Coupon Crimes

Stung by a surge of bogus Internet coupons last year, merchants in Virginia lobbied for legislation to toughen laws against coupon counterfeiters. As technology makes it easy to turn a manufacturer’s offer of a 10 cents savings into a $1 discount, the retailers wanted new protections.

Web-sourced coupon fraud, which has been growing for years, reached fever pitch late last summer when consumers began streaming into stores with phony offers for free pints of Häagen-Dazs ice cream and big savings on products like Pepsi and Stouffer’s frozen dinners.

“The Internet is a good thing and a bad thing,” says Mike O’Connor, president of the Virginia Petroleum, Convenience and Grocery Association, the trade group and coupon clearinghouse that helped identify the problem for the state legislature. “This is one of the places where we find out it’s a bad thing.”

In February, a bill making coupon fraud a Class I misdemeanor was held over in a Virginia Senate committee, where it may be reconsidered next year. In the meantime, O’Connor is wondering, “Is there a company, is there an association, is there a manufacturer that has figured out a way to successfully address this issue? There must be a solution out there.”

Not yet. But marketers, manufacturers and retailers are grappling with costly and growing coupon crime. In addition to fake coupons printed on home computers, the Web makes it easy to advertise, sell and distribute quantities of forged or altered coupons, of both the offline and home-printed types. And it has enabled the spread of coupon crime techniques and tips through online message boards.

It’s unclear how much Internet-related coupon fraud has cost manufacturers and retailers so far. The Coupon Information Council estimates $500 million a year in the U.S. But that includes old-fashioned deceits, such as clipping and redeeming coupons in bulk under phony retailer names.

While traditional coupon fraud often involves large-scale conspiracies by a network of people, the Web makes the production and trafficking of phony coupons accessible to the masses. “When we fight traditional coupon fraud, it’s generally a situation involving some type of organized crime. This is disorganized crime,” says Bud Miller, executive director of the CIC.

The response so far has been a hodgepodge of civil suits, proposed legislation, changes in retailers practices, new fraud-busting technology and revised policies for auction Web sites. A number of trade associations are beginning work on finding a more comprehensive solution — or combination of solutions.

EBay cracks down — sort of

In battling Internet coupon fraud, there are some obvious targets. “The big money is being made on the exchange or transfer in bulk over auction sites, so one way to stop this is to get the auction sites to agree not to allow this activity to go on,” says Louis Ederer, an attorney who specializes in intellectual property cases. This works better than trying to go after those who post the items for sale, says Ederer, because the Web enables them to hide behind phony names and addresses. “Good luck trying to find out who these people are,” he says.

Pressured by retailers and manufacturers, two major auction sites have changed their coupon policies. In October, Yahoo banned coupon sales. That increased pressure on eBay, as the Grocery Manufacturers of America and the Food Marketing Institute called on the site to follow Yahoo’s example. In January, eBay bowed part way with a new policy banning the sale of expired or electronically delivered coupons. Its new rules also limit bulk sales and sales of free product and home-printed coupons. “Ideally, we would have liked for coupon auctions to be taken off totally, based on the argument that coupons are non-transferable intellectual property owned by the manufacturer, but we understand eBay’s position,” says Karin Kroft, GMA’s senior director of industry affairs. The GMA and other industry groups are working to make sure the policy results in real reform. The groups now scour the site for offending offerings and notify eBay when they find one.

Having won a partial victory with eBay, the Joint Industry Coupon Committee, of which GMA is a member, is addressing electronic coupon fraud and related legal and governmental issues. “Rather than take a scattershot approach, at this point we’re trying to figure out what’s out there and come up with a more integrated approach,” Kroft says.

Is it real, or is it a photo copy?

But Yahoo and eBay are only the best-known names in Internet auctions. Coupons are still auctioned off or sold in bulk at a flat rate on countless smaller sites, Miller says. And it’s not just paper copies that are passed around. Counterfeiters use e-mail to distribute electronic coupon files, which can mutate and spread like a virus. Legitimate Internet coupons, which manufacturers intend for consumers to print out at home directly from their PCs, are vulnerable. Savvy hackers “capture” (download) coupon files, or print and scan coupons into their computers, then change dates, amounts, bar codes or even the product on the face.

While it takes special equipment and know how to produce credible fakes of full-color FSI coupons, it’s easier to produce forged or altered versions of the online type. “If somebody makes alterations on something that’s printed on a $49 printer, how do you know it?” Ederer says. “It might just look funny because it was a $49 printer.” The CIC considers Internet coupons so inherently insecure, it advises against using them. “The risks outweigh the benefits,” Miller says.

