Marketplace fraud: The cost of inaction

Learn about the different types of marketplace fraud — and the negative repercussions that can happen when you don’t proactively prevent marketplace fraud on your platform.

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⚡ Key takeaways
  • Failing to address marketplace fraud can result in damaged customer trust, lower revenue, and regulatory risks.
  • Fake real estate listings, counterfeit goods, spoofed transactions, account takeover scams, promotion schemes, and chargeback fraud are just a few examples of marketplace fraud.
  • Marketplaces can reduce the risk of fraud by establishing a trust and safety team, performing identity verification during onboarding, conducting ongoing monitoring and link analysis, and more.

When a customer makes a purchase through an online marketplace, they can’t look a seller in the eye. They can’t pick up a product, turn it over in their hands, and inspect it from all angles for defects and imperfections. They can’t try on a pair of shoes to make sure they fit true-to-size or feel the fabric of a dress. 

With all of this in mind, it might seem like a miracle that online marketplaces exist at all. And yet, they don’t just exist — they thrive. 

Online marketplaces like Amazon, eBay, Etsy, Mercadolibre, Shopee, and AliExpress are household names around the world. Some of them are amongst the largest and most valuable companies that have ever existed, doing billions of dollars of business each year.

And the only way any of this is possible is through trust. 

Successful online marketplaces have been able to make the business model work, despite its limitations, because customers trust them. This trust has been built over time, and it’s potentially the most valuable asset that a marketplace has. 

When customers trust your marketplace, they’re more likely to not only use your platform (as buyers, sellers, or both) but also tell their friends about it. These word-of-mouth referrals bring you more users cheaply and organically. And when there are more users in your marketplace, it becomes more valuable due to network effects. More users attract more sellers, which list more products, which attract more users — becoming a self-reinforcing cycle of growth. 

Unfortunately, this trust is not bulletproof. Marketplace fraud, in its many forms, can destroy customer trust. All it takes is one bad interaction, and both buyers and sellers may seek other platforms for their business. 

A customer who thinks they’re buying an iPhone on your marketplace but who receives a box of rocks in the mail will, understandably, be wary of placing a followup order. They’re also likely going to tell others about their bad experience, potentially costing you additional users in a sort of reverse network effect.

And yet, many online marketplaces don’t think about fraud prevention until after fraud is already a problem. Instead, they choose to focus on conversions and growth — especially in their earliest days. Because of this focus on fast growth, setting up fraud prevention measures becomes an afterthought. Unfortunately, by the time fraud becomes a “big enough” problem to warrant action, there are usually higher stakes, with brand reputation and customer trust on the line.

Below, we take a quick look at marketplace fraud and the different types that exist. We also discuss the negative repercussions that can happen when you don’t proactively prevent marketplace fraud on your platform. 

What is marketplace fraud?

Marketplace fraud is a catchall term that refers to the different types of fraud that can take place through an online marketplace. Marketplace fraud can affect one-sided, two-sided, and three-sided markets, and can occur on both the buyer side and the seller side.

Common types of marketplace fraud include:

  • Listing fraud
  • Product fraud
  • Counterfeit goods
  • False advertisement
  • Fake profiles
  • Promotion schemes
  • Referral fraud
  • Duplicate accounts
  • Transaction/payment fraud
  • Spoofed transactions
  • Chargeback fraud
  • Account takeover fraud
  • Account-as-a-product fraud
  • and more

Examples of marketplace fraud

As marketplaces grow in popularity, they fall onto more fraudsters’ radars. Bad actors see this growth as an opportunity to scam more innocent users. Here are a few marketplace fraud examples we’ve come across to give you an idea of how pervasive and creative these scams can be:

Fake real estate listings: A bad actor signs up for a popular housing or rental site and pretends to be a property owner or landlord. They find a listing they like, copy the information, save the photos, and then create a brand new listing elsewhere, dropping the cost. The listing is almost too good to be true. The price is lower than anything in that neighborhood, and the pictures look beautiful. When someone inquires about the property, they're told there has been a lot of interest but they can snag it sight unseen if they transfer the deposit in full that day. The only problem is the home isn’t available anymore, it has been rented from the original legitimate posting, and the couple is out thousands of dollars.

