Dropshipping 3 min read
15 Dec 2020

10 Ways To Protect Your Dropshipping Business From Fraud

10 Ways To Protect Your Dropshipping Business From Fraud

So, you want to start a dropshipping business? It’s a fantastic option for online retailers who prefer to avoid the hassle of overhead expenses and warehouse space. Not only does dropshipping let you offer a wide array of sought-after products, but it can also be managed from anywhere—and your risk related to managing excess inventory is virtually non-existent. 

But, dropshipping isn’t all smooth sailing. This type of business puts you at greater risk for fraud, which means you need to put serious thought into how to prevent it from happening in the first place. 

To help you get started, we’ve compiled a list of the 10 ways you can protect yourself and your dropshipping business from the most likely sources of fraud.

Wholesaler Fraud

Let’s start with the wholesalers. These are, essentially, your business partners in a dropshipping business. 

The good news is they manage and store inventory. The not-so-good news? You’re dependent on them to actually provide the products you’ve sold to customers on your site. Wholesalers control how much of a product you can sell and how quickly it is shipped to your customers after purchase. 

If you partner with a wholesaler that isn’t doing business in good faith (or worse, running a scamming operation), you can end up in real trouble. Avoid wholesaler fraud by considering these suggestions:

1. In the same way, you wouldn’t choose a business partner randomly on the internet, you shouldn’t choose your wholesalers that way either. Do your research and fully vet wholesalers. You are looking for a responsive, well-established wholesaler with a good reputation and an address that you can find on a map. Any wholesaler with a P.O. Box should make you cautious. 

2. Pay attention to red flags and suspicious practices. Wholesalers that ask for subscription fees or bulk orders in advance should ring your alarm bells, as they potentially create a situation where you will be stuck with inventory you might not be able to sell.

3. Your wholesaler should be willing to sign a Dropshipping Agreement, and it should protect you from being liable for any questionable or illegal business or personal activities your wholesaler does or is accused of doing. 

4. Most of all, trust your gut. If something seems amiss, it probably is. You don’t have to dance with the first wholesaler you find. Take your time and be thorough. The last thing you want is to find out your “business partner” isn’t reputable after you agree to do business with them.

Friendly Fraud

Friendly fraud happens when an issue with a purchase causes a breakdown or confusion for the customer. Often it is attributed to purchasing products that aren’t received, products that don’t look or function as they appeared or were described on your site, and the customer forgets about or doesn’t recognize a charge from your business on their credit card statement. 

When these situations happen, the customer may contact you to resolve the situation. When they go directly to their credit card company to complain, the credit card company may give the customer a refund and then reverse the purchase amount paid to your business plus a fee.

The reversal plus fee is called a chargeback. There are chargebacks that cannot be avoided because they are due to legitimate issues, but you don’t want your chargeback rate to become so high that credit card companies begin to penalize your business or even decide not to do business with you at all.

The nature of a dropshipping business makes it more susceptible to chargebacks because so much about the product is out of your control (again, this is why it’s so important to choose the right wholesaler).

Assuming you do have a great wholesaler as your partner, here are some ways you can avoid friendly fraud in your dropshipping business:

1. Take advantage of your ecommerce website platform’s address filters to make sure customer addresses are correct. Using custom online keyboards for the phone numbers and zip codes, auto-filling cities from zip code information, and using drop-downs for states are ways to prevent the errors that can send packages to the wrong address or hold them in limbo.

2. Be as clear as possible in product descriptions and use high-resolution photos so customers know exactly what they are getting. You should also order a few samples of each product you are selling to make sure the quality is consistent, which will help to avoid customer dissatisfaction.

3. Make your FAQs or Commonly Asked Questions page as robust as possible and consider chatbots and other tools that help customers make informed purchasing decisions.

Card-Not-Present Fraud

While chargebacks are a concern with friendly fraud, they are more of a concern when it comes to card-not-present fraud, which is a result of stolen credit card information used to make online purchases.

Fraudsters are quite clever, and they do their research on the type of sites that are more susceptible to fraud. Dropshippers tend to make easy targets because many don’t put safeguards in place to prevent fraud from taking place.

Here are some ways you can protect your business:

Be on the lookout for signs of potential fraud, including:

a. Billing and shipping addresses that don’t match (If it’s the holiday season, this is more common, making fraud harder to distinguish).

b. Overnight and express shipping on pricey purchases. Often, fraudsters will do this to get products quickly before an issue is detected.

c. Excessively large orders can be a sign of fraud. So can high multiples of the same product.

d. Purchases from remote towns in other countries or a customer’s “sudden” change of address to another country should raise suspicion.

Use the fraud filters that come standard on your ecommerce platform. These will help flag potentially fraudulent transactions. Because they are already available, these filters are inexpensive to turn on, but keep in mind that if you set the filters to be too sensitive, you may block legitimate transactions and increase the number of false declines.

One of the most effective ways to prevent fraud is to enlist the help of a trusted fraud prevention solution partner. Instead of automatically declining potentially fraudulent transactions, they are flagged, reviewed, and assessed by experienced fraud analysts.

And because these solution providers work with their client partners, you will be able to make the ultimate decision about approving or declining transactions.

Not does a great fraud prevention partner help you avoid fraudulent transactions on a day-to-day basis, they can help you keep your fraud prevention robust even when sales spikes occur during the holiday season and for sales offers. 

Central to running a successful dropshipping business is being able to protect it from fraud.

Choosing the right wholesaler from the start is essential, especially one with which you can communicate about potential fraud and how to prevent it.

While you cannot keep all fraud from happening, you can put safeguards in place that make you less attractive to fraudsters and give you the power to protect your business from being the victim of fraud. 

Rafael Lourenco

Rafael Lourenco

Rafael Lourenco is Executive Vice President and Partner at ClearSale, a card-not-present fraud prevention operation that helps retailers increase sales and eliminate chargebacks before they happen. The company’s proprietary technology and an in-house staff of seasoned analysts provide an end-to-end outsourced fraud detection solution for online retailers to achieve industry-high approval rates while virtually eliminating false positives. Follow on LinkedIn, Facebook, Twitter @ClearSaleUS, or visit: https://www.clear.sale/

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