The Group-Con Effect: Fraudulent Photography Deal Stings Groupon

It was bound to happen eventually: One of those too good to be true deals on popular startup Groupon turns out to have been false.

The apparent attempted fraud came to light on Sept. 15, when photography blog PetaPixel posted details about how a photographer offering a Groupon deal on photo shoots was displaying other photographers' work as her own on her website, and offering her services to more clients than she could possibly accommodate in the period the deal was covering. Despite her claims of an honest mistake by her website designer, the deal was pulled, and Groupon refunded the money to the 1,175 patrons who had signed up.

The incident raises an ugly specter about fraud within the new group buying genre. Granted, such instances are rare, and it's mostly quite easy to verify that a group buying deal is the real thing. Go to Google or Bing, search the business name, look for a map location, and call the phone number.

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In that sense, this tempest is a classic case of caveat emptor. On the other hand, the fact that Groupon allowed the bad deal to slip through demonstrates slipshod account management on their part, the sort of mistake that's characteristic of what could be a slap-dash growth push run primarily out of call centers where achieving deal volume is the primary motivator. In other words, perhaps Groupon's big local play may be harder to pull off than it looks without true local knowledge. In fact, even with decent feet-on-the-street sales teams, group buying services could become a fraudsters dream, a tool to help them sucker even savvy shoppers.

Step one: Set up a PayPal account. Step two: Build out a fake website and get a phone answering service with a voice message -- or multiples thereof. Step three: Buy a fake yellow pages listing. Step four: Post fake Yelp! reviews and ratings. Step five: Offer your Groupon deal. Step six. Collect your check and disappear before anyone's the wiser. Scaling up a group buying fraud network could be easier than scaling up a group buying business.

A likely stopgap measure to keep such ambitious fraudsters in check will be some sort of escrow period for the payments, but such a move would also remove some of the incentives that group buying services present to legitimate businesses: upfront cash and redemption rates of less than 100% (and perhaps as low as 60%). Could this be the Achilles heel of what has so far been perceived as the most amazing cash register to emerge on the Internet since Google, a service recently valued at an eye-popping $1.35 billion? Stay tuned, Groupon groupies! It's gonna be a wild ride!