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Is Lyoness a pyramid scheme?

By Farhaanah Mahomed
Last Updated: Friday, 18 October 2013 | 17:01 GMT

International shopping program Lyoness is in the spotlight as claims stream in that it is a pyramid scheme in disguise.

Is Lyoness a pyramid scheme?

"Based on my understanding of Lyoness and what has been put out there in terms of transparency and its contract in plain language, it seems to me that there is a secondary purpose to the company," Megan Power, consumer rights journalist for the Sunday Times newspaper told CNBC Africa on Monday.

Lyoness is a free loyalty programme based on shopping and cash back benefits through a variety of channels such as cash back cards, mobile vouchers, gift cards or online shopping from selected merchants who have partnered up with the company. The company was started in Austria and was launched in South Africa in 2011.

According to the Lyoness, there are already 30,000 members registered in South Africa.

“I have no idea what the true figures are, Lyoness says that’s the number and growing and they believe there’s a large market here in South Africa and there will be further uptake,” said Power.

She explained that Lyoness offers a cash back benefit where you get up to 2 per cent cash back for every purchase you make with selected loyalty merchants. Once you reach 250 rand in your lioness account, the funds are transferred into your private bank account.

The suspicions however stem from the friendship bonus scheme where you receive a discount of 0.5 per cent off purchases made by members that you referred to Lyoness.

According to reports, the company could be categorised as a pyramid or Ponzi scheme as the system is based on the fact that profits are derived from recruiting new members and not a sale. As long as new members are available, the system works, once the resources are exhausted, everything collapses. This will leave those at the top of the pyramid with the most money.

Other areas causing controversy, Power pointed out, is Lyoness’ claim to be partnered with four of the biggest retailers in South Africa- Woolworths, Pick ‘n Pay, Dischem and Foschini.

“The retailers have been pushed to the forefront as they have lent this program credibility so in Lyoness’ selling pitch, it has referred over the last two years to those four companies yet the only involvement they actually had was in selling bulk gift cards,” explained Power.

She added that Lyoness sells the idea to its members that they can purchase a gift card at a discount through them.

“I have since spoken to Woolworths, Pick ‘n Pay, Foschini and Dischem and they claim they were unaware of this. They were aware of the bulk purchase, as it ran into millions and these purchases came through their gift card departments,” said Power.

She stated that the four big companies may not have been aware of Lyoness’ business model before and now that they do understand it better, they are unhappy that their consumer gift cards are being resold to consumers at a discounted rate.

 Lyoness has also sparked widespread controversy from around the globe. Power pointed out that the Austrian Economic and Corruption prosecutor is in the process of an investigation into allegations that Lyoness is a pyramid scheme, following complaints laid by two former Lyoness members.

Also, Eric Breitenede, an Austrian lawyer, representing over 300 complainants against Lyoness, mainly comprising of premium members that are demanding the return of the large deposits that they had made into the Lyoness scheme. Breitende has had several victories thus far. 

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