What is marketplace fraud, and how do companies stop it?

For as long as commerce has existed, both businesses and customers have had to contend with the potential for fraud. 

In many ways, this was easier when goods and services were primarily bought and sold in person. Buyers could speak directly to sellers and inspect items before deciding to buy; sellers, meanwhile, were paid immediately for the purchase. While fraud still exists in the physical space — for example, vendors selling faulty items or buyers using counterfeit money — society has had millennia to develop different techniques to identify and minimize it. 

But as more and more business moves online, fraud detection has become increasingly difficult. Though there are many factors at play, this is largely due to the fact that bad actors, posing as legitimate buyers and sellers, are able to hide behind the relative anonymity that the internet offers. 

While fraud is a concern for all ecommerce businesses, it’s even more concerning for online marketplaces, which must contend with potential fraud on both sides of the equation: the buyer side and the seller side. 

Below, we define marketplace fraud, explore the different types of marketplace fraud, and discuss steps you can take to help stop marketplace fraud in your business and offer a more trustworthy and secure platform for your users. 

What is an online marketplace?

An online marketplace is any ecommerce app or website that connects buyers with sellers. (Though it should be noted that other transactional relationships can also exist outside of the buyer/seller relationship, depending on the specifics of a marketplace. Other examples can include learner/educator, courier/customer, and renter/landlord, amongst others. )

The marketplace typically does not sell products or services itself, but instead facilitates transactions. In many ways, marketplaces can be thought of as a digital version of shopping malls — bringing together a variety of vendors under a single roof where customers can come to browse. 

Online marketplaces often specialize in transactions related to either goods or services, and can cater to either business-to-business (B2B) or business-to-customer (B2C) transactions, though some marketplaces do cater to both. Online marketplaces can be one-sided (think: Walmart.com), two-sided (think: Amazon), or three-sided (think: DoorDash) in nature, depending on how many different parties are involved in a transaction. 

Online marketplace examples

Some of the most well-known product marketplaces in the United States include Amazon, eBay, Etsy, and Facebook Marketplace. Global examples include Alibaba (China), Jumia (Africa), Shopee (Southeast Asia), and MercadoLibre (South America), amongst others. 

Well-known service marketplaces include Fiverr, Upwork, Uber, Postmates, Thumbtack, and Taskrabbit. Even e-learning platforms like Udemy and Coursera can be considered online marketplaces, since they facilitate transactions between learners and educators. 

There are literally thousands of less well-known alternatives as well. 

How do online marketplaces make money?

Online marketplaces earn money in a variety of ways, most commonly in the form of fees. While these fees vary from marketplace to marketplace, common examples include listing fees, transaction fees, payment processing fees, and more.

In other words, online marketplaces make money when their platform is used to facilitate a transaction. The more transactions completed on the marketplace — and the more buyers and sellers the marketplace can attract — the more money it will ultimately earn.

The best way for online marketplaces to attract buyers and sellers is to ensure their platform is safe, trusted, and secure. Unfortunately, the potential for fraud exists at every stage of a transaction, threatening to undermine the trust and security that is essential for online marketplaces to thrive. 

What is marketplace fraud?

Marketplace fraud is a term that encompasses the various types of fraudulent activities that commonly occur in online marketplaces. This fraud can be carried out by buyers (buyer-side fraud), sellers (seller-side fraud), and even on both sides of the equation at once.

Marketplace fraud can be a costly issue for online marketplaces. 

First, as mentioned above, fraud can damage the marketplace’s reputation as being trusted and secure. This reputational harm can make it more difficult for the marketplace to attract buyers and sellers, ultimately limiting their ability to grow. 

Beyond this, many online marketplaces have policies that reimburse defrauded users (buyers or sellers). These refunds eat into the business’s bottom line, directly impacting revenue and profitability. 

Combatting marketplace fraud can also be costly, as it may involve purchasing fraud prevention software and hiring customer service representatives/fraud prevention staff. That being said, given the damage that fraud can inflict upon a marketplace’s reputation and loss of revenue, most businesses find that these resources are an important and necessary investment. 

Types of marketplace fraud 

There are many different types of marketplace fraud that you should be aware of. Below, we highlight some of the more common forms of fraud that online marketplaces must contend with.

Seller-side marketplace fraud

Seller-side marketplace fraud refers to any type of fraudulent activity that is conducted by the seller and which negatively impacts either the buyer or the platform itself. Examples of seller-side fraud include:

