How To Reduce Affiliate Fraud

by Marc Porcelli

I came across a very interesting study by Benjamin G. Edelman last night titled, “Optimal Deterrence when Judgment-Proof Agents Are Paid In Arrears—With an Application to Online Advertising Fraud.” There is also a useful Q&A synopsis that can be found via Harvard Business’s Working Knowledge, titled, “Reducing Risk with Online Advertising” which outlines the main pointers.

Edelman argues that by delaying payment by two to four months advertisers could eliminate more than 70% of fraud without decreasing profits. The research was based on findings from a major advertising affiliate network. Which affiliate network that is one can only speculate? In Edelman’s report he did state that in 2007 the network had 4,357 affiliates so your guess is as good as mine, but I would by no means consider that a “major” affiliate network.

Edelman’s abstract reads “I develop a screening model with delayed payments and probabilistic delayed observation of agents’ types. I derive conditions in which a principal can set its payment delay to deter bad-type agents and to attract solely or primarily good-type agents. Through the savings from excluding bad agents, the principal can increase its profits while offering increased payments to good agents. I apply the model to online advertising markets widely perceived to be a hotbed for fraud. I estimate that a leading affiliate network could have invoked an optimal payment delay to eliminate 71% of fraud without decreasing profit”. This is significant, the reduction of fraud by 70% without a reduction in revenue will get an online marketer’s attention, and it got mine!

Coming from the affiliate network space while working as a Sales Director for AzoogleAds I know payment terms were very important to many publishers. Based on current standards for payment terms, I don’t see may publishers willing to wait two to four months to be paid. On top of this, if any particular affiliate network or advertiser tried to make an affiliate wait such a long time to be paid, they would just go to another affiliate network or competitor to run the same or similar offers. There is a huge lack or loyalty in this space; it’s all about the money for many.

I personally think Edelman is onto something with his findings and believe they hold merit, however I do not believe they are realistic based on the highly competitive nature of the industry. If an affiliate network decided to impose such extended payment terms, they would be out of business in a very short time because a competitor would offer quicker or maintain current standard terms well less than two months, let alone four. The incentive to pay publishers a bonus is great, but publishers likewise have issues with affiliate networks also. Why should affiliates have to put up front the cash for two or four months just to make the affiliate network(s) and advertisers money?

The only way this would work is if all advertisers universally said they were not going to pay for two or four months. Online marketing being as competitive as it is, rules this out. Furthermore, what is to say that some advertisers won’t say their leads or sales are fraudulent after a month or two, who will hold advertisers accountable under Edelman’s recommendations? All advertisers convert their traffic that affiliates send differently, many better than others. Like all business, advertisers too go through tough times and what’s to say when they are facing tough times that they would not claim the leads are fraudulent?

It has to be a two-way street with what is in the best interests for advertisers and publishers. Edelman’s recommendations given the current affiliate climate are simply not realistic. As an advertiser I of course support the conversation and discussion of reducing risk with online advertising, but I know the onus is on me to ensure that I am taking proactive steps to ensure the traffic that I am receiving and paying for is of high quality. Withholding payment would not be an affective or sustainable means to reduce risk.

Edelman points out a few examples relating to advertisers and how they have failed to take simple pro-active measures. “Advertisers have omitted many of the kinds of protections that you would ordinarily expect when dealing with little-known suppliers; for example, easy tasks like determining whether the supplier is a bona fide business entity, or cross-checking the supplier’s street address with its phone number and tax ID number. These very obvious and easy things haven’t been done in many instances because they were believed to be superfluous. If fraud is impossible, then why should we waste our time looking?” Further to the advertisers responsibility to be pro-active Edelman goes on to state, “yet in practice many online advertisers don’t have these kinds of tools even when they are spending hundreds of thousands or even millions of dollars on potentially fraud-ridden advertising.” Clearly many advertisers are behind when it comes to dealing with fraudulent traffic. Even those advertisers that do catch-up need very much to stay abreast of fraud. Online marketing fraud is continuously evolving; there is not one stop solution.

To make matters worse, it’s often times not in the affiliate networks best interests to curtain fraudulent traffic anymore than what they need to. To be direct about it, there are affiliate networks out there that will only remove publishers that need to be removed. The incentives have often times outweighed the benefits. It should be stated that this is often not the case and increasingly affiliate networks are being more pro-active when dealing with fraudulent publishers. Having worked for AzoogleAds, I can vouch for the quality of traffic. AzoogleAds very pro-actively took a stance to eliminate any fraudulent traffic and has been an industry leader in maintaining that stance.

