Fraud Risk Profile for Nutraceutical and Drug Retailers

As people become more conscious of what they’re putting into their bodies, there’s been an increased demand for high-quality supplements and healthful food and beverages. The result has been a dramatic rise in the expansion of both these industries and their product lines — the global market size was $262 billion in 2018 and is projected to reach $486 billion by 2026.

And this market is getting even more attention as the COVID-19 pandemic makes consumers more aware of how they can prevent diseases and the comorbidities that exacerbate them.

As nutraceuticals (any food product that offers health benefits) and drug retailers continue expanding into the ecommerce marketplace, they may find themselves increasingly at risk for losses due to fraud. Here’s how these retailers can minimize their risks.

Why Is Fraud a Problem for Nutraceutical and Drug Retailers?

Despite the popularity of this vertical, much of the industry remains restricted by federal laws and is considered unpredictable and high-risk.

As a result, many domestic banks are reluctant to accept credit card processing for these merchants. In exchange for obtaining a high-risk merchant account, however, retailers may find themselves at the mercy of high processing fees and little room for error.

Perhaps more alarmingly, however, is that the banks will also be watching even more carefully for fraud and chargebacks—too many of them, and the merchant could lose their account, putting a massive roadblock in their ecommerce goals.

Is this industry at risk for fraud and chargebacks, however? Unfortunately, yes:

Increased Risk of Chargebacks

Health is big business, and many are looking for that magic pill to help them lose weight and improve chronic health conditions and prevent others. However, due to individual biology, results may vary. And if that magic pill doesn’t work for every consumer, merchants may find themselves at an increased risk for costly chargebacks.

Companies who use recurring billing models to capitalize on consumers’ optimism may also risk increased chargebacks if they don’t notify customers of upcoming shipments or changes to product prices.

In addition to chargebacks, some customers may take their dissatisfaction online. And that action can translate to negative social media posts, bad reviews and the lost potential lifetime value of the customer.

Card-Not-Present Fraud

With so many of these purchases made online, retailers are often the victim of card-not-present transactions, where fraudsters use stolen credit card data to purchase goods, often to resell them for a tidy profit.

As mentioned, the nutraceuticals and supplements industry is expected to experience rapid growth in the next few years. Just like with any other new and growing industry, fraudsters will be out in full force trying to take advantage of three things:

1. Demand: It remains to be seen whether the growth in nutraceuticals will continue beyond this decade. Is this a trend, or the beginning of a growing, stable market? Fraudsters want to make their money while they can, so they’ll try to establish their fraudulent markets early on, in hopes of grabbing market share.
2. Consumer inexperience: Because nutraceuticals is still an emerging industry, consumers may not know of any reputable merchants. As such, they’ll be more likely to fall prey to an upscale-looking (but completely fraudulent) shop.
3. Merchant inexperience: Many merchants want to leap onto this growing market, but they may be diving into ecommerce for the first time, leaving them vulnerable to sophisticated fraudsters.

How Nutraceutical and Drug Retailers Can Protect Themselves Against CNP Fraud

While fraud can devastate an ecommerce business, it doesn’t have to. Retailers selling nutraceuticals and drugs can protect themselves in several ways, like:

• Offering free trials to avoid the frustrated customers and chargebacks that occur when a customer forgets to cancel their account within the trial period.
• Reminding customers of recurring orders to avoid the chargebacks that result from customers claiming they were unaware of an upcoming charge to their credit card.
• Using a team of manual fraud reviewers to identify the subtle instances of fraud that basic fraud filters may not catch.

To succeed in today’s ever-competitive ecommerce marketplace, nutraceutical and drug companies must balance fraud and chargeback management with the customer experience. ClearSale can help you do just that.

We’re committed to helping merchants in every industry maximize their sales and protect their profits. Contact us today to learn more about integrating a fraud protection solution that will protect you against the rising threat of CNP fraud.