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

Jeremy Gottschalk and Maximilian Pinnaubehalf Market risktalk about the major trends in the marketplace sector and the main fraud issues impacting this business model

Marketplaces are places where buyers and sellers transact for goods, services, and commodities. By definition, marketplaces do not own the inventory sold through their platform, and they typically monetize transactions by earning commissions on each sale. Marketplaces can be categorized as either horizontal or vertical. Horizontal marketplaces sell a variety of goods and services, while vertical marketplaces are more specialized in specific goods or services. The best examples of horizontal marketplaces are Alibaba, Amazon, and Mercado Libre. Verticals include Drizly or Saucy Brew Works for alcohol delivery, and Deliveroo or Just Eat for food delivery.

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The first markets, commonly called bazaars, were recorded as early as 3000 BC, although markets are thought to date back even further. In the 16th century, the bazaar of Tabriz attracted and connected traders from all over the world – today’s Amazon. Today, physical markets still exist (and are making a comeback thanks to farmers markets, food halls, and exchanges), but with our busy lives and readily available mobile technology, markets are mostly digital.

Most markets can also be categorized as either two-sided or three-sided. Bilateral marketplaces trade goods, services, and commodities between two parties – buyers and sellers, most commonly referred to as businesses and consumers (or peers when there are consumers on both sides of the transaction). Bilateral marketplaces can be categorized as follows:

  • Business to business (B2B) – these marketplaces carry out transactions of goods, services and goods between two companies;

  • Business to consumer (B2C) – these carry out transactions of goods, services and goods between a company and a consumer;

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

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

Key Marketplace Industry Trends

Over the last 18 months of the pandemic, marketplaces have exploded in popularity and need, largely due to quarantines, lockdowns and restrictions. Globally, 47% of online sales were made through marketplaces in 2020, totaling nearly $2 trillion. This momentum is expected to continue over the next five years as more businesses adopt marketplaces to increase their online sales. In effect, marketplaces serve to fill the void of physical stores with digitization capability and an inherent ability to deliver higher buying and selling volumes.

These trends are evident around the world. For example, Latin American online marketplace Mercado Libre sold twice as many items per day in the second quarter of 2020 compared to the same period a year earlier. African e-commerce platform Jumia reported a 50% increase in transactions in the first six months of 2020. And China’s share of online retail sales increased from 19.4% to 24.6% between August 2019 and August 2020.

Fraud Challenges

With the explosion of marketplaces around the world, so has the fraud that accompanies any e-commerce. That said, marketplaces present opportunities for somewhat unique, but also the most common types of fraud.

  • 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 malicious user gains access to a legitimate account, often through stolen credentials obtained through phishing, credential hijacking, 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 due to limited intervention during profile creation.

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

  • Order cancellation: Using fake profiles, sellers place orders to be paid in cash on 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 profiles 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 through illegal or illicit means.

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

The total elimination of fraud will probably never be achieved. That said, there are several good practices that can help consumers. First, consumers should only do business with reputable platforms and not allow platforms to store their payment information. This minimizes the risk of payment information being compromised. Consumers should also create separate usernames and passwords for each platform so that if an account is compromised, that information cannot be used on other platforms. Additionally, consumers should be vigilant when reviewing bank and credit card statements in connection with paying their monthly bills.

This editorial was first published in our Cross-Border Payments and E-Commerce Report 2021-2022which taps into the fast-growing cross-border market and provides a comprehensive overview of the trends and developments that are essential in this space, being the ultimate source of information for e-commerce businesses wishing to expand globally.

About Jeremy Gottschalk

Jeremy Gottschalk is an expert in risk management, trust and safety, and legal strategy for market startups. With over 15 years of experience as a lawyer, trader and consultant, Jeremy founded Marketplace Risk as an education, networking and information sharing platform for the market 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 community development and retention for those engaged in risk management, trust and safety, compliance, and legal strategy for the steps.

About market risk

Marketplace Risk is the most comprehensive source of education, networking, and information sharing for the sharing economy and marketplace startup ecosystem to learn about risk management, trust and security, 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 risk of market. com higher level.