Reducing Losses from Reseller Fraud: A Merchants Perspective

Online criminals have gone through a dramatic process improvement that’s hitting online merchants and direct marketers hard with a new level of reseller fraud and affiliate fraud.

Online merchants offering affiliate programs, reseller programs and multi-payment trials are undergoing significant fraud increases resulting in higher charge backs, penalties and losses related to shipped-goods. Reseller schemes are as simple as ever to make a fast buck AND often times go unnoticed for weeks leaving a merchant, marketer and analyst pondering where the money is going.

The scheme is not complex and requires no freight forwarding delivery, middleman or work at home schemes:

1. Fraudster sets up a simple online storefront or marketplace on places such as eBay or Craigslist.

2. The innocent shopper does a search and finds a new product priced below retail.

3. The innocent buyer makes the purchase with legitimate credit or debit account.

4. Innocent buyer’s funds go into the fraudsters (merchant) account. This can easily be a PayPal account. The innocent buyer views everything business as usual.

5. The fraudster usually will access the merchant website through a series of compromised computers hiding their true identity, IP and geolocation. These infected computers can be in any household, café, library or other type ‘lab’.

6. The fraudster then actually goes to the REAL merchant’s website making a purchase following one or several of the following scenarios, while entering the REAL buyer’s name and ‘ship-to’ address:

a. Uses a pre-paid gift card for a trial version and agrees to multi-payment, but has no intent to follow up on payments and no future available funds

b. Uses a stolen credit card that has yet to be reported as compromised

c. In some cases, the fraudster is registered as an affiliate and collect commissions

7. The REAL merchant believes the transaction is legitimate shipping the product to the innocent buyer. The buyer receive the product, is happy and clueless as to what occurred.

8. Merchant pays affiliate commission (if applicable)

9. Merchant later suffers the following losses

a. Chargeback + associated fees

b. Uncollectable accounts receivable for initial payment and follow-up payments

c. Lost affiliate commissions

d. Losses related to shipped product

The above scenario is one of many ways the sophisticated and well connected network of criminals defraud online merchants through gift card, affiliate fraud and reseller schemes. It doesn’t require many transactions when stealing high-dollar merchandise to make a good living for a fraudster or for a merchant to lose their margins.

If you are a direct marketer or online merchant trying to combat these types of fraudulent schemes, please contact Jeremy Drzal +1.512.234.3036 to discuss solutions to take control and reduce your losses today.