RST Software
Editorial Team
Magdalena Jackiewicz
Reviewed by a tech expert

Marketplace fraud detection and prevention best practices

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The digital marketplace is a double-edged sword. On one hand, it brings the world to our fingertips, offering unmatched convenience and a sea of choices. On the other hand, it opens a Pandora's box of risks, with fraudsters lurking in every corner, ready to exploit these platforms for illegal gains. They are striking everywhere from sign-up to checkout.

They masquerade as legitimate buyers and sellers to scam platform users through various clever deception tactics to ultimately steal money or goods. They recognize marketplaces and ecommerce platforms offer a trove of targets, from sellers advertising hot products to enthusiastic buyers placing too-good-to-be-true orders. Fortunately, knowledge neutralizes fear.

This comprehensive guide arms ecommerce operators with insights into common ecommerce fraud scenarios as well as actionable techniques to fortify defenses.

What is marketplace fraud?

Marketplace fraud refers to intentional deception on peer-to-peer ecommerce platforms to illicitly obtain money or goods. Attackers use several tactics to:

  • Impersonate buyers and sellers – fraudsters create fake profiles to pose as legitimate market participants. By appearing trustworthy, they can deceive users into fraudulent transactions,
  • Falsify identities and listings – this involves creating counterfeit identities or posting fraudulent product listings to lure in victims. It is a tactic aimed at deceiving users about the authenticity of the seller or the product,
  • Manipulate reviews – dishonest users often generate fake reviews to boost the credibility of their fake profiles or listings, misleading potential buyers about the quality or legitimacy of the product or service,
  • Rig transactions – this can include tactics like price manipulation, bid rigging, or other forms of transaction tampering to defraud buyers or sellers.
  • And more – the methods used are continually evolving, with fraudsters constantly finding new ways to exploit marketplace systems and users.

Rather than outright hacking site infrastructure, fraudsters abuse tools meant to facilitate exchange between buyers and sellers using identities and interactions camouflaged as normal transactions. This way, over $41 billion was lost to ecommerce fraud in 2022. Worse still, $48 billion is expected to be lost in 2023.

Types of marketplace fraud

Though endless creative variants exist, all ecommerce fraud cases ultimately fall into three core buckets depending on the deceiving party: seller-side, buyer-side or collaborative illicit coordination between both buyer and seller accounts.

Seller-side marketplace fraud

Fraudsters posing as merchant sellers bait buyers into fraudulent deals through various common schemes. This form of deception leverages the trust that buyers place in the marketplace's vetting process, exploiting it for illicit gains.

Fake profiles

Scammers fabricate entirely fictitious seller accounts, crafting legitimacy facades via false metrics like ratings and reviews. Without ever intending product delivery, they simply abscond with buyer payments into thin air.

This tactic often involves creating a fake online persona complete with a fabricated history of transactions, designed to deceive buyers into trusting the legitimacy of the seller.

Listing fraud

Similar to fake profiles, posting sham listings for non-existent products or services focuses simply on eliciting buyer payments rather than intent to furnish actual goods. Victimized shoppers receive no items at all from these fraudulent solicitations. These listings often appear genuine, featuring detailed product descriptions and images stolen from legitimate sources, making it challenging for buyers to discern their authenticity.

False advertising

While technically offering a bona fide product, devious merchants knowingly misrepresent items to trick buyers through tactics like advertising used, defective, or inferior quality products as new. This involves deliberately misleading descriptions or images that do not accurately represent the product's condition, leading buyers to believe they are purchasing something of higher quality than what is actually being sold.

Buyer/seller closed-loop account fraud

Highly organized scam rings engineer entire networks of fake, interchangeable buyer/seller accounts to fabricate credibility veneers. By mutually trading items and positive ratings between this cluster of controlled accounts, collective trust scores artificially balloon to appear legitimate for unsuspecting platform participants.

