Online Marketplaces - How to Stop Fraud

Posted by Neal Reiter on Nov 14, 2017 6:00:00 AM

Online retailers have found that in addition to selling products, letting third party vendors sell on their platform has enabled them to grow by leaps and bounds. For example, Amazon has 2 million third-party sellers and over 50% of all items sold are through them. The benefits to online retailers for having third-party vendors include:

  1. Revenue - Customers order additional products that merchants don't stock
  2. Better pricing - Customers receive lower prices due to competition between vendors
  3. Risk reduction - Merchants don’t own or take risk of the inventory  

However, the risks of running marketplaces are greater than found in typical e-commerce and must be addressed. The largest immediate risk is fraud. There are many new fraud risks because you have risk on both sides of the transaction, which poses risks that you didn’t have to consider before.

Listed below are the most common types of fraud, which we've learned about from working with some of the world's largest retailers in reducing risk in their marketplaces.

  1. Fake accounts - Fraudsters creating fake buyer and seller accounts in bulk
  2. Account takeover - Fraudsters taking over seller accounts to sell non-existent items
  3. Referral Fraud - Fraudsters sending traffic that appears legitimate to benefit from referral programs, using stolen customer information to fake the volume of traffic
  4. Promotional Fraud - Setting up fake sellers and buyers to take advantage of a marketplace’s credits system
  5. Fake Seller Fraud - Fraudsters copying the profile of a legitimate seller  
  6. Closed Loop Fraud - Fraudsters create fake buyers and sellers. The buyers pay using stolen credit cards for nonexistent items or services offered by fake sellers
  7. Clone fraud - Fraudulent sellers copying a good transaction from a different retailer where they’re selling and use the buyers name/address to double sell items
  8. Bad Actor Fraud - These are legitimate accounts with real data created to conduct fraud. This may be done by individuals or rings

8 Effective Anti-Fraud Strategies

How do you successfully combat all these different types of fraud? Our clients have found that what works best is a risk-based system to validate sellers and buyers based on various information including transaction amount, geography, and products. You want to determine four things:

  1. Is this buyer/seller real? This helps with #1 - Fake accounts, #4 Promotional Fraud, #6 Closed Loop Fraud
  2. Is this buyer/seller authorized to use this account? This helps with #2 - Account Takeover and #3 - Referral Fraud
  3. Can you do business with this buyer/seller? This helps with #7 - Clone Fraud #5 - Fake Seller Fraud
  4. What’s the risk of working with this buyer/seller? This helps with #8 -Bad Actor Fraud

When you know the answer to these four questions, you can prevent fraud, even in high-risk environments. The question then is how to do it. A common concern for risk and compliance teams in marketplaces is that they don’t have robust information. What we’ve found is that these organizations do in fact have a tremendous amount of data, it’s just not the typical KYC data. This data includes:

  • Seller rating
  • Number of transactions
  • Social engagement
  • High risk SKUs  
  • Payout information
  • Credits

The key with the above data is that there is a single view. A single view brings together all the user's attributes, ultimately providing a more complete view into the risk that that identity poses to your marketplace.

How NOT to Onboard Fraudulent Customers

Here’s how we help marketplaces prevent fraud:

  1. Identitylink analysis: IdentityMind’s machine learning recalculates a customer’s risk score every time a customer creates an account, logins to their account, conducts a transaction, makes a purchase or sale whether in your store or any of the hundreds of stores we work with.
  2. Digital identity reputation:  eDNA reputation of both buyers and sellers. Would you like to know if someone committed fraud elsewhere? The perils of simply validating customers is that you can have good information and still be a bad actor.
  3. Rules engine: Allow marketplaces to set rules.You know best which countries, transaction values, and products are high-risk ... no one knows your business as well as you do.
  4. Third party services: We integrate with a wide variety of third parties to verify buyers and sellers in a risk-based manner. Here are some of the factors we look at during validation:
    • Name
    • Address
    • Phone Number
    • Tax ID Number
    • Social Security Number
    • IP Address
    • Email Address
    • Government Documents  
    • Device

Marketplaces are important. Not creating one leaves money (and opportunity) on the table. However, the risk they bring is greater than standard e-commerce, and must be managed correctly. Combining the data that marketplaces collect with digital identity helps you better evaluate your marketplace players, and stay ahead of the myriad forms of fraud.

In a follow-on post, we’ll discuss how we’ve seen bad actors use marketplaces for money-laundering, and how this can be stopped.  

 

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