Reseller Fraud: What Is It and How to Protect Your Business

The surge in online shopping has undeniably brought convenience and variety to our fingertips. However, this ease of access is not without its pitfalls. As we navigate through endless online storefronts and marketplaces, a darker underbelly of the digital market emerges, one that preys on unsuspecting consumers: reseller fraud.

According to the Federal Trade Commission, consumers reported losing nearly $8.8 billion to fraud in 2022, a significant increase of more than 30% over the previous year. The most commonly reported frauds were imposter and online shopping scams, highlighting the growing concern in online retail​​. 2023 marked a distinctive year as more money was reported lost to fraud originating on social media than any other method of contact. Of all the social media scams, 44% can be attributed to fake storefronts or reseller fraud. Most reported scams started with an ad on Facebook or Instagram to lure unsuspecting shoppers and ended with undelivered goods, with no-show clothing and electronics topping the list.

Reseller fraud, also known as reseller abuse, is the unauthorized sale of products or services through online marketplaces. Reseller fraud happens when a reseller distributes a product without having an official relationship or agreement with the original merchant. Such resellers often do not adhere to the original brand’s pricing, warranty, or service standards, leading to issues with product quality and customer satisfaction.

Gray Market Selling

Gray market selling refers to selling authentic products through channels that the original manufacturer does not authorize. These products are sold outside the brand’s official distribution networks, often at lower prices. Not all gray market selling is fraudulent, but it can be associated with risks for both buyers and sellers, including potential legal consequences. In some cases, illegal counterfeit products are passed off as genuine and sold on the gray market.

Product Diversion

Similar to gray market selling, product diversion consists of merchandise sold through unauthorized channels. The difference is that diverted products are designed by the brand for specific markets or promotional use, but are intercepted for sale into unauthorized regions or for unintended audiences. Fraudulent resellers may take advantage of regions where a merchant’s items aren’t sold by listing diverted products on their fake storefront. This approach disrupts the brand’s intended marketing and distribution strategies. It also damages the customer experience because the fake store fails to provide the original brand’s level of service.

Misrepresenting Affiliation

Resellers may falsely claim to be authorized distributors or partners of a well-known brand to gain credibility, customer trust, and a competitive edge. 

Retail Scalping

The practice of buying products, typically those in high demand or limited supply, and reselling them at significantly higher prices. Scalpers often use automated tools or bots to purchase large quantities of coveted items before they sell out on regular retail channels. This activity capitalizes on the scarcity and high demand of these items, often leading to frustration among regular consumers who are unable to purchase the products at their original retail prices.

Retail Arbitrage

Similar to retail scalping, retail arbitrage involves purchasing products from retail stores or online marketplaces at lower prices and reselling them at higher prices. This could involve purchasing clearance items from a store like Walmart or Target and then selling them on another storefront or third-party marketplace like Amazon or Etsy. What makes arbitrage different from scalping is that this method capitalizes on price discrepancies between different markets or platforms, often leveraging clearance sales, limited-time offers, or geographical price variances. It does not necessarily involve limited supply items but rather focuses on finding deals or pricing inefficiencies across different retail platforms. While not illegal or fraudulent, it is important to be aware of and may leave shoppers feeling tricked after learning they paid an unnecessarily higher price.

Selling Counterfeit Goods

Reseller fraud can involve the sale of counterfeit or knock-off products that are falsely marketed as authentic. Counterfeit goods are typically of lower quality and can damage the reputation of the original brand.

The impact of reseller fraud is far-reaching. It leads to lost revenue for legitimate businesses, damage to brand reputation, and legal complications. Shoppers end up with substandard products, lack proper warranty support and become scam victims. Additionally, manufacturers and brands suffer as the perceived value of their products becomes distorted, and their market analytics and demand forecasting become skewed due to the artificial demand created by resellers. Ultimately, legitimate merchants face the following consequences from unauthorized resellers:

• Damage to the brand: Customers receiving subpar products and services while believing they are dealing with an authentic merchant are more inclined to leave negative reviews. Negative reviews influence other shoppers, as 98% of consumers report that reviews are a deciding factor in their purchase decisions.
• Poor customer experience and service: Scammed shoppers aren’t dealing with the high level of service you’ve curated as part of the customer experience. Fraudulent resellers don’t care about quality, and their lack of service will have an unfortunate, lasting impact on customers who intended to shop with the original merchant. One in three shoppers will not return to a shop after just one negative experience.
• Inaccurate inventory due to shrinkage: A 2023 report found retail shrinkage slightly increased compared to the previous year, representing $112.1 billion in losses. The primary driver of shrink is cited as retail crime, including reseller and organized retail fraud.
• Market disruption: Reseller fraud can disrupt the intended market dynamics. For example, products intended for one market or demographic might be diverted elsewhere, affecting the brand’s marketing and distribution strategies.

