Personalized loyalty programs offer unparalleled convenience for consumers, from earning points on daily purchases to effortlessly accessing exclusive discounts. For businesses, these programs provide invaluable insights into customer preferences, fostering stronger relationships and a competitive edge. The tailored rewards not only enhance customer satisfaction but also drive engagement and retention, making them a strategic asset in building long-term loyalty.

Managing loyalty programs isn’t without its challenges, though. With evolving privacy laws and growing consumer awareness, businesses must carefully balance personalization with privacy. Given the data-intensive nature of these programs and the heightened focus on data protection, navigating privacy regulations and mitigating breach risks is crucial. Ignoring these concerns can lead to hefty penalties and damage customer trust. This article explores the legal risks of loyalty programs from privacy and data security perspectives and offers practical strategies for building effective and compliant programs.

Why should businesses prioritize privacy and security when designing their loyalty programs?

In today’s digital landscape, data breaches are not just inevitable but increasingly costly to manage. The direct expenses associated with handling breaches — such as legal fees, call center setups and notifications to regulators and affected individuals — can quickly add up, not to mention the hidden and unquantifiable costs like reputational damage and brand impact. Moreover, businesses, although victims of breaches, might face lawsuits for failing to maintain robust security practices. For example, in August 2023, Caesars Entertainment suffered a data breach that exposed sensitive personal information of a “significant number of” its 65 million loyalty program members, according to its SEC 8k report. This security incident has resulted in a few class action lawsuits in different courts in the United States, including the federal courts in New Jersey and Nevada. Many of these cases remain unresolved. 

Investing in privacy and security proactively when designing a loyalty program can save businesses from these costly repercussions. After all, consumers willingly share their data with loyalty programs in exchange for convenience and rewards. However, if a loyalty program loses credibility — perhaps due to a high-profile data breach or regulatory violation — consumers are less likely to trust the business with their personal information. Ensuring robust privacy and security measures from the beginning not only protects the business from potential legal and financial fallout but also maintains consumer trust, a vital asset for any loyalty program’s success.

What can businesses start doing now to build trust and loyalty?

Involving legal counsel early in the design of a loyalty program is essential, as the landscape of privacy and cybersecurity laws is complex and ever-evolving. The United States has a patchwork of privacy laws and regulations, with the applicable law depending on various factors, such as the type of data collected (e.g., contact information or Social Security numbers) and its sensitivity (e.g., health data or information from children). Notably, as of September 2024, 19 states have enacted comprehensive privacy laws — a significant increase from just one handful at this time in 2022.

Because loyalty programs collect vast amounts of data, lawmakers are introducing specific rules for these programs, which regulators are actively enforcing. For example, Section 1798.125 of the California Consumer Privacy Act (CCPA) prohibits businesses from denying goods or services, charging different prices or rates, or offering varying quality levels based on consumer data. On January 28, 2022, California Attorney General Rob Bonta issued notices to a number of businesses operating loyalty programs, citing violations of the CCPA for failing to publish a notice of financial incentive. According to the California attorney general’s press release, many major corporations in retail, home improvement, travel and food services received those letters. 

What can businesses do to build trust and loyalty from the get-go?

Compliance

Identify relevant privacy and data protection laws based on the specifics of the loyalty program, such as participant location, data types collected and third-party involvement. Assess the current compliance status, including existing privacy and security policies. Establish and maintain a compliance program that adapts to evolving legal requirements, ensuring the program remains current and effective.

Transparency and communication

Clearly communicate how customer data is collected, used and protected. Transparency builds trust and reassures customers that their privacy is a priority. Use simple language to explain data practices and avoid technical jargon that may confuse customers.

Data minimization and security

Collect only the data that is necessary for personalization. This reduces the risk of data breaches and ensures compliance with privacy laws. Implement robust data security measures, including encryption, access controls and regular security audits to protect customer data.

Customer consent and control

Obtain explicit consent from customers before collecting and using their data. This can be achieved through clear opt-in mechanisms. Provide customers with control over their data, allowing them to access, correct or delete their information as needed.

Personalization with purpose

Focus on delivering genuine value through personalized rewards. Ensure that personalization efforts align with customer preferences and enhance their overall experience. Use customer feedback to continuously improve and refine loyalty programs, making them more relevant and effective.

Engage legal effectively

Involve legal counsel in designing your loyalty program and in managing breaches, as they can effectively address these notices and guide businesses back into compliance in a cost-efficient manner.