With this manufactured credibility allowing them to masquerade as valid merchants, they ultimately market and sell utterly worthless junk to actual human buyers. The study highlights that currently, 9% of all identity fraud cases are attributed to the widespread creation of counterfeit identities, a phenomenon commonly referred to as identity pharming.

Promotion schemes

Fraud merchants ensnare victims by promoting deals seemingly too lucrative to pass up thanks to absurd price cuts or limited-time discounts on hot items. However, once payments clear, scammers never deliver promised goods.

An intriguing aspect of this fraud type is its seasonal prevalence, with a significant uptick observed during holiday seasons, exploiting the high volume of shoppers looking for deals.

Buyer-side marketplace fraud

Swindlers exploit buyer privileges, using compromised or entirely fake accounts to unjustly retain goods, causing significant losses and trust issues in ecommerce platforms. The following are the most prevalent types of buyer-side ecommerce frauds.

Fake accounts

Criminals open entirely fraudulent buyer accounts for illicit purchases enabled via compromised payment data or to write deceptive glowing testimonials that enhance other co-conspirator scam profile legitimacy. These accounts are often used in conjunction with other fraudulent activities, creating a web of deceit that can be difficult to unravel.

Duplicate accounts

Individual fraudsters multiply criminal options by creating multiple accounts associated with the same buyer. Each additional identity re-qualifies for new user promotions and discounts by impersonating a first-time patron. This practice not only defrauds the marketplace but also unfairly disadvantages legitimate buyers who miss out on these offers.

Transaction fraud

Unethical buyers execute a bait-and-switch by initially completing the expected ecommerce dance of good-faith agreeing to terms, paying, and receiving goods as promised from sellers. However, they later abuse buyer protection policies that allow transaction disputes by bald-faced lying to platform mediators through false claims of the sale failing authorization or delivery in order to effectively steal goods already received. This undermines the integrity of buyer protection policies and can lead to increased costs for sellers.

Chargeback fraud

Even when buyers receive exactly what the seller shipped and charged for per specifications at the time of purchase, filing friendly fraud chargebacks allows them months later to potentially retain goods while forcing double repayment from the merchant. This form of fraud is particularly damaging as it not only impacts the seller's revenue but also their reputation and standing with payment processors.

Both sides

In sophisticated marketplace fraud strategies, buyers and sellers collaborate in carefully planned schemes, utilizing a range of tactics. By doing so, they manipulate marketplace mechanisms rather than depending solely on opportunities offered by individual accounts.

Onboarding inaccuracies

Submitting false identification or business operating permits when initially registering for marketplace purchasing or selling privileges allows downstream account-based fraud. This can lead to a host of fraudulent activities, as the marketplace's trust and verification systems are compromised from the outset.

Account takeover (ATO) fraud

Hijacking already active and established accounts offers immense payout potential. Compromised seller accounts grant inventory and merchant account access to directly list fake goods and drain revenue. Similarly, seized buyer profiles present opportunities to buy goods with stolen payment sources. The impact of ATO fraud is significant, as it not only leads to financial loss but also damages the reputation of the hijacked accounts. 

Account-as-a-product fraud

Once seizing control of legitimate marketplace accounts, these valuable criminally-controlled assets get illegally sold outright on underground dark web outlets to underpin broader black market commerce schemes globally. This form of fraud exemplifies the advanced extent criminals will reach to take advantage of online marketplaces, underscoring the necessity for stringent security protocols.

Fraud-as-a-service (FaaS)

Another form of advanced exploitation of online marketplaces is Fraud-as-a-Service (FaaS). In this model, perpetrators provide their fraudulent tools or services for rent to clients operating in the dark web. These entities function similarly to legitimate businesses, constantly honing their techniques and tools to boost their success and operational efficiency. Their offerings might include access to networks of compromised computers (botnets), automated fraud software, or specialized hacking services tailored to specific targets.

What is triangulation fraud?

