Home Insights Maximising customer loyalty: getting data protection right in running loyalty schemes

Maximising customer loyalty: getting data protection right in running loyalty schemes

Eight months ago, a cyber security researcher contacted US bakery-café Panera Bread to let it know that a security vulnerability meant that its customer’s loyalty program information was exposed on its website. The company did nothing about it, so earlier this month the researcher took the news to a security news website, where it became public.

The vulnerability has since been rectified, with Panera claiming it only affected 10,000 customers. The security researcher says it affected around 37 million.

Loyalty programs may be a rich source of personal information for retailers, however a security incident will quickly erode the trust relationship with customers.


In an age where a wealth of personal information is available freely online and individuals willingly give over information in exchange for services, it is easy to think that people are becoming complacent about privacy.

They are not.

Individuals are becoming increasingly privacy-conscious – but in a different way to the historical concept of “privacy”. Instead of withholding information about themselves, they are happy to share it:

  • in exchange for valuable services;
  • when they know how the recipient will deal with that information; and
  • on the condition that the recipient keeps information secure.

Customer’s expectations regarding cyber security are clear – failing to secure their personal data may prove dire for your company. A Ponemon Institute study in May 2017 found that companies who had suffered a data breach lost an average of 5% share price in the subsequent days, and experienced churn of up to 7% of its customers.


The risk of churn following a data breach is likely to be more significant where the breach involves personal information collected through a loyalty program, because it erodes the trust in the company held by its most loyal followers (who are also likely to be their highest value customers).

Information collected through loyalty programs is likely to be particularly private - not only comprising a person’s key details such as their name, address and date of birth, but also their spending habits. Loyalty program data often contains information or indicators of the wealth, habitual whereabouts at certain periods of time, behaviours and interests, and possibly even health information of a company’s most valuable clients.

That type of information warrants a high degree of attention. While consumers are willing to hand over this data in exchange for valuable goods and services, it is usually on the implied condition that such information is kept secure. Customers will walk away if they find out that this condition is not being honoured, and be vocal in their displeasure, creating a multiplier effect of customer and potential customer dissatisfaction.


Taking a step back from security incidents: it’s first worth identifying issues with the collection of personal information relevant to loyalty programs.

While organisations that collect sign-up information online are likely to have fewer issues, companies that sign up their customers in-store should take a close look at their privacy obligations.

Typically, a loyalty program requires the person signing up to provide their name and email address. It may also include residential address, mobile number and date of birth – especially if you will be offered free products on your birthday. This information may be collected verbally with the company’s representative at a store, within hearing distance of other store-goers. It may also be collected on a form but verified verbally when you visit the store. Other organisations may keep a sign-up list, which is usually visible prominently to others in the store.

Taking a cynical view that malicious actors may skulk around retail stores listening into loyalty program sign-up conversations or reading sign-up forms left lying around, a person overhearing or reading that information may now be equipped with most information it needs to perpetuate some pretty serious identity fraud.

If you are an APP entity with an obligation to keep information secure under Australian Privacy Principle 11, you should be taking a close look at whether your information collection practices reasonably protect personal information from unauthorised disclosure – especially as such disclosures may be subject to mandatory data breach notification requirements.


As the quantity and sensitivity of personal information increases, so too do the “reasonable steps” a company is required to take to protect that information under Australian Privacy Principle 11.

Your organisation’s usual information security practices may not be enough to secure compliance with APP 11 in relation to loyalty program information. Your organisation should have the following controls in place and articulated in order to demonstrate compliance with its privacy obligations (as well as community’s expectations):

  • robust technical safeguards should be in place over the system(s) in which the loyalty program information is stored, including user access controls;
  • stored personally identifiable data must be encrypted. In the Panera matter, the data was stored and viewable in plain text;
  • robust physical safeguards in place over the system(s) and the ability for information to be extracted from the system and transferred elsewhere electronically or in hard copy;
  • privacy compliance training for personnel involved in the collection and use of loyalty program information;
  • mechanisms to ensure that the loyalty program information is not used for a purpose for which it is not permitted, such as being unlawfully cross-matched with other data held by the organisation (or another organisation);
  • a procedure to ensure that information is destroyed or de-identified after it is no longer required to be retained by law, and cannot be lawfully used or disclosed; and
  • having a data breach response plan implemented within the organisation which articulates the steps the organisation will take in respect of an actual or suspected data breach (including those for which notification is not required).


While it is always hoped that personal information won’t be affected by an information security incident (touch wood), it is now considered that a data breach is inevitable for most or all organisations.

While the actual security incident in the Panera data breach alone was a fairly serious data breach, it was a significant failing that Panera failed to take steps after being notified of the issue. In large part, the media attention was drawn to the significant disparity between Panera’s account of the data breach as affecting 10,000 customers and that of the security specialist who claimed it affected 3.7 million.

On the other hand, there are now numerous examples of good responses to “bad” data breaches, where the confidence of customers and the public has been maintained (for example the Australian Red Cross blood bank response). Customers don’t necessarily demand perfection and recognise that all organisations can be the victim of crime. While they will feel troubled by a data breach, competent management will go a long way to restoring trust. On the other hand poor management of the security response reinforces the feeling that the customer has been let down – particularly if the breach relates to their ‘loyalty’ program.

The message is simple: take all information about information security incidents seriously. If you are required to notify affected individuals (or the public) about the incident, you may wish to look at our thinking piece on how messaging can influence public reaction to the notification.[1]

The reputational damage of adverse media reaction to a cyber security incident should be carefully considered when deciding to collect loyalty program information – information should not be collected just for collection’s sake.


Australia is already gearing up to pass legislation to introduce a ‘consumer data right’ which gives individuals certain rights over their information held by a company about them. The ‘right’ will only be introduced industry-by-industry, starting with banking data (taking effect around 2020-2021) and moving to telecommunications and other industries.

Over time, the right may extend to retail data, such as loyalty program data.

Further, those companies already struggling with the compliance burden of Australia’s privacy laws will be disappointed by the Senate recently having passed a motion to consider strengthening Australia’s privacy laws, particularly looking to the European Union’s General Data Protection Regulation (which came into effect 25 May 2018) as a model.[2]

If Australia does choose to go down that path, it may impose broader data portability obligations, as well as regulation of automated decision making using personal information. Privacy regulation is ripe for fast-paced development, so keep abreast of the changes.

[1] See here.

[2] Available online here.



Cyber Security Technology, Media and Telecommunications

This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.