The Dangers of the Digital Market — And How to Guard Against Online Fraud

The e-commerce boom continues to generate robust revenue streams for retailers, but it has also unleashed a growing threat for brands: online fraud.

Companies have long battled footwear’s dark underbelly, facing issues ranging from counterfeits to minimum advertised price (MAP) violations and retail shrinkage to illicit chargebacks. But the proliferation of online marketplaces can leave brands more vulnerable than before. There are a number of reasons — one being that scammers prefer digital transactions because they can bypass chip-and-pin technology and they don’t have to show an actual credit card.

“In the past, people could clone a card just by walking near someone,” said Suresh Dakshina, president and co-founder of the fraud prevention service Chargeback Gurus. “But with the new chip cards, the cloning of the physical card has become very difficult; the risk has instead shifted online.”

Marketplace Watch

Monitoring unauthorized sellers is another digital challenge for brands. Most are now selling through multiple retail channels, both online and offline. So if products are being sold — with deep discounts — on third-party sites such as Amazon, Alibaba or Walmart, a company might not even know.

G2, a merchant risk intelligence business, expanded into brand protection two years ago. The large marketplaces were not providing proactive security measures against unauthorized sellers; all sales are positive for the marketplace as it takes revenue from every transaction and third-party seller, whether legitimate or not. But even just one or two unauthorized sellers can damage brand integrity, sale prices and bottom lines.

MODEL RELEASED A warehouse worker trying to climb a rack of products in a distribution warehouse.VARIOUS
It has never been easier to open a storefront online; more than 1 million sellers have joined Amazon in 2019.
CREDIT: Mint Images/Shutterstock

“If people want to buy your brand, you want to make it easy for them,” said Bill Snowden, VP of business development at G2. “But the easier you make it for them to buy your authentic product, the easier you make it for people to sell the unauthentic product, too.”

By using services like G2 and Trackstreet, a brand protection and data platform, labels can scan all the major marketplaces for fraudulent retailers and then take action against them. Catching the unauthorized sellers also provides the opportunity to convert them into a licensed partner, if a brand wishes, thus widening its retail network.

Whether through an internal monitoring team or external solution, experts said it is important that brands routinely check for unauthorized sellers. While an initial purge may produce sizeable results, the boundless nature of e-commerce means it’s increasingly easy for new storefronts to be opened by repeat offenders.

“The bad guys are pretty smart,” said Snowden. “They throw things up every once in a while and if nobody pings them back and says, ‘Hey, I’m watching you,’ then they come back in full force again.”

On the MAP

Still, brands can face issues with pricing at their legitimate retail partners, if their distribution agreement does not comprehensively cover online marketplaces. MAP violations are dangerous as they can result in a race to the bottom; retailers have to stay competitive, so one storefront selling at a discounted price can have a knock-on effect. Fortunately, this is fairly easy to resolve with a rigorous MAP policy.

Fundamentally, a MAP policy sets the terms for the lowest price at which a retail partner can advertise a brand’s product. According to Trackstreet, many companies are operating either with insubstantial agreements or with outdated ones that don’t address e-commerce channels. But by renegotiating its distribution agreement with retail partners, a brand can defend its future product sales prices — and the retailer can benefit, too.

“A lot of retailers are asking for [MAP policies] because they want to be able to showcase the products in a proud and margin-enhanced way,” said Ryan Erickson, VP of sales and brand protection at Trackstreet. “They have the same issues with a customer coming into a showroom and trying on product, only to use their phones to order it from a cheaper, unauthorized seller.”

As online shopping becomes easier, so does fraud because most companies lack the bandwidth to verify each transaction.
CREDIT: Chargeback Gurus

Money Back Guarantee?

Once a brand has safeguarded its retail partners, attention also needs to be paid to the transaction process. Chargebacks occur when a customer queries a purchase and requests a refund. Since the burden of proof lies with the merchant, it’s very easy for shoppers to claim their money back. In legitimate cases, this means a smooth customer experience and an increased likelihood that they will return to that retailer.

However, it can also put merchants in a vulnerable position for fraudulent claims. Luxury brands and limited-edition items are particularly at risk for this. In this scenario, not only will a customer request the refund, but frequently they will then post the item for resale with the goal of making a profit.

Reducing so-called friendly fraud can be done by inserting more rigorous security checks during purchase, such as verifying CVV codes or addresses. But research shows that many customers abandon their carts if payment isn’t successfully processed the first time. This has led some merchants to reduce the safeguards and resign themselves to the fact that some fraud will occur.

“Most of these companies, even now, are writing off the chargebacks and disputes as a cost of doing business,” said Dakshina. “They aren’t realizing that there is an opportunity to recover this money. But when they factor this in the cost of business, the fraudsters are going to attack them over and over.”

Watch the video below to see how digitally-native shoe brand Allbirds is succeeding:

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