Triangulation fraud is a deceptive technique that disrupts the normal delivery process in online transactions. This fraud involves:

  1. Creating new buyer accounts. Fraudsters set up fake accounts on ecommerce platforms.
  2. False shipping addresses. They order goods using these accounts but provide unrelated or random addresses, not their own.
  3. Parcel interception. The key objective is to intercept these parcels, severing the tracking link between the real buyer and seller.

This method allows fraudsters to obtain goods anonymously, complicating traceability and accountability. It often results in losses for both the legitimate buyer, who may not receive their order, and the seller, who faces challenges in proving order fulfillment.

How to identify fraud on your online marketplace?

Despite endless permutations of marketplace deception, several consistent clues can indicate underlying fraud. Vigilant monitoring of these indicators is key to early detection and prevention of fraudulent activities.

Monitor low value orders to catch stolen cards data

Since fraudsters initially test compromised payment data validity by risking small charges less likely to trigger alerts, unusually elevated levels of low-ticket purchases may reflect presence of stolen credentials. This tactic, often a precursor to larger fraudulent transactions, relies on the assumption that minor charges will go unnoticed, thereby providing an effective early warning sign for vigilant marketplace operators.

Monitor users using different credit cards for each purchase

Similar to testing activity, constantly rotating payment cards across purchases likely indicates piecing together fragments of card data leaked from various security breaches. This pattern of behavior, while seeming innocuous on the surface, can be a clear red flag of fraudulent activity, revealing a systematic approach to evade detection by using multiple compromised cards.

Analyze repeated declined transactions

A high volume of declines concentrated around newly opened accounts points to the creation of fraudulent identities associated with invalid payment data. This trend suggests systematic attempts to validate stolen or fabricated card details, often serving as a clear indicator of nefarious intent within the marketplace.

Pick-up unusual IP locations that mismatch order shipping addresses

GeoIP tracking cross-referencing order shipping addresses with user account IP locations unmasks location cloaking schemes fraudsters use to disguise physical whereabouts. Does the delivery address reasonably align with the buyer’s profile area? This discrepancy is often a telltale sign of fraudulent activity, especially when combined with other suspicious account behaviors.

Monitor different billing and shipping addresses 

Providing accounts under their control for product shipment while funding purchases via entirely different sources reduces money flow tracing. This separation of billing and shipping information can be a strategic maneuver by fraudsters to complicate the tracking of illicit transactions.

Monitor PO box shipping addresses

Anonymized receiving environments like PO boxes demonstrate classic tricks to enable parcel delivery with minimal recipient visibility. Tracking requests headed to obstructed locales may warrant further inspection. The use of such addresses is a common tactic to evade identification and capture by law enforcement and ecommerce fraud prevention teams.

Review user reviews and feedback

Interconnected fake accounts exhibit suspiciously similar behaviors like concentrated torrents of positive ratings indicative of synthetic legitimacy campaigns. This pattern, often orchestrated to build unwarranted trust and credibility, can be a crucial indicator of coordinated fraudulent activities on the platform.

How to prevent fraud on your online marketplace?

Once recognizing a threat's face, marketplaces can take decisive action to perform effective e-commerce fraud detection, ensuring both the security of transactions and the trust of their user base. This multi-faceted approach involves a combination of technology, education, and procedural diligence. How to prevent ecommerce fraud? We shall find out.

Implement customer education programs

Arming the entire user community with intelligence on prevailing fraud tactics makes them active sentinels. Public updates empower all marketplace participants to help pinpoint suspicious activities. It can be done through:

  • FAQs  – Frequently Asked Questions sections can address common concerns and educate users on how to identify and avoid typical fraud schemes,
  • Notifications  – timely alerts and updates about recent fraud trends or new security measures keep users informed and vigilant,
  • Guidance articles  – in-depth articles provide detailed insights into fraud prevention ecommerce strategies, helping users understand the nuances of marketplace security.