Still, some see it as a chance worth taking. While only 0.2% of the 258 billion CPG coupons issued in 2003 were distributed online, according to coupon processor NCH Marketing Services, such distribution is growing in popularity. Coupon clearinghouse CMS reports that consumers printed out 992 million Internet grocery coupons in 2003, a 365% increase over 2002. Security concerns notwithstanding, there are compelling reasons to take coupons online, says NCH VP Charles Brown. “It can be a very targeted type of medium, so you may reach consumers you wouldn’t be able to otherwise.”

Savings on such CPG brands as Hershey’s, Gorton’s, Aquafresh and Scotchgard are posted on Internet sites such as Eversave.com and Coolsavings.com, as well as the online divisions of leading off-line coupon providers like Smartsouce.com and Valpak.com. These sites insist that Internet coupons are at least as secure as other types because of technical safeguards built into their systems and because they can track what members (you have to sign up for free membership to get coupons) are doing.

SmartSource wants to become as pervasive online as it is offline, where it supplies FSI coupons to 68 million households and store coupons in 33,000 locations, says Heather Harde, senior VP-SmartSource iGroup. This year she expects consumers to print out 20 million coupons from SmartSource.com, with an average redemption rate of 10%. The rate of misredemption, according to the company, is far less than 1%.

Harde touts security measures that include limits on how many times a coupon can be printed from the same machine (typically twice), never letting a coupon appear on the screen and a third barcode meant to foil counterfeiters. The company is also cautious about the types of coupons it carries, avoiding any for free products and carefully scrutinizing those that give a large discount. (The more generous the offer, the greater the incentive for abuse.) There are also safeguards that electronically detect excessive redemptions of the same coupon. “We send a kind, but stern, warning letter alerting them that we found unusual account activity,” Harde says. “If we see 10 or 20, then we say, ‘We should alert this consumer, something non-standard is happening.’ In 99-plus percent of cases, that letter really does the trick, once they know their behavior is trackable.”

In extreme cases, SmartSource disables an account; it’s done so only 22 times in the two and a half years it has been in business, she says.

Valpak.com has similar technological safeguards, including encrypted codes that specify the date and time of printing. This way, retailers can catch a coupon photocopied and redeemed more than once, says Brian Bombei, Valpak.com audience manager. He acknowledges that photocopied coupons do sometimes slip through. “Many of our local store owners do not have sophisticated technology systems at checkout, so some will take a few times to realize if a coupon is being redeemed more than once,” he says.

While the CIC preaches abstinence, the Association of Coupon Professionals urges members who use Internet coupons to do so as safely as possible. However, it is currently reviewing its two-year-old guidelines for Internet coupons, which advise manufacturers to limit the number of times a coupon can be printed and encrypt serialized bar codes. Such standard precautions have been repeatedly circumvented by forgers.

In the absence of more foolproof technological safeguards, it’s marketer beware. “The Internet is a great way to build your brand, but there’s also some risk to it,” says John Morgan, VP-marketing for Lees Marketing. He’s seen a decline in the number of Lees’ clients using online coupons, though it’s unclear whether this is related to fraud concerns.

Worries about fraud have led technology companies to introduce new services they say will thwart the bad guys. In October, E-centives announced a combination of additional fraud-deterrence services, including a point-of-sale handheld decoder that reads a special watermark and encrypted coding on coupons, and a telephone verification system that store personnel can use to determine the validity of a coupon. “Our view is not that this is going to happen to every single coupon, it’s really a deterrence factor,” says Dadi Akhavan, E-centives president and co-founder. At the same time, E-centives announced a new service by which it would search the Internet to look for sites offering fraudulent versions of its clients’ coupons.

Even while promoting his own company’s efforts to fight fraud, Akhavan says the problem has been overblown. “A lot of people are talking about Internet coupon fraud,” Akhavan says. “But Internet coupon fraud is a miniscule problem compared with traditional coupon fraud. In our view, properly executed programs on the Internet are safer.”

In August, rival company Coupons, Inc., which provides the technology that powers SmartSource.com, launched its own fraud-busting service, Veri-Fi, through which retailers can log on to a Web site and test the authenticity of a coupon by plugging in a series of numbers. Its coupons also carry a watermark and encrypted coding designed to foil forgers. Like Akhavan, Coupons, Inc. CEO Steven Boal says the problem of Internet fraud has been “grossly and greatly exaggerated.” (Don’t expect them to agree on much else: E-centives has a patent infringement suit pending against Coupons, Inc.). But Coupons, Inc. did consider the problem serious enough to go after a company it contends was making illegal copies of its coupons. In February, a U.S. District Court granted Coupons, Inc. an injunction against Anthony “Tony” Leland, Andrea Heintzelman and Midwest Wholesale, on the grounds that its coupons were protected by the Digital Millennium Copyright Act. Boal says the case sets a powerful precedent for cracking down on future violators.