• Fake profiles: Fake profile fraud occurs when a bad actor creates a fake profile to defraud potential customers — by sending the buyer counterfeit goods instead of the expected items, or never fulfilling the order, for example. Often, the fake profile will be a copy of a legitimate — and often popular — profile on the marketplace. When this is the case, fake profiles harm not only the buyer, but also inflict reputational harm on legitimate profiles which are copied. 
• Listing fraud: Listing fraud is similar to fake profile fraud in that a bad actor creates a fake product listing, often based on legitimate products found elsewhere in the marketplace. The fraudster then takes the customer’s money with no intention of fulfilling the order. Listing fraud is also sometimes called product fraud. 
• False advertising: False advertising refers to any practice that misrepresents the products or goods being sold. This can include, but isn’t limited to, fake photos, inaccurate product descriptions and specifications, and even fake customer reviews. Unlike listing fraud, cases of false advertising typically do result in the order being fulfilled — only with a product or service that is different or of lesser quality than what the customer believed they were purchasing. 
• Buyer/Seller closed-loop account fraud: Also called spoofed transactions, this type of fraud usually involves a single bad actor who creates both buyer and seller accounts. They then use the fake buyer profile to place an order for products or services on the fake seller profile. The purchase is completed with stolen credit cards or debit cards, while the fraudster absconds with the funds. It can also entail second-party fraud in which the individual completes a purchase using a friend or family member’s payment information. 
• Promotion schemes: Many online marketplaces offer rewards to vendors who reach certain sales milestones — for example, making a certain number of sales or referrals within a given period of time. This can incentivize some sellers to create fake buyer profiles, which they then use to hit their sales targets and pocket the reward. 

Buyer-side marketplace fraud

Buyer-side marketplace fraud is any type of fraudulent activity that is conducted by the buyer. Buyer-side fraud negatively impacts the seller or the platform itself. Examples include:

• Fake accounts: One common means of scamming sellers is to create a fake account. These fake accounts can be used to leave false negative reviews on buyer listings or otherwise harass users. Sometimes, existing customers will create new fake profiles in order to gain access to “new customer” promotions or discounts. Fake accounts can also be leveraged for cyber-attacks, especially if the account is based on an account created by a legitimate user. 
• Duplicate accounts: When users are allowed to create multiple accounts on a platform, it can make it more difficult for the marketplace to have a clear picture of who that person is, due to the fragmentation of data and user behavior across multiple accounts. This obfuscation can make it more difficult to identify patterns of suspicious activity, and otherwise hinder data analysis efforts. 
• Transaction fraud: Payment fraud involves a buyer making a purchase with payment information that isn’t theirs — such as a stolen credit card. This type of fraud is distinct from buyer/seller closed-loop fraud in that the seller is not aware that the payment is fraudulent. Transaction fraud is also called payment fraud.
• Chargeback fraud: In cases of chargeback fraud, a buyer completes a purchase using their legitimate payment information, typically a credit card. After they have received the product or service, they then dispute the purchase with their credit card company in order to receive a refund. This is sometimes referred to as friendly fraud.

Both sides

Some forms of marketplace fraud can be carried out on both the buyer- and seller-side. examples include:

• Onboarding inaccuracies: In order to create a buyer or seller account on virtually any online marketplace, the potential vendor or user must create an account. Sometimes, whether intentionally or unintentionally, users provide inaccurate information during the onboarding process. These inaccuracies can make it more difficult for the platform to understand exactly who its users are. In some cases, it can also make it more difficult to police for fraud instances such as buyer/closer closed-loop fraud (above).
• Account takeover (ATO) fraud: An account takeover happens when a bad actor gains access to an account (buyer or seller) that is not theirs. The bad actor then potentially has access to sensitive information, such as financial information, which can be used to make fraudulent purchases. 
• Account-as-a-product fraud: This is similar to account takeover fraud, as it involves a bad actor gaining access to an account that is not theirs. But instead of using the account to make fraudulent purchases, they then sell the account to other bad actors, who in turn leverage it for any variety of fraudulent activities on the marketplace. 

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How to stop marketplace fraud

One of the most effective means of identifying and preventing fraud is to implement Know Your Customer (KYC) or Know Your Business (KYB) protocols for your platform.

KYC refers to a set of practices, including identity verification, that businesses use to understand exactly who their customers or users are. While often associated with financial companies, and while not typically required for ecommerce platforms like online marketplaces, adequate KYC protocols can make it much easier to detect and stop fraud. KYB is the same principal, but focused on verifying the legitimacy of businesses your company works with.

In practice, this may look like implementing identity verification as a part of your account creation process for both buyer and seller accounts — and then periodic identity authentication and reverification over time to prevent account takeover, as appropriate for your business.

The identity verification processes that would be best for you will depend largely on the mechanics and needs of your business. That being said, you can leverage a number of verification techniques to identify and reduce incidences of fraud. 

For example, you might collect the device fingerprint of anyone creating an account, and then use that fingerprint to detect multiple accounts or buyer/seller closed-loop fraud. Or, you might collect a user’s IP address or geolocation in order to detect cases of fraud where a user’s physical address does not match the address in their account. You can also conduct email address and phone number lookups to see if the contact information has been tied to fraudulent activity in the past. If you are particularly concerned with spoofing or account creation by bots, you may decide to layer liveness detection into your verification processes. 

Here at Persona, we understand how important it is to spot and stop fraud in your online marketplace. We also understand how difficult it can be to balance the friction necessarily introduced by identity verification against the need for a pleasant user experience. That’s why we’ve designed our Verifications solution to be customizable, so that you can craft the KYC processes that are right for you.  And for marketplaces who want to find, fight, and ban fraud rings on their platform, Graph is an investigation tool that’s in early access today. 

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