Voice of the Industry

Hidden frauds that translate into marketplace losses

Thursday 4 February 2021 07:55 CET | Editor: Anda Kania | Voice of the industry

Jeremy Gottschalk of Marketplace Risk presents the variables that explain the increase in marketplace fraud and types of fraud that have proliferated during the pandemic
Fraud Prevention in Ecommerce Report 2020 / 2021

McKinsey reported that US ecommerce penetration doubled during the early months of the COVID-19 pandemic, which represents 10 years of growth. The result is that one-third of all US business flows through ecommerce, replacing physical channels. Of all the ecommerce sales, 63% is transacted through marketplaces. With so many more transactions, it follows that fraud has increased as well. According to Arkose Labs, the pandemic has brought on ‘heightened attack rates, significant spikes in fraud attempts and greater volatility than in 2019’, resulting in a doubling of attacks over a six-month period. In this article, we look at a few common types of fraud that have increased as a result of the pandemic.

There are many variables that explain the increase in marketplace fraud resulting from the pandemic. First, the increase in online transactions creates more opportunities for fraudsters, especially with lockdowns and quarantines causing consumers to work, shop, and bank remotely. Second, with incentives for fraudsters increasing, so, too, do the amounts and sophistication of fraudsters. Third, related to the second, the economic collapse in so many regions has caused widespread desperation, leading people to find ‘creative’ ways to make money. Fourth, many businesses have been forced to sell online in order to survive, but they have little-to-no understanding of the fraud landscape and are ill-prepared to combat fraud. Fifth, even marketplaces with experience fighting fraud are not prepared for the rapid growth in volume and their pre-pandemic fraud-fighting blueprints quickly have become antiquated.

Whether you are a legacy marketplace or bringing goods and services online for the first time, the fraud behaviour looks essentially the same, although the level of sophistication varies. And, with the urgency and immediacy driving spending habits during the pandemic, catching the fraud is complicated that much further. Therefore, consumers expect necessary and, in some cases, life-dependent goods and services right away (and often on a daily basis). This makes it difficult to identify and prevent fraud from happening at the speed and volume of the transactions. Here are a couple types of fraud that have proliferated during the pandemic.

Fake profiles

Marketplaces are driven by user-generated content. In fact, one of the hallmarks of marketplaces is the ability for buyers and sellers to transact through a passive intermediary without any substantive intervention. This often means that the platform does not verify the profile or the veracity of the information in the profile – the marketplace simply facilitates the transaction. As a result, it is quite easy for sellers to create fake accounts to sell bogus goods or services to unsuspecting buyers. In bad cases, sellers offer expensive goods (often at discounted prices) and buyers will be out significant sums. In the worst scenarios, sellers steal buyers’ credit card information from transactions and, combined with buyers’ personal information, can use credit cards for other nefarious purposes later.

For the more sophisticated fraudsters, profiles will often mirror known, legitimate sellers, complete with fake reviews and testimonials to add credibility. Unknowing buyers purchase items at too-good-to-be-true prices, but never receive them. By the time buyers realise they have been scammed, so, too, have many other unwitting consumers and fraudsters vanish into thin air (not that they ever appeared in the first place). 

Stolen credit card purchases 

It’s no secret that hacked financial and personal information is readily available on the dark web. But, fraudsters have many other avenues to access information beyond the dark web, including by collecting information from purchases through fake profiles or, with a little bit of development experience, by injecting malicious code to skim customers’ financial and personal information from checkout pages of websites. When fraudsters get their hands on stolen credit cards, the most straightforward scam is to purchase goods or services with the stolen credit cards and have them shipped outside the country or to locations where the items can be picked up ‘safely’ by someone within that fraudster’s network. In the case of services, such as food or alcohol delivery, items are often delivered to different addresses and/or often left outside and retrieved (after all, during the pandemic, contactless delivery has become normal for many platforms). 

Money laundering 

Also known as fake buyer/seller closed-loop fraud, money laundering generally requires a stolen credit card. In this case, often the same person creates a fake ‘seller’ account and a fake ‘buyer’ account (or many accounts). 
The seller advertises expensive goods for sale and the buyer(s) bids or transacts for those goods with the stolen information. The seller receives the payout from that transaction and moves on to the next. This can happen repeatedly until the credit card limit is reached or the fraud is detected and the credit card is shut down. By the time either of these occur, often the fraudsters have made off with tens of thousands of dollars. 

The pandemic has brought fraud to the doorstep of nearly every consumer. The result has adversely impacted the reputation of the marketplaces through which those customers transact. In order to restore lost confidence and maintain those customers post-pandemic, platforms must dedicate resources to identify and prevent fraud. Otherwise, marketplaces will lose the customers that fell into their lap.

This editorial was published in the Fraud Prevention in Ecommerce Report 2020/2021, the go-to source in securing transactions while offering a frictionless customer journey.

About Jeremy Gottschalk

Jeremy is an expert in risk management, trust & safety, and legal strategy for marketplace startups. With 15+ years of experience as a lawyer, operator, and consultant to insurance companies, investors, founders and operators, he has become an industry-leading voice. Jeremy founded Marketplace Risk as a platform for education, networking, and information sharing for the marketplace ecosystem. Jeremy holds a JD from Loyola and an MBA from Kellogg. 


Fraud Prevention in Ecommerce Report 2020 / 2021

About Marketplace Risk

Marketplace Risk is the most comprehensive source of education, networking, and information sharing for the sharing economy and marketplace startup ecosystem to learn risk management, trust and safety, and legal strategy. From our blog, e-newsletter, Platform Podcast, Slack Forum and Webinar Series, to the Marketplace Risk Management Conference, Masters Program, Road Shows and Sharing Economy Global Summit, Marketplace Risk is the most trusted resource for startups taking their businesses to the next level.

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Keywords: Marketplace risk, online fraud, ecommerce, sharing economy, money laundering
Categories: Securing Transactions | Digital Identity, Security & Online Fraud
Countries: World
This article is part of category

Securing Transactions