The problem though is of course not just the affiliate networks, but often times the employees such as affiliate managers and sales managers. There are many affiliate managers and sales managers out there that turn a blind eye to fraud, often times making money from the fraud as they are paid on commission. Edelman provides a great example, “For example, an affiliate program manager might be paid a modest salary plus 10 percent of year- over- year growth in the size of the affiliate program. But consider the incentives of someone paid in that way. If there is fraud in the affiliate program and the staff person recognizes it and ejects it that means the program is smaller and her bonus gets smaller. In fact, her bonus might be disproportionately smaller because it’s based on growth, so if you took out the 10 percent of fraud in the program, there goes this year’s growth and the Christmas bonus. So in many companies the incentive to get to the bottom of this quickly and successfully is tempered by the incentive of staff to do what is in their personal interest.” To deter fraud affiliate networks need to structure compensation in alternate manners that don’t incentive their employees to turn a blind eye or to potentially make money from this fraudulent traffic. How that can be done is a whole other topic!

Long story short, online marketing is still a relatively new industry with very low barriers of entry. It would be irresponsible for advertisers to blame affiliate networks or vice versa for fraud incurred. Both parties must pro-actively do their parts to ensure quality and control. In the end, extended payment terms will deter fraud, but will also deter and eliminate all or most distribution. It is ultimately up to the advertiser to ensure the money that is spent is done so in a wise fashion and to know their traffic. For affiliate networks, they need to pro-actively reach out to many of their advertisers to educate and actively arm them with the tools to create sustainable long-term relationships. As an industry both advertiser and distributor (affiliate and or affiliate network) need to start thinking long term.

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Marc Porcelli
marcporcelli.com
http://www.marcporcelli.com/
e: marc@marcporcelli.com

Share your Comments

No affiliate will wait 2-4 months for payment. Any network that tries to implement this will lose their publishers. If the network paid the pubs on a regular basis, but the sponsors take months to pay the network, it'll be the network who gets screwed footing the bill for the fraud.

The honest truth is (at least in the world of CPA advertising) much of the fraud could be eliminated if merchants did more homework, analyzed their data quickly, and reported the findings back to the network in a timely manner.

Posted by: JP Sauve Date: March 27, 2008

204712

I agree. Would not work for us either. More homework is the best way to do it. Focus more on quality and not quantity

Posted by: Rick Lea Date: March 27, 2008
URL: http://www.pantheranetwork.com
204713

The problem with most of these "offers" is that they are lead-based and not product based. There are so many checks and verifications that go into a product-based affiliate program like ours that we simply don't see much fraud.

I don't think any of our affiliates would wait 2-4 months for their cut of a $12,000 ring :)

Posted by: Eric Peerless Date: March 27, 2008
URL: http://www.since1910.com
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We are in the Affiliate Marketing business in Europe since 2000, running several big name programs. Here affiliates have always been paid around 1-2 month after the lead/sale actually happened, and this has never been a problem. If affiliates are short of cash (lets say because they bought their traffic) it's often possible to arrange some upfront payments.

But the actual commission payment should always be based on real (=not fraud) leads or sales. In the travel industry commission is often only paid once the customer actually started the trip, even if this is 8 months after the booking. Its all about fairness: the merchant has to pay as soon as an lead/sale qualifies as valid, and an affiliate has to accept that worthless leads/sales are not paid.

Don't fool yourself with fast payments: they just mean the average fraud/cancellation rate is already calculated into the commission, so any affiliate delivering high quality traffic (=better than average) actually earns less that way. I don't see why an affiliate would accept that, instead of waiting some time for the final payment?

Posted by: Ralf Hein Date: March 28, 2008
URL: http://www.nonstopconsulting.net
205010

Monitor your affiliates with LashBack and check their compliance reputation before onboarding them. Much of the fraud we do find, could actually have been prevented with more due diligence before allowing an affiliate into your network.

Posted by: James O'Brien Date: March 28, 2008
URL: http://www.lashback.com
205042

There is no way my company would ever deal with an ad network that made us wait 2 to 4 months to get paid. Impossible. Not happening. You should have named this article how to ruin your ad network by having all of your publishers stop promoting your offers 101.

Posted by: Russell Rockefeller Date: March 29, 2008
URL: http://www.Extravagantmedia.com
205201

You guys all bring up great points. The basis of writing the article was to keep the conversation moving. I understand that for affiliates, it is not a conversation they want to have.

For networks though, it seems from the responses that they all know it happens. That being said, networks needs to educate their advertisers. Why is it that networks don't educate their advertisers about fraud? The answer is likely obvious, but that needs to change. Networks should pro-actively educate advertisers, this creates value and sustainability.

Posted by: Marc Porcelli Date: April 01, 2008
URL: http://www.marcporcelli.com
205669

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Posted by: cvbc Date: May 29, 2008
URL:
212106

ya, no way people would wait that long. I just ran into this problem recently with ENT Book, and having huge return/chargeback issues. It's coming from the incentive market and the reg path market, and shitty affiliates taking advantage of the system, knowing it may not catch up to them.

The other problem is the prepaid credit cards, and being able to use them when they have a zero balance. I also think that most lead based campaigns and email submit programs will have to deal with this forever, hence I only push tangible products that need to be purchased.

Posted by: Mulkeen Date: June 20, 2008
URL:
213496