09/12/2012 09:10 pm ET Updated Nov 12, 2012

Fraud: The Scourge of the Daily Deals Industry

The daily deals industry is under siege. After Groupon released its quarterly earnings report, analysts were quick to predict the daily deals industry's grim future and reporters eager to find disgruntled businesses willing to share their negative feelings about running daily deals.

Both sides are frustrated -- the businesses offering daily deals are worried about ROI, and customers are concerned about receiving the value they believe they deserve. While the media focuses almost exclusively on what's wrong with the daily deals industry, there has been an overwhelming silence about what can be done to make daily deals more attractive to businesses and customers.

One way that many daily deals companies could make themselves more appealing to their constituents is by revamping their policies aimed at addressing fraud.

Fraud was one of the key issues that Rakesh Agarwal called out in his infamous series on Groupon, including one titled "Groupon was the single worst decision I ever made as a business owner." He notes that the business owner had a paper binder with more than 900 names and needed to check off each Groupon as people came in. This is a huge undertaking. The result? Massive fraud, with many people using deals multiple times.

Daily deal giants like LivingSocial have a simple answer for fraud -- don't allow the transfer of daily deals. When a Washington City Paper reporter recently asked LivingSocial about its new Terms of Service, the company said that unless your name is on the deal you shouldn't be able to use it.

This solution may stop counterfeit daily deals from being used, but it has horrible consequences for businesses and consumers.

Firstly, there is no true mechanism in place for enforcement of fraud. LivingSocial pushes the problem back onto the merchants, saying that it's up to each merchant to match the name on the deal with the name of the person. That's great in theory, but in practical application it falls apart. Is a barista supposed to slow down a whole line of people to check IDs for every LivingSocial deal turned in? To make matters even more confusing, LivingSocial's gifting policy seems to imply that someone can purchase a daily deal and give it to a friend as a gift, which contradicts other parts of the company's policies aimed at limiting daily deal fraud.

Secondly, enforcing this policy is greatly contributing to the number of daily deals that go unused, which creates further problems. On the consumer side, these non-transferable policies effectively dissuade people from selling or gifting a daily deal that they purchased but don't have the time or desire to use.

Not being able to use a daily deal does more harm that creating a disgruntled customer. Today nearly one-third of the $5 billion in annual daily deals sold are going unused, causing businesses to suffer through nightmarish accounting issues like keeping huge liabilities on their books for months or years. In the worst cases, businesses may owe the state the uncollected core daily deal value in three to five years due to escheatment laws.

A strategy for addressing these issues can be found in the ticketing industry, which struggled with counterfeiting and an associated illegal secondary market for a generation. They tried everything, from special paper to holograms, yet people still bought lots of tickets and sold them on the street and they still faced counterfeiting problems.

The answer, eventually, came in technology. Simple bar codes that ticket takers can scan when you enter a venue, but that can also be transferred through a secondary market like StubHub. Suddenly the counterfeiting problem disappeared but the industry never needed to tie the tickets to identity. Now people are free to gift their tickets to friends, sell them on the open market or keep them for themselves. Consumers are now more likely to buy tickets in the first place due to the emergence of StubHub, a trusted secondary market. The sports team that work with StubHub are even compensated directly by StubHub for every ticket sold on the secondary market. Everybody wins.

Daily deal companies like LivingSocial and Groupon should learn from the ticket industry and take active steps to legitimize secondary markets. By allowing legitimate options for reselling daily deals, businesses will have fewer accounting issues associated with unused daily deals. Daily deal buyers will also have fewer associations of buyer's remorse with purchasing daily deals. This may not be the silver bullet for making businesses and customers fall back in love with daily deals, but it will be a big step in the right direction.