Auction site scams: A fraudster creates a fake account posing as a buyer or seller on a popular auction site. They spot a listing for a pair of designer sunglasses. The fraudster sends a message to the owner offering to pay 3X the listing price if they agree to ship the sunglasses overseas. The payment will be sent once the owner confirms they have sent the package and shares the tracking number. But, once the individual ships the glasses and emails the seller the tracking information, they never hear back and the sunglasses are out of their hands.

Account takeovers: A bad actor sends a phishing email to an e-commerce platform account holder who is a frequent buyer on the site. They claim there's a problem with the account and they need to verify the user’s information. They are asked to click a link, which directs them to a site that looks a lot like the platform. They enter their credentials, see a pop-up that says they have secured their account, and go about their day, oblivious to the fact that they’ve been duped. The fraudster then logs into the user's account to buy and redirect merchandise, change the password, or conduct other malicious activities.

How failing to address marketplace fraud hurts your business

When fraudsters and other bad actors are allowed to operate on your platform, whether as buyers or sellers, they can inflict real and lasting damage on your legitimate users — and on your business. 

As mentioned above, unchecked marketplace fraud can severely damage your customers’ trust in your brand. But it can also directly and indirectly lead to strengthened competitors, lost revenue, and even regulatory risks. 

Damaged customer trust 

When a user experiences fraud on your marketplace, it can cause them to lose trust in your platform. This lost trust can then manifest in a number of ways, each of which is damaging to your business. 

For buyers using your platform, this might include:

  • Second guessing whether they should risk making another purchase through your platform, since their last experience was so poor
  • Deciding to only purchase cheap or “low-risk” items through your platform, as doing so means they are risking less money than if they were to purchase a more expensive item
  • Referring fewer friends or other new users because they don’t want to be the reason that a loved one loses money or experiences some other type of fraud
  • Leaving a poor review of your marketplace, engaging in negative public commentary through social media, or even reporting your business to the Better Business Bureau (BBB), Consumer Financial Protection Bureau (CFPB), or other agencies
  • Deciding to stop using your platform altogether and instead making purchases through a competitor

Sellers, too, may question whether or not it is worth it to continue using your platform if they continue to experience high levels of fraud. Like buyers, they may decide that a different platform would offer a better experience. 

At the end of the day, this means that when customers lose trust in your platform, it doesn’t just hurt your business: it has the potential to strengthen your competitors, making it more difficult for you to win back user trust once it has been lost. 

Lower revenue

When buyers make fewer purchases through your platform or no longer consider purchasing big-ticket items, which would typically translate into higher transaction fees for your business, it has a direct effect on your revenue stream. Fewer transactions and lower-value transactions mean less money for your business. 

The same is true on the seller side of the equation — except the loss of sellers can also lead to a loss of listing fees, marketing fees, and other revenue streams. 

Fewer referrals from both buyers and sellers, on the other hand, might make it more difficult or costly for you to grow your business. Instead of enjoying the benefit of network effects that come from word-of-mouth referrals, you may need to purchase your growth. These higher customer acquisition costs mean less revenue for you to invest elsewhere in your business.

And then, of course, there are certain types of fraud that have the potential to directly impact your bottom line. Promotion and referral fraud, for example, immediately lead to a loss of revenue.

Regulatory risks

Governments around the world are increasingly proposing legislation designed to target marketplace fraud — particularly fraud that involves counterfeit items. For example, in the United States, the INFORM Consumers Act was signed into law in late 2022 and goes into effect June 2023.

The INFORM Consumers Act requires online marketplaces to collect and verify certain information about sellers that do at least $5,000 in business through the platform, amongst other requirements. The goal is to make it easier for regulators to go after bad actors who have engaged in the sale of counterfeit or stolen goods.

