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How digital beats paper

The biggest case of fraud in the history of discount coupons is finally coming to trial in Milwaukee. In a criminal case that has taken nine years to wrap up, more than a dozen people are alleged to have stolen $250 million over a period of 10 years by exploiting the paper coupon relationship between brands and stores.

At first glance it seems beyond belief that a group could fraudulently reap millions of dollars a year trafficking in 50-cent and dollar-off discount coupons. But that is what the executives at International Outsourcing Services, one of the nation's largest coupon clearinghouses, apparently did.

The most shocking thing is the scale of the operation. When people say there is a warehouse of evidence to consider in the case, they are speaking literally. And some of the details, like using cement mixers in Mexico to make the coupons look worn before submitting them for reimbursement, sound like something out of the TV series "Breaking Bad." What happened?

How it worked

The International Outsourcing case is interesting because it provides the public with a glimpse into how coupon processing works. One of the most reliable methods for manufacturers and retailers to obtain a quick boost in sales, coupons clipped from circulars and magazines are ubiquitous in our society.

But while issuing paper coupons is a relatively straightforward process, dealing with their redemption can be a hassle. That's why many companies rely on coupon clearinghouses, like International Outsourcing, to handle it for them.

Clearinghouses collect coupons from participating stores, submit them to the issuer for reimbursement, and then redistribute that money back to retailers. Clearinghouses act as the middleman in the transaction, turning coupons into cash for distribution and making money for themselves by charging handling fees.

That's how it is supposed to work but, dealing with large volumes of both coupons and cash, it's not hard to see how this arrangement can open up the opportunity for wide-scale coupon fraud. International Outsourcing committed fraud using several methods, including:

  • Using "chop shops" to cut up large quantities of coupons that were never used by consumers and submitting them for reimbursement. Cement trucks in Mexico were sometimes used to make these coupons look "worn" and validly used by consumers.
  • Attempting to cover their tracks by mixing real coupons used by consumers collected from smaller stores with large quantities of fake ones.
  • Pocketing the cash instead of distributing reimbursement to participating stores by claiming their coupons were rejected by the issuer.

In order to acquire large volumes of coupons for chopping, the company worked with sub-brokers, who offered bribes and payoffs to store owners to participate in the deception. It was all a complicated web of lies that ultimately unraveled when one honest storeowner finally stepped up and told authorities after being offered a bribe to participate.

Part of the reason the criminal enterprise flourished for so long was because the individual transactions were small and most companies were inclined to write it off.

Few noticed the long-term cost that was being accrued. One company, S.C. Johnson of Racine, WI, which employs 12,000 people and offers $100 million in coupons annually was bilked out of $6.5 million over two years.

Once again, digital eats paper

The traditional paper-coupon process welcomed a brilliant business opportunity for burning the candle at both ends. Fraudsters stole profit from both manufacturer and store owner. Once a paper coupon is created and distributed, the issuer has almost no ability to track its circulation and use.

To combat against fraud and to fully account for every penny, big box retailers like Target, Best Buy, and Walmart have been opting to distribute coupons digitally via mobile phone texts and email. Consumers love them, judging by the millions of mobile coupons issued and redeemed. They allow for the collection of metrics such as store location and expiration, and can track the coupon's journey from text/email offer, to time of redemption.

With mobile coupons, fraud is eliminated because a customer receives only one mobile offer regardless of the various channels (e.g., SMS, mobile web, a retailer's app, email, social, wallet apps, online shopping cart) by which consumers receive the coupon. Once the offer is redeemed, it expires simultaneously in all channels and the coupon cannot be used a second time. All coupons are guaranteed as one-time use and the opportunity for fraud is reduced to nearly zero.

Stopping the fraudulent use of 50-cent and dollar-off coupons may seem a task too small for many retailers and manufacturers. But as the International Outsourcing case shows, ignoring a problem only makes it larger. It's best to stop the possibility entirely through the use of mobile coupons.

Dan Slavin is CEO and co-founder of CodeBroker, a developer of patented mobile marketing applications. He was CEO of Framework Technologies, VP of Open Market, and CEO of International Testing Services. He earned a BS in Electrical Engineering from...

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