Dropshippers: How Identify and Reduce Their Credit Card Fraud Risk?

Dropshipping allows online retailers to offer consumers a wide range of products, without the need to invest directly in expensive inventory. It’s convenient, efficient and scalable – and it’s also a model that’s ripe for credit card fraud. Dropshippers are prime targets for savvy fraudsters, and the smaller size of many dropshipping businesses and high average value of transactions means these businesses have a lot to lose if even one order turns out to be fraudulent.

To be successful and reap all the benefits of dropshipping, merchants must be committed to stopping fraud before it has the chance to do permanent damage to their bottom line and reputation. Here’s what these businesses need to know about credit card fraud and how they can reduce their fraud risk.

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The Cost of Fraud and Chargebacks to Dropshippers

When a dropshipper receives an order, the merchant pays the supplier for the wholesale cost of the order, and the supplier sends the product to the customer.

But what happens if the order turns out to be fraudulent and the customer files a chargeback? Unfortunately, the merchant will be held responsible and stands to lose a significant sum, including:

• Associated chargeback fees
• The entire cost of the customer’s transaction, including shipping fees
• The dollar amount already paid to the supplier for the shipped product

And the damage doesn’t always end there. Get hit with too many chargebacks, and a business risks losing their merchant account — making it more difficult and expensive (at best) but sometimes impossible (at worst) to process credit card transactions.

And what e-commerce merchant can survive without being able to process credit cards?

Even if a business has the documentation to prove the legitimacy of an online transaction, they’ll need to spend a considerable amount of time and effort protesting chargebacks – and this isn’t the best use of a merchant’s resources.

Unfortunately, the result of a fraudster using stolen credit cards to purchase merchandise is almost always the same: Merchants are left holding the bag. So, how can merchants protect themselves and identify fraud before it happens?

Proceed With Caution: Credit Card Fraud Signals

As fraudsters become more sophisticated, their attempts at fraud aren’t always obvious. But if merchants pay attention, they’ll become aware of the signs an order is fraudulent.

While these red flags aren’t absolute predictors of credit card fraud, they’re important reminders of what may be worth further investigation.

• Different billing and shipping More than 95% of all fraudulent orders have differing addresses, but be aware that during the holiday season, this is often explained by customers buying gifts.
• Differing names. As above, different bill to/ship to names can indicate credit card fraud or simply a gift.
• Suspicious email addresses from free services. Because anyone can open an email account without providing legitimate personal data, merchants who see suspicious-looking, nonsensical email addresses are smart to be wary.
• Rush shipping on expensive purchases. The faster a fraudster can get stolen merchandise in their hands, the better. Therefore, cybercriminals often splurge on overnight shipping to receive the order before the cardholder notices something is wrong.
• Package re-routing. After fraudsters place an order (generally with the cardholder’s legitimate data), they quickly contact customer service or the carrier themselves to change the shipping address. This tactic lets the thief bypass the security measures that flag orders with different shipping and billing addresses.
• Unusually large orders. Criminals have a short amount of time in which to use a stolen card, so they buy as much as they can, as fast as they can.

How Dropshippers Can Reduce Their Risk of Credit Card Fraud

While each of the indicators above can help identify fraud, these signals may not be enough on their own to catch all fraud. Fraud indicators can also be inconclusive, and relying solely on these signals may mean legitimate orders are incorrectly rejected.

Instead, merchants should consider a comprehensive fraud protection solution that can combines automated rules with personalized monitoring to detect even the subtlest signs of credit card fraud while still ensuring all legitimate orders are successfully processed.

Fraud prevention errors (or a complete lack of fraud protection) put merchants in fraudsters’ sights. And don’t be fooled into thinking that fraudsters won’t come after small businesses; fraudsters are equal opportunity criminals. They’re willing to leverage any perceived vulnerability, and that can have a massive impact on a merchant’s bottom line, reputation and future.

A managed services solution, which is composed of an expert team of fraud analysts and advanced artificial intelligence, is often just what your business needs to protect itself against credit card fraud. To learn more about ClearSale’s fraud managed services solution and whether it’s right for your dropshipping business, download our new e-book, Is a Fraud Managed Services Solution Right for Your Business?