Collusion fraud in marketplaces

What is collusion fraud and why is it so prevalent in marketplace businesses?



As the use of online marketplaces continues to rise, so does the risk of collusion fraud, a significant challenge that demands attention from businesses in this space.

Article at a glance

  • What is collusion fraud and why is it prevalent in marketplace businesses?
  • How can collusion fraud be prevented in marketplaces?
  • What measures should be taken at the transaction and account sign-up levels to detect and prevent collusion fraud?

Collusion fraud was once a team effort event that occurred in brick-and-mortar stores; someone buys an item with a stolen credit card and a second person returns the item in exchange for a store gift card. This small-time crime has since evolved into a major online industry with a primary target: ecommerce marketplace businesses.

Let’s explore what marketplaces are, how they’re impacted by fraud and what can be done to stop collusion fraud in its tracks.

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What are marketplace businesses?

Marketplace businesses are two-sided, and facilitate the exchange of goods and/or services between the sellers and buyers on their site. They then charge a small fee on each transaction processed; this is generally their main source of revenue. Therefore, in order to grow their business, they need to increase the number of transactions they process, which means attracting new buyers and sellers to the platform.

Collusion fraud in marketplaces

Because of this reliance on both buyers and sellers, marketplace businesses are the perfect setting for online collusion fraud. Collusion fraud happens when two entities, in this case, the buyer and the seller, conspire to launder and/or steal money.

In the case of money laundering, a fraudulent seller posts a fake item or service on the marketplace’s site which the fraudulent buyer can then order using illegally obtained or otherwise ‘unclean’ funds. Once the transaction is processed, the seller cashes out their funds, which are then ‘cleaned’ and usable. Marketplaces must address this type of fraud because it can damage trust and their reputation.

Ultimately, the type of fraud that most directly impacts the marketplace’s bottom line is theft. Again, this starts with a fraudulent seller posting a fake item or service on the site. The fraudulent buyer then uses a stolen credit card to pay for the item or service. Assuming the marketplace doesn’t catch this before the transaction is processed, the fraudulent seller will cash out those funds before they are marked as stolen. The marketplace business is then responsible not just for paying back the funds to the credit card’s rightful owner, but also are charged a fee by the payment processor. This type of fraud can be devastating to a marketplace since it directly impacts revenue and has reputational costs.

Collusion fraud prevention

How to prevent collusion fraud

There are two places where collusion fraud can be prevented: at the transaction level and/or at the account sign-up level. Ideally, there are measures taken at both of these points in the workflow to prevent as much fraud as possible.

Our Identity Graph and Identity Network give marketplaces more information about the identities of people doing business with each other on their site. The additional information provided with these tools can be leveraged to make decisions at any point in the workflow to help prevent collusion fraud.

In summary, the rise of collusion fraud poses significant challenges for marketplace businesses. Fraudsters can commit collusion fraud at scale to launder money or outright steal from marketplaces, with devastating impact – both financially, and reputational. Preventing collusion fraud is critical to the success of any marketplace business. Leveraging tools like our Identity Graph and Identity Network, marketplaces can gain valuable insights into user identities, enabling proactive fraud detection and prevention. By taking action to prevent and stop collusion fraud, marketplace businesses can safeguard their financial well-being and reputation, fostering a secure and thriving ecosystem for both buyers and sellers.

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