eBay acts to curtail Internet fraud

Online auction firm puts systems in place to protect consumers.

By Ellen Messmer
Network World, 07/24/00

The rising tide of Internet-based fraud is forcing online auction sites to redouble their efforts to protect consumers and the sites' business reputations.

At the eBay auction site, for example, the main problem is sellers who never deliver the goods they advertise for sale on eBay or substitute inferior goods. To combat the growing problem from such "fraudsters," as law enforcement likes to call them, eBay has put in place a slew of new online business practices.

Initially, eBay relied on "community policing," asking its users to report suspected fraud through a Web form. But as eBay has expanded its user base - there are 700,000 registered eBay users in the U.S. alone - fraud has risen, too. So eBay is taking new measures.

"For one thing, the seller on eBay now has to supply eBay with a credit-card number," says Robert Chestnut, eBay's associate general counsel, who spoke on the fraud issue at the recent e-Gov conference. The online auction firm uses the card number to verify the seller's address.

In addition, eBay has decided to insure every transaction on its Web site up to $200, with a $25 deductible to the buyer.

EBay also recently hired a firm called Square Trade to mediate between buyers and sellers when disputes arise. The auction firm subsidizes most of the service, with buyers and sellers paying about $10 each. That way, eBay hopes to differentiate between cases of resolvable disagreements and downright fraud.

As another way to hold fraud in check, eBay purchased a company called BillPoint. BillPoint's service is based on the idea of allowing sellers to process credit card transactions online even though sellers don't have what the credit card industry calls merchant accounts.

BillPoint charges sellers a 3.5% fee for each item sold at auction that the buyer agrees to pay for with a credit card instead of certified check. This way, the buyer is protected under the U.S. credit card laws, which allow for chargeback.

Plus, BillPoint - which worked out the arrangement with Visa and MasterCard - doesn't actually give card numbers to sellers.

Chestnut says eBay works closely with law enforcement in the U.S. and abroad to nab fraudsters.

"We often know who all the victims are in a fraud case," Chestnut notes, pointing out that law enforcement is not always inclined to take on a fraud case that only involves $500.

But eBay, cultivating contacts with law enforcement, is now organized to e-mail the appropriate investigator directly with information submitted by what could be dozens of victims tricked in a fraudster's online scam. Victims can fill out a Web-based complaint form on the eBay site.

In addition, eBay cooperates with manufacturers such as Gucci to identify fake goods or with musicians like Metallica and Bruce Springsteen, whose representatives contact eBay when they spot unauthorized music sales. Software companies, fighting piracy, are also in regular contact with eBay.

The Federal Trade Commission, which has taken a strong stand to combat Internet fraud, has seen a tidal wave of complaints, mostly related to online auctions.

"Last year, we got over 10,000 complaints, mostly where sellers failed to deliver the goods," according to Delores Gardner, an FTC attorney. There are about 1,400 online auction sites.

The FTC has no problem with eBay's BillPoint service. But the FTC is more critical of other card services, such as BidPay, that work by providing a cash advance to a seller based on a buyer's credit card. The cash advance requires the buyer to waive the right to the chargeback whether the buyer is aware of that or not, Gardner notes.

As to whether online auction sites are liable for the misdeeds of sellers (or in more rare instances, buyers that commit fraud by lying about what they received), the FTC gives a qualified "yes."

"As for liability, we handle this on a case-by-case basis," Gardner says. If an online auction site is negligent in policing for fraudsters (for instance, allowing them repeated infractions), then the site could well be held liable.

That could mean shutting down the site and possibly holding its operators responsible for monetary damages.