators recovered more than $25 million worth of counterfeit coupons and 22 assault weapons spotted, 21 vehicles and a 40-foot boat. The scam the film is based on is one that snagged a list of 40 major manufacturers including Procter & Gamble, PepsiCo and Hershey. Police estimated hundreds of millions of dollars in profits were lost — most of it to fake coupons.

While this shocking tale caught the attention of Hollywood directors, it’s not exactly uncommon. There have been other large-scale coupon scams in recent months, including an incident in which a Virginia man was sentenced to more than seven years in prison. In addition to the prison sentence, he was ordered to pay $31 million in compensation in connection with what prosecutors described as “possibly one of the largest counterfeit coupon schemes in history.”

The problem with the existing technology

Considering the scale of the crimes mentioned above, it becomes clear that the existing technology for processing coupons and verifying their authenticity is simply not sufficient. Even with the shift to online shopping and increased use of digital coupons as a result of the pandemic, fraud has remained a major problem.

In fact, digital coupons may even contribute to an increase in the number of people who overuse coupons as online retailers expand discount codes to attract new shoppers and encourage customer loyalty. While an effective marketing tactic, distributing digital coupons carries some risk, especially when shoppers misuse referral programs to distribute or reuse coupons.

In 2020, a fraud detection report released by Forter highlighted a significant increase in coupon abuse, growing by 133 percent between H2 2018 and H2 2019. This has been attributed to excessive sharing of coupon codes by users and merchants who are unable to take precautionary measures on site to prevent this type of abusive behavior. At the time of this report, it was estimated that coupon fraud costs businesses between $300 million and $600 million each year.

One of the issues fueling coupon abuse is the migration to mobile devices. Across the industry, the technology and standards implemented for coupon redemption were not consistent. The result here is that there is a fragmented and isolated coupon distribution landscape. This can – and has – been exploited. The old AI (8110) coupon format has experienced significant fraud rates due to the inability of retailers and brands to share real-time data.

Another reason why coupon abuse has proven so easy for criminals is that the existing process of verifying coupons is both time-consuming and labor-intensive. More than 1.7 billion coupons are redeemed annually in the United States, with the Consumer Packaged Goods (CPG) industry spending $225 billion annually on promotional activities such as coupon distribution. Most coupons scanned in stores and used in the US are shipped to Mexico where they are painstakingly hand-matched, creating a fraudulent process.

To bring this process into the 21st century, we turned to distributed ledger technology (DLT), better known as blockchain technology. Simply put, DLT is a decentralized database of information and assets that are stored and shared securely and in real-time, rather than being controlled by a central authority. With a decentralized blockchain ledger, the blockchain protocol remains secure even if some of the computers on the network act maliciously. The result? The records of the information recorded on the blockchain are virtually tamper-proof and therefore anyone can verify the information recorded on it.

Solving the problem with blockchain

Given the severity of the losses and criminal activity in the coupon sector, stakeholders have started 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 develop a universal retail digital coupon to improve coupon security and reduce fraud. The Universal Digital Coupon uses Hedera Hashgraph’s DLT technology and the Hedera Consensus Service to phase out older coupons and replace them with a safer alternative.

Using this next-gen DLT means a decentralized ledger is updated in real-time to instantly verify the authenticity of coupons that can be fully trusted. More specifically, at the heart of this universal coupon standard is a single source of truth, or manufacturer-created “master offer file.” All stakeholders can access the file to perform their specific functions – from distribution and validation to clearing. All of the data associated with this process can be accessed through a set of standardized APIs that allow retailers to connect, validate and retrieve offer details while reporting to all involved stakeholders on each coupon. By the end of 2021, this technology should be integrated in more than 75 percent of grocery retailers.

This new coupon standard aims to reduce coupon fraud by millions of dollars a year. This will have a significant impact on consumers as retailers will no longer need to find other ways to make up for the business lost to coupon abuse. Of course, the universal coupon standard also has a number of benefits for stakeholders within the coupon industry, including increased efficiency, increased accuracy, a significant reduction in the risk of fraud, and a reduction in billing and billing disputes. Overall, it’s a significant step forward for retailers and manufacturers who have long been looking for ways to eliminate coupon fraud.

Christian Hasker is Chief Marketing Officer at Hedera Hashgraph, a distributed ledger technology.

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