By fostering a culture of awareness, customers can become an invaluable first line of defense against fraud, often identifying and reporting anomalies that automated systems might miss.

Invest into employee training and awareness

Ongoing education across fraud analyst squads ensures comprehension of breaking threats and adversary innovations essential for resilience. Annual conferences, regular seminars from external experts, and testing programs focused on emergent scenarios help frontline fraud response teams maintain vigilance. Equipping employees with the latest knowledge and tools not only enhances their ability to detect fraud but also instills a proactive mindset towards marketplace security.

Enhance precision of your risk scoring models

Transaction data sits at the core of combating fraud. Regularly enhance risk algorithms by feeding insights from dispute filings, reviewing cross-checks with histories, and integrating third-party threat intelligence feeds to sharpen fraud detection and reduce false positives. This continuous refinement of risk models ensures that they evolve in tandem with the ever-changing tactics of fraudsters, thereby maintaining their effectiveness.

Verify users’ identity 3rd-party KYC onboarding platforms

Since faking identities underpins much market fraud, integrating robust Know Your Customer (KYC) checks during signup via leading platforms specializing in authentication techniques curtails fraudulent accounts. To prevent ecommerce fraud, use:

  • Document validation  – this involves checking the authenticity of identification documents provided by users. It ensures that the documents are genuine and have not been tampered with, effectively reducing the likelihood of identity fraud,
  • Liveness confirmation  – this process verifies that the individual creating an account or conducting a transaction is physically present. It typically involves real-time actions or responses during the verification process, which helps prevent fraudsters from using stolen or fake identities,
  • Biometrics verification  – utilizing unique biological characteristics such as fingerprints, facial recognition, or iris scans for user verification. This is one of the most effective ways to authenticate users, as biometric data is extremely difficult to replicate or forge.

This layer of identity verification serves as a crucial barrier, deterring fraudsters and protecting genuine users.

Use link analysis

Illuminating obscured connections in crime networks helps preempt attacks. Analyzing potential relationships across shipping addresses used, associated payment sources, review threads, and other relevant linkages unmasks stealthily connected accounts and behaviors indicating systematically coordinated efforts. This method of analysis can reveal the complex networks that fraudsters use, allowing for more effective disruption of their activities and ecommerce fraud protection.

Establishing a robust fraud reporting system

Convert community visibility into actionable threat intelligence by creating streamlined crowdsourcing channels for shoppers to flag questionable marketplace actions for follow-up inspection. This system not only engages the community and inform about ecommerce fraud prevention best practices but also provides valuable data that can be used to refine detection algorithms and strategies.

Use secure payment processing gateways

Adding intermediate payment scrutiny by funneling all commerce transactions exclusively through trusted PCI-compliant processors with fraud threat detection protocols purpose-built for order screening provides critical secondary validation gating. This step acts as a vital checkpoint, catching fraudulent transactions that might have bypassed earlier filters.

Prepare a clear fraud response plan

Written plans institutionalize effective protocols for incident investigation, suspicious account restrictions, jurisdictional legislative escalations, and law enforcement agency referrals required to disarm threats. A well-structured response plan ensures a coordinated and efficient approach to managing and mitigating incidents, reducing the impact of fraud on the marketplace.

Develop custom fraud detection and prevention algorithms with RST Software

The ever-adapting face of fraud schemes ensures marketplace ecommerce platforms face constant pressures from adversaries probing defenses for gaps. Maintaining vigilance against threat evolution coupled with extensive preparation offers the best practices for executives to partner with users to make their platforms unfavorable environments for hackers. 

Now armed with extensive insights into the enemy’s agenda, leaders can take action before their sectors become the next playgrounds for attacks. The above recommendations synthesized from aggregation of leading fraud research provide actionable, evidence-based techniques to safeguard online marketplaces. Use these comprehensive fraud-fighting methods. RST Software is here to help if you need to develop custom fraud detection and prevention algorithms for your marketplace.

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