Online auction providers grapple with fraud

As con artists lurk in the dark corners of online auction marketplaces scamming buyers, auction sites are having to deal with the persistent specter of fraud, which some believe is seriously harming buyer participation and sales in this very popular and large e-commerce medium.

In January, a coalition of eBay sellers warned that, in their view, fraud is eroding the integrity of that marketplace and challenged eBay to implement concrete measures to address the issue. "The members of this organization feel this is the number one issue that is impacting their business and their ability to grow on the eBay marketplace," said Jonathan Garriss, executive director of the Professional eBay Sellers Alliance (PESA), which groups about 600 large eBay sellers that collectively generate over 70 million eBay transactions and US$1 billion in eBay gross merchandise volume annually.

Meanwhile, the U.S. government has also identified fraud in online auctions as a real problem. On Feb. 1, the U.S. Federal Trade Commission (FTC) in its "National and State Trends in Fraud & Identity Theft" study for 2004, reported that online-auction fraud last year made up 16 percent of all consumer complaints, or about 100,000, second only to identity theft with 39 percent. In the sub-set of Internet-related complaints, online auction fraud topped the list with 48 percent.

Fraud in online auctions can take a variety of forms. Most commonly, buyers may pay for an item but not receive it, or receive an item that doesn't match the description of the one advertised by the seller. However, some buyers also commit fraud by not paying for goods or by lying about not receiving merchandise. "Most of the complaints are basically about someone offering to sell something and then the consumer will send payment and never receive the item," said Deborah Matties, a staff attorney at the FTC.

EBay, by far the largest online auction marketplace, estimates that only around 1 in 10,000 of its transactions are proven fraudulent, but PESA argues that, even if fraud is rare, incidents get wide media coverage and are likely to discourage many potential buyers from participating in online auctions.

Garriss believes the fraud problem is partly to blame for eBay's slower growth in 2004 compared with 2003 in areas such as listings, consolidated net revenue and gross merchandise volume. This slower growth and eBay's missed earnings expectations in 2004's fourth quarter drove eBay's stock price down after its fourth-quarter 2004 financial report. The day after the report, eBay's stock closed at US$83.33, from the previous day's US$103.05 close. Since then it hasn't reached US$90.

"We do think there is room for improvement on making the eBay auction marketplace a safer environment for shoppers," said Garriss, chief executive officer of Gotham City Online, a shoes and accessories seller on eBay. Specifically, PESA would like eBay to be more stringent in screening sellers who are new to the marketplace and want to sell either very expensive merchandise or sell in large volumes. PESA suggests possibly putting restrictions on these buyers until their identity has been thoroughly checked out and they have established a good track record on the marketplace.

But placing limits on sellers who haven't acted improperly is something eBay will not entertain, said Hani Durzy, an eBay spokesman. "While we respect the opinion of all community members, we will not engage in any screening before any wrongdoing has occurred. All the people in (PESA) at one point started off as brand new sellers as well. Had seller screening been in place where sellers would be severely limited if they hadn't sold anything before, everybody in (PESA) would have been affected at one point as well," he said.

Durzy says eBay has implemented many tools and information for buyers and sellers to educate themselves about the best way to conduct themselves during an auction. For example, all eBay buyers and sellers are evaluated by the peers they do business with, so everyone has a ranking and anyone can read their feedback trail. If there are problems, eBay has a section of its Web site called Security Center where members can lodge complaints and bring eBay in as a mediator.

Beau Brendler, director of Consumer Reports WebWatch, the online investigative arm of Consumer Reports, says reputable online auction sites such as eBay are trying to do a lot to prevent and combat fraud, but there is only so much they can do within the reality of an auction environment, where the presiding principle generally is "buyer beware." "Online auctions are perfect venues for fraud in the same ways that offline auctions are," Brendler said.

Some common-sense practices buyers are urged to follow include:

  • Pay only with a credit card or via eBay's PayPal service; avoid sending checks, cash or money orders or wiring money.
  • If purchasing an expensive item, use an escrow service, because they acknowledge receipt of your payment but don't release the funds to the seller until you confirm receiving the item in good condition.
  • If using an escrow service, make sure it is a reputable one.
  • Check the feedback others have left about the seller, a common feature on sites such as eBay.
  • Look for listings with clear details and pictures of the item.
  • If the deal sounds too good to be true, it probably is: walk away.
Still, there is a tipping point at which a critical mass of users can sour on an online auction marketplace, an executive warns. This is why online auction sites have to be as vigilant and aggressive as possible, said Patrick Byrne, chairman and president of e-commerce provider Overstock.com, which launched its online auction business, Overstock.com Auctions, in September and has seen it grow steadily. "Fraud is like a weed. Once you have too much of it in the marketplace, then you don't know who to trust anymore. The whole thing starts getting very shaky," Byrne said.

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