A third technology provider, micro-investing company Vesdia, also thinks it has the answer to online coupon mischief. Its patented technology enables coupon savings to be deposited into a customer’s account instead of taken off the total at the register. Vesdia, which previously used the technology in its investing programs, announced it was making the service available to grocers and CPG companies in August, in the wake of high-profile fraud cases in the South. So far it’s had no takers, though Vesdia president Peter Davis says the company is in discussion with several potential customers. Davis, who believes online coupons will eventually eclipse offline, agrees that they’re a relatively safe way to promote a product. “You can copy a traditional coupon as well as you can an Internet coupon. I believe that Internet coupons are more secure than traditional.”

Cashier as cop

Despite technology, the frontline against fraud remains the checkout counter where cashiers, trying to move customers quickly and amicably through the line, are expected to be coupon cops.

For example, Wal-Mart, the nation’s largest retailer, won’t accept an Internet coupon unless it includes a valid expiration date, remit address and bar code, says spokesperson Sarah Clark. It’s up to “the great eyes of our associates” to tell if a coupon meets the standard.

Jeff Lowrance, spokesperson for the Food Lion chain of stores, says the stores’ employees have been trained to detect bad coupons, but he declined to be more specific. “The few [fraudulent coupons] that we’ve seen are very good, so the folks who are doing this are very good, and we don’t want to give them any clues about what we’re looking for.”

Some retailers, left holding a till full of worthless paper rejected by the manufacturers, have changed their tune on Internet coupons. Last fall, Publix Super Markets issued a policy against honoring them at any of its 808 stores. Virginia supermarket chain Ukrops temporarily banned Internet coupons, but softened its policy after it realized the bulk of the problem was coupons for free items that required no purchase. “Nobody knew how to react,” says Jim Scanlon, managing director of retail operations for the 29-store chain. “Then we determined that we were getting hit with the free ones.” Its new rule, posted in all stores, is to only reject Internet coupons for free items.

For the majority of retailers, though, keeping customers happy trumps the threat of being duped. “We review the coupon to see what the offer is. But it’s a service for our customers to use the coupons; there are many legitimate offers out there, so we do accept them,” says Kathy Lussier, a spokesperson for Winn Dixie.

For coupons to really be secure, stores need better point of sale technology, says Ron Fischer, president of Redemption Processing Representatives and of the ACP. “You need to develop ways through a numbering system and controls and communication to help take the burden off the cashier,” he says. Ultimately, supermarkets may have a smaller stake in this, because they often do get reimbursed for invalid coupons. “The manufacturers have to partner with the retailers. [They] are really the ones who are paying and absorbing the cost,” he says.

Free Money

While businesses that promote and sell consumer goods talk about fighting fraud, overzealous bargain hunters chat online about how to circumvent each new safeguard.

The favorite topic on one message board is finessing bar codes. Veteran coupon cheaters post detailed messages, passing their knowledge onto self-described “newbies,” who typically return a few days later to brag about their virgin forays into bar code chicanery.

One newcomer to the game recently posted this message: “You can use a 992 for anything — anything you buy, made by that company or not. You can buy eggs and use a 992, or meat or milk and use a 992. The coupon does not correspond to any product — it’s like free money!”

Of course, there’s always the chance a store employee will visually check to see if the coupons scanned correspond with the items bought. Here’s the advice offered on the board: “…Your best bet is a u-scan that lets you scan your own coupons. Otherwise, try to hide them in with your legitimate coupons and look for a young inexperienced cashier or a cashier who is busy.”

Most of the chat is about old-fashioned coupon cheating. Many messages focus on Internet home-printed coupons and trading tips for getting more copies than the manufacturer. And to avoid trouble, chatters advise the uninitiated to always give phony information during registration.

Some express frustration with tightening safeguards — a sign that technology is cutting down on misuse. But for every roadblock, there are cyber crooks working together to find a way around it. And they are generous with other would-be coupon counterfeiters. Wrote one, “I had a friend make a file for me with the coupon….now I can print out as many as I like….my store has triples this week so I am getting a lot of stuff free…if anyone wants the file for it, let me know.”