When merchants want to be able to sell a wide range of products without having to maintain a warehouse full of merchandise, many turn to dropshipping as an option. Not only does dropshipping let online retailers avoid the need to invest in and hold onto expensive inventory, it also frees them from the hassle of managing the shipping of orders to customers.
But how does this impact the e-commerce fraud risk inherent to the dropshipping industry?
While running a dropshipping business offers ample benefits — dropship businesses are relatively easy to start, flexible to run and efficient to operate — this doesn’t mean that the industry is completely risk-free.
In fact, dropshipping business owners may still find themselves forced to deal with shipping problems and supplier errors, not to mention intense competition. And unfortunately, dropshipping businesses typically also face a higher risk for fraud and chargebacks.
Dropshipping is attractive because it’s convenient, efficient and scalable. Unfortunately, this also makes dropshippers a target for fraudsters.
Some merchants are so eager to dive into the dropshipping industry that they’re easily duped by scammers who publish a legitimate-looking website but lack telling details, such as company contact information and a verifiable street address. Other scammers might not actually possess the inventory they claim to have, which can leave the merchant holding the bag when orders go unfulfilled and customers file complaints and chargebacks.
Worse, many dropshippers are small businesses dealing with small profit margins – which means these businesses have a lot to lose from even one fraudulent order.
If an order turns out to be fraudulent, it’s the merchant, not the supplier, who bears the financial burden. When this happens, merchants stand to lose a lot:
These aren’t the only costs to merchants. If merchants dispute a chargeback, they must invest time and resources to research and fight the chargeback. Even so, merchants often find themselves losing these disputes.
To avoid fraud when selecting a wholesaler, merchants need to do some research. To start, look for wholesalers that list a street address. This is important, because this is where the items ship from. Moreover, merchants should confirm this address is located in an industrial park or warehouse district, not a P.O. box or residential neighborhood.
Other red flags are suppliers who make “get rich quick” promises, ask for subscription fees, or demand bulk orders that are paid in advance.
Just as merchants must be mindful of the suppliers they partner with, they must also pay close attention to the orders their customers place. Fraudsters can be incredibly sophisticated with their schemes, so merchants must keep their eyes open for red flags, such as:
Unfortunately, these signals aren’t proof-positive of fraud. Sometimes, orders that look like fraud are actually legitimate. If merchants decline every order that is merely suspicious, they may end up rejecting good transactions and inadvertently losing good sales.
Instead, dropshipping businesses should invest in a comprehensive fraud protection solution that combines automated rules with manual reviews capable of identifying fraud and validating transactions to ensure chargebacks are minimized and sales are maximized.
ClearSale’s managed services solution, which combines a team of trained fraud analysts and advanced machine learning, may be just what your business needs to protect itself against credit card fraud. Want to learn more about ClearSale’s fraud managed services solution and how it could benefit your business? Download our free e-book,