The SHOP Safe Act is similar to the INFORM Consumers Act, except it is a proposed piece of legislation specifically concerned with counterfeit goods that have the potential to harm a consumer’s health or safety, such as pharmaceuticals, cosmetics, supplements, etc. The law would likewise require online marketplaces to perform certain types of verification.

Online marketplaces could face regulatory and legal action if they do not meet the requirements of laws that come into pass.

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Preserve customer trust and loyalty by addressing marketplace fraud

The good news is that there are many steps you can take to preserve and protect customer trust by reducing the risk of marketplace fraud on your platform. These include:

Establishing a trust and safety team

A trust and safety team is the specific team within an online marketplace (or other online platform) that’s responsible for promoting a safe environment for users. Its overarching goal is to foster and protect users’ trust in a business. 

The specific duties of a T&S team can vary significantly from business to business, but it often involves moderating content, manually reviewing reported or suspected fraudulent behavior, and other activities. 

By implementing a trust and safety team for your marketplace, you are designating specific members of your organization with the job of protecting user trust. That, in and of itself, is a powerful action, as it makes trust and safety a priority for your business instead of an afterthought. 

Identity verification during onboarding

Identity verification is the process of ensuring that users are who they say they are. It can involve a variety of different processes, including:

When identity verification is conducted during onboarding, it can prevent bad actors from ever even getting a foothold on your platform. In this way, you might think of it as a first layer of defense for all of your legitimate users. 

Identity verification can be especially helpful in reducing the number of duplicate accounts in your system, making promotion fraud, referral fraud, and account takeover more difficult for bad actors. 

Reverification at point-of-transaction

Once you have established identity verification as a part of your onboarding process, other tools that you can use to further combat fraud also become available. Reverification is one example. 

Reverification is the process of reverifying the identity of someone that has already been verified. It can be used for a variety of purposes. In the setting of an online marketplace, for example, you might require a buyer to reverify their identity prior to completing a transaction to ensure it’s actually them and not a bad actor looking to take over their account. 

You can also require reverification before users are allowed to complete other actions that you deem as “high risk.” For example, if a buyer or seller attempts to update key account information, such as payment details or contact information, it could be innocent. But it could also be a sign of account takeover or other forms of fraud. Like two-factor authentication, reverification at these moments is simply an added layer of defense for your users. 

Ongoing monitoring and link analysis

All of the steps discussed above can help you prevent fraudsters from taking advantage of your platform in the future, but what about the bad actors who are already there? Link analysis can help you understand who your users are and which of them may be bad actors hiding in plain sight. 

Link analysis is a data science technique that allows you to understand how different users on your platform are related to one another. It is specifically used to identify links or relationships between accounts — such as by uncovering shared IP addresses, browser or device fingerprints, phone numbers, and other signals that may be indicative of fraud. 

By performing link analysis on your database of users, you can immediately identify the accounts of suspected bad actors and fraud rings. You can then place these accounts on a watchlist, immediately block them, or review them manually before taking further action. 

Link analysis can also be leveraged during the onboarding process as an added layer of real-time defense against bad actors. If a new user tries to open an account on your marketplace but is shown to be connected to a ring of people in your system that are already deemed fraudulent, you can immediately block them and prevent them from opening an account. 

Then, ongoing link analysis can help you continuously identify suspicious accounts to ensure that new fraud rings do not emerge. 

The right tools make fraud prevention easier

Here at Persona, we understand just how important customer trust is for online marketplaces. We also understand the importance of maximizing conversions while minimizing risk. 

That’s why we’ve developed a suite of fully-customizable fraud prevention solutions that you can leverage to promote a safe and trusting environment for your users. 

Our Verifications solution empowers you to establish the identity verification and reverification processes that make sense for your business. Meanwhile, Graph, our link analysis tool, makes it easy to understand how your users are connected to one another so you can identify potentially fraudulent accounts. And when manual review becomes necessary, Cases, our case management tool, makes follow-up easier than ever. 

Interested in learning more? Get a demo today.

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