Canada's Shopify battles the scammers behind fake web stores

Every day, startups all over the world set up websites in the hopes of becoming a runaway success like Casper or Warby Parker. Many of them turn to Shopify, a Canadian company that makes it a snap to open a web store. Shopify charges a mere $30 a month to maintain the site and can help with shipping, payments, even inventory. More than 600,000 merchants have signed on, and most have no complaints.

Then there are people like Mike Lindell. He runs My Pillow, which makes pillows, sheets and mattresses. Earlier this year, Lindell noticed that an unidentified scammer had used Shopify tools to set up a near facsimile of mypillow.com called mypillowstore.com, which claimed to sell My Pillow products. In April, My Pillow sued Shopify alleging it supported trademark infringement. Shopify took down the site, but My Pillow is demanding damages plus any money Shopify made running the bogus store.

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"They've never contacted us to tell us how they're going to stop this from happening in the future," Lindell says. "Millions of dollars could go into fake sites like this before they take them down. You could destroy a company."

Shopify declined to comment on the suit itself, but says it has a team focused on identifying and taking down sites like the fake pillow store. Still, the fake site problem could sully the reputation of a fast-growing company that has wowed Wall Street since going public three years ago and is on the cusp of generating $1 billion in annual sales.

Shopify's fight against fake users echoes similar battles being waged at Facebook, Twitter and YouTube. And like those companies, Shopify is contending with the same conundrum: Is a so-called platform company responsible for the behavior of those who use it? Shopify must police users without limiting its ability to make fistfuls of cash from them.

"We can ensure that there are fewer bad actors on our platform every single day," says Shopify Chief Operating Officer Harley Finkelstein. "Do some sneak in from time to time? It could happen, just like it could happen on any platform."

My Pillow is one of many companies battling fake web stores built with Shopify software. The Pokemon Company International subpoenaed Shopify in 2016 after a merchant offered Pokemon-branded products without permission. This year alone, at least four lawsuits have targeted Shopify-built sites for alleged trademark or copyright infringement, including one filed by RV retailer Camping World Holdings Inc. Another Shopify-built site sold fake Bose headphones.

Fraudsters are attracted to Shopify's ubiquity and ease of use. Fourteen years after its founding, the company dominates its niche. In the last year, Shopify's 600,000 customers have done about $32.6 billion of business; BigCommerce, a rival, has attracted 60,000 users who generated about $5 billion in business.

It's dead simple for a criminal to set up a fake storefront using Shopify's software. Signing up, designing a store and uploading products takes minutes. Payments and order processing are all handled by Shopify. Algorithms hunt for suspicious behavior, but even if a store gets shut down someone can always open another with a new email address. The fake My Pillow site kept reappearing earlier this year, forcing Lindell's company to hound Shopify multiple times to keep it offline.

"You get up and running within minutes, selling t-shirts, teabags, etcetera. The bad part is, so can a fraudster," says Don Bush, vice president of marketing at Kount, which sells software that helps prevent e-commerce fraud. "When they get caught, they drop the site and set up another one. It's incumbent on the platform to make sure the merchants they bring onto their platform are legitimate."

The cost of fraud to U.S. retailers reached 1.8 percent of sales last year, up from 0.5 percent in 2013, according to a survey by LexisNexis Risk Solutions. Cyberbreaches and incidents of identity theft have soared, but better physical store payment security means it's tougher to make money from the stolen information. So fraudsters have increasingly gone online, with some using website-building services to achieve their goals.

A favored tactic is known as a triangulation scheme. Scammers use Shopify and similar services to quickly create sites selling mainstream products like baby chairs, according to Paul Bjerke, a fraud and identity executive at LexisNexis Risk Solutions. Consumers click and pay, then the fraudsters use details from previously stolen credit cards to buy the item from a real retail website and have it shipped to shoppers' homes. Later on, the card payment networks reject the purloined credit card transaction and the real retailer gets what's known as a chargeback, leaving it with no money for the product it sold. But the scammer still has the original consumers' money, Bjerke explained.

"You see waves of this, especially with new hot products," Bush says. When the Pokemon Go game came out in 2016, he says, there was a surge of online stores purporting to sell Pokemon products to lure shoppers into triangulation schemes using stolen card details. "They can make $100,000 or more in a month and walk away and leave the damage for someone else to clean up," says Bush, who adds that companies like Shopify should consider conducting background checks on sellers.

Shopify's basic argument has been that market forces would weed out merchants using unsavory sales tactics. But as lawsuits pile up and defrauded consumers complain, the company has begun to take a more active role. It has beefed up the team focused on merchant misbehavior and responds to clear notices of copyright and trademark infringement. The company built software to spot potential fraud and help shoppers and brands flag improprieties.

COO Finkelstein argues that Shopify's centralized platform means it can scan all stores at once. "We now have more people, more capacity, therefore we can do a lot more things," he says. "We've been able to get more sophisticated."

Rival BigCommerce says it stops fraudsters from using its service rather than kicking them off after they've done something wrong. New merchants must pay upfront and prove they have real inventory before they can start selling. "On other platforms, you can sign up for a free trial and you're ready to go without paying effectively," says the company's chief product officer, Jimmy Duval. "Our approach provides a natural barrier for bad actors."

Finkelstein says new merchants can set up shop for free but must pay Shopify before collecting any money from shoppers. He defends his company's easy-to-use strategy and says making it harder to open an online store to avoid fraud is a "lazy" way to curb misbehavior. "Do we make it really easy to start businesses?" he says. "Absolutely. But what we also do simultaneously is we ensure there are these gates and these checks and balances."

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