Voice of the Industry

The ABC of online marketplaces and main fraud types impacting this business model

Monday 11 April 2022 09:51 CET | Editor: Raluca Constantinescu | Voice of the industry

Jeremy Gottschalk and Maximiliano Pinnau, on behalf of Marketplace Risk, talk about the key trends in the marketplaces sector and the main fraud challenges impacting this business model

Marketplaces are venues where buyers and sellers transact for goods, services, and property. By definition, marketplaces do not own the inventory sold through their platform, and they generally monetise the transactions by earning commissions from each sale. Marketplaces can be categorised as horizontal or vertical. Horizontal marketplaces sell a variety of goods and services, whereas vertical marketplaces are more specialised in specific goods or services. The best examples of horizontal marketplaces are Alibaba, Amazon, and Mercado Libre. Vertical marketplaces include Drizly or Saucy Brew Works for alcohol delivery, and Deliveroo or Just Eat for food delivery. 

Business models 

The first marketplaces, commonly referred to as bazaars, have been recorded as early as 3000 BC, though it is believed that marketplaces go back even further. During the 16th century, the Bazaar of Tabriz attracted and connected traders from around the world – that day’s Amazon. Today, physical marketplaces still exist (and are making a comeback by way of farmer’s markets, food halls, and swap meets), but with our busy lives and readily available mobile technology, marketplaces are predominantly digital. 

Most marketplaces can also be categorised as either two-sided or three-sided. Two-sided marketplaces transact for goods, services, and property between two parties – buyers and sellers, most often referred to as businesses and consumers (or peers when there are consumers on both sides of the transaction). Two-sided marketplaces can be further categorised as follows: 

  • Business-to-Business (B2B) – these marketplaces transact for goods, services, and property between two businesses; 

  • Business-to-Consumer (B2C) – these transact for goods, services, and property between a business and a consumer; 

  • Consumer-to-Consumer (C2C) or Peer-to-Peer (P2P) – these connect individual consumers for goods, services, and property. 

Three-sided marketplaces transact for goods, services, and property between three parties – a combination of businesses and consumers. While there are many combinations of three-sided marketplaces, some well-known include grocery, food, and beverages delivery platforms like DoorDash, Glovo, Just Eat, and Deliveroo, where the consumer purchases goods from the business, with an intermediary consumer (or individual) transporting or delivering the goods. 

Main trends in the marketplaces sector 

Over the past 18 months of the pandemic, marketplaces have exploded in popularity and necessity, in large part due to quarantines, lockdowns, and restrictions. Globally, 47% of ecommerce sales were made through marketplaces in 2020, totalling nearly USD 2 trillion. It is expected that this boost will continue over the next five years, as more companies adopt marketplaces to increase online sales. This is because marketplaces serve to fill the void of physical stores with digitisation capability and inherent ability to provide higher volumes of buying and selling. 

These trends are evident throughout the world. For example, Latin America’s online marketplace Mercado Libre sold twice as many items per day in the second quarter of 2020 compared with the same period the previous year. African ecommerce platform Jumia reported a 50% jump in transactions during the first six months of 2020. And China’s online share of retail sales rose from 19.4% to 24.6% between August 2019 and August 2020. 

Fraud challenges 

With the explosion of marketplaces around the world, so, too, is the fraud that accompanies all ecommerce. That said, marketplaces present opportunities for somewhat unique types of fraud, but also the more common. 

  • Fake accounts: Sellers create fake accounts to sell non-existent goods to unwitting buyers. Marketplaces are targets because they are designed to be intermediaries with limited intervention. 

  • Account takeover: A legitimate account is accessed by a nefarious user, often through stolen credentials obtained through phishing, credential cracking, or other malicious means. 

  • False advertising: Sellers misrepresent the quality of goods or services through false or fraudulent claims or statements. Again, marketplaces are targets because of limited intervention during profile creation. 

  • Stolen credit cards: Individuals posing as sellers may steal a buyer’s credit card information and use it to purchase goods elsewhere. Buyers may also use stolen information to purchase goods and services. 

  • Order cancellation: Using fake profiles, sellers place orders to be paid in cash upon delivery; however, once the marketplace advances payment to the restaurant, the restaurant cancels the order and keeps the payment. 

  • Fake buyer/seller closed-loop fraud (or friendly fraud): Individuals create fake seller and fake buyer profiles to ‘sell’ non-existent goods or services using stolen credit cards. This type of fraud is commonly used to launder money earned from illegal or illicit means. 

  • Referral schemes and promotions: Buyers create fake accounts to unlock rewards, discounts, and bonuses using different emails and other credentials. 

Total elimination of fraud is likely never going to be achieved. That said, several good practices can help consumers. First, consumers should only do business with reputable platforms and not allow the platforms to save their payment information. This minimises the risk of the payment information being compromised. Consumers should also create distinct usernames and passwords for each platform so that if one account is compromised, that information cannot be used on other platforms. In addition, consumers must be vigilant in reviewing bank and credit card statements as a part of paying their monthly bills. 

This editorial was first published in our Cross-Border Payments and Ecommerce Report 2021–2022, which taps into the fast-growing cross-border market and provides a comprehensive overview of trends and developments that are pivotal in this space, being the ultimate source of information for ecommerce businesses interested in expanding globally. 

About Jeremy Gottschalk 

Jeremy Gottschalk is an expert in risk management, trust and safety, and legal strategy for marketplace startups. With 15+ years of experience as a lawyer, operator, and consultant, Jeremy founded Marketplace Risk as a platform for education, networking, and information sharing for the marketplace ecosystem. He holds a JD from Loyola and an MBA from Kellogg. 

About Maximiliano Pinnau 

Maximiliano Pinnau is the Director of Community and Operations at Marketplace Risk, where he oversees the development and curation of the community for those engaged in risk management, trust and safety, compliance, and legal strategy for marketplaces. 

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, compliance, and legal strategy. From our blog, e-newsletter, Platform Podcast, Slack Forum, and Live Event Series to the Marketplace Risk Management Conference, Masters Program, and Sharing Economy Global Summit, Marketplace Risk is the most trusted resource for startups taking their businesses to the marketplacerisk.com next level.

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Keywords: marketplace, ecommerce, account takeover, credit card, cross-border payments, cross-border ecommerce
Companies: Marketplace Risk
Countries: World

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