Online auction providers grapple with fraud

IDG News Service - 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 Inc. 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 No. 1 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 $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% of all consumer complaints, or about 100,000, second only to identity theft with 39%. In the subset of Internet-related complaints, online auction fraud topped the list with 48%.

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 proved 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 $83.33, from the previous day's $103.05 close. Since