Reseller fraud also negatively impacts shoppers:

• Shoppers get defrauded by the fraudulent reseller. Over 38% of all scams worldwide can be attributed to online purchases.
• Warranty and support issues: Products bought through unauthorized channels may not be eligible for manufacturer warranties or support, potentially leaving consumers with no recourse in case of defects or issues.
• Inflated prices: Resellers sometimes mark up the prices significantly, making products more expensive for genuine customers.
• Risk of counterfeit products: Resellers often list counterfeit or substandard products, which can be harmful or disappointing for consumers who are expecting an authentic brand experience.
• Shortages/lack of inventory: Resellers disrupt the inventory of authentic brands, leaving genuine shoppers with a subpar experience when the merchandise they’re shopping for isn’t available.

Historically, reseller fraud has evolved with the growth of the Internet and eCommerce platforms. Initially, it was a relatively minor issue, but with the rise of online shopping and the proliferation of limited-edition or “hype” products, particularly in the fashion and consumer electronics sectors, it has become more prevalent. 

The rise of social media and online marketplaces has made it easier for unauthorized resellers to reach a wide audience, exacerbating this type of fraud. Trends indicate an increase in sophisticated methods employed by resellers, including the use of advanced bots that can bypass security measures implemented by online retailers. Reseller fraud has become a global issue, affecting major economies and emerging markets.

Adding to the allure of resellers, economic challenges are attracting more shoppers who are looking for discounts or deals to save money and alleviate financial pressures. Unfortunately, fraudulent resellers offer “too good to be true” deals that often capture unsuspecting consumers who end up victims to reseller scams — ultimately causing greater financial stress.

Expand Into Popular Reseller Markets

Identify geographical areas or market segments where reselling activities are particularly profitable and consider establishing a direct selling presence there. By doing so, businesses can effectively bypass resellers, reducing the risk and impact of reseller fraud. Direct selling in these lucrative markets allows for greater control over the distribution and pricing of products and also enhances the ability to monitor and manage inventory effectively. This strategy can lead to more direct customer engagement, fostering brand loyalty and reducing the likelihood of customers turning to the gray market. 

Additionally, by establishing a direct selling presence in these markets, merchants can better understand local consumer behavior and market dynamics, which is invaluable for tailoring marketing strategies and improving overall competitiveness. This proactive approach of directly tapping into high-demand markets is crucial in safeguarding against the pitfalls of reseller fraud while simultaneously capitalizing on market opportunities.

Software That Uses Behavioral Biometrics and Machine Learning Models

Online retailers must seriously consider integrating the latest technology that is already highly effective against reseller fraud. A solution like NoFraud can help combat reseller fraud with its advanced algorithms that utilize artificial intelligence (AI) and machine learning. This technology enables the automatic, real-time analysis of digital footprints, such as device setups and behavioral biometrics, effectively identifying and eliminating fraudsters and dishonest customers. The core of reseller fraud typically involves bots mimicking fake user identities, either through entirely fabricated identities or a combination of real and fake information (synthetic fraud), often involving multiple email accounts. NoFraud’s machine learning algorithms help merchants take a robust “Know Your Users” (KYU) approach to weed through bulk purchases from fake accounts to reduce reseller fraud significantly.

Enable Velocity Checks

Use fraud prevention software equipped with velocity checks to monitor and analyze the frequency and patterns of transactions over a specific period. This technology identifies unusual spikes in activity that deviate from normal purchasing behaviors, such as a high volume of purchases made in a short time frame, which is a common tactic used by resellers to acquire goods in bulk with the intention of selling them at a markup. By setting thresholds for acceptable transaction velocities, the software can automatically flag or block transactions that exceed these limits, thereby preventing resellers from exploiting promotional offers or purchasing large quantities of limited-stock items. This not only helps in safeguarding inventory but also ensures that genuine customers have fair access to products, maintaining the integrity of the sales process and protecting businesses from potential revenue loss and reputational damage caused by reseller activities.

The ever-evolving nature of fraud necessitates that risk management professionals stay updated with adaptive anti-fraud solutions. Effective fraud prevention tools are crucial for maintaining the integrity of an eCommerce business model, which centers on providing a positive customer experience. This approach is feasible and critical to preserving a company’s esteemed online reputation. Neglecting to employ a proficient fraud detection system can be a costly oversight, risking the company’s revenue and reputation. Thus, integrating these advanced technologies is essential for safeguarding against reseller fraud and maintaining a secure online business environment.