Description: As we head into an unchartered economic situation, dropshippers need to be aware of their costs, and loss to fraud shouldn’t be one of them.
Fraud 101: A Dropshipper’s Guide to Ecommerce Fraud
The last few years have been a rollercoaster for retailers. A global pandemic, supply chain issues, and now a rocky economic outlook have left business owners gasping for breath. Retailer costs have escalated, as has the rate of ecommerce fraud.
Of course, it’s not all doom and gloom, especially not for ecommerce retailers. Ecommerce was expected to grow, and the global events of the last few years have only accelerated what was anticipated. More consumers are shopping online now, with the ClearSale State of Consumer Attitudes on Ecommerce, Fraud & CX 2021 showing that 78% of online shoppers had increased their online spending, while another 13% made their first ever online purchase.
That’s good news for dropshippers, who now have an even larger audience to delight with their products. Grand View Research estimates that the dropshipping industry will reach $557.9 billion by 2025.
Still, with a shaky economic landscape, online retailers must be smart about operations. And one of the biggest avoidable costs is ecommerce fraud. To stop losses from fraud, you first have to understand what it is and where it comes from. So let’s pour over some information on how dropshippers can keep cash in their pockets instead of losing it to fraudsters.
What is Ecommerce Fraud?
Ecommerce fraud is much more than someone using a stolen credit card to make a purchase. In fact, for some criminals, it’s big business. In 2021, ecommerce fraud globally was expected to top $20 billion.
Methods used to defraud online retailers range from using stolen cards and loyalty points to the actions of organized crime rings using information from data breaches and AI tools to bypass simpler fraud protection systems. Despite its name, friendly fraud – where a legitimate purchase reports an item as missing or damaged – is a significant source of ecommerce fraud as well.
Despite multiple potential vectors for fraud, one thing is certain – it’s an expensive issue for online businesses. As we’ll see, the direct cost of fraud – i.e., the items stolen – is just the tip of the iceberg.
How Ecommerce Fraud Impacts Dropshippers
The direct costs associated with fraud include the merchandise, shipping, packaging, and so on. In addition to the goods lost to fraudsters, dropshippers and other ecommerce retailers face indirect costs that aren’t immediately apparent. These indirect costs include:
- Card processing fees: Fraudulent orders are the financial responsibility of the retailer, not the supplier, for dropshippers. That means paying for the shipping fees, transaction costs, the cost of the shipped product, and chargeback fees.
- Reputational damage with customers: In trying to stop fraudsters, you could alienate your customers. False declines occur when a retailer tightens up their fraud filters, turning away paying customers who may never return. Sixty-six percent of customers in ClearSale’s report said they would abandon an order where they were asked for additional documentation for a declined order. And 34% said they would post a negative comment about a business on social media if their order was falsely declined.
- Reputational damage with card processors: A business with high levels of chargebacks and fraud face consequences with card processors. Higher processing fees and even getting blacklisted from a processor can result. Plus, this could shut doors to new payment methods right at a time when consumers are exploring things like Buy Now, Pay Later and e-wallets.
- Personnel costs: While shippers may be the ones putting your orders together and sending them out, a chargeback or fraudulent purchase still puts a burden on the dropshipper. From the time wasted processing an illegitimate transaction to the hours spent researching, logging documentation, and proving a chargeback isn’t valid, ecommerce businesses are on the losing end no matter what the credit card processor’s ruling on the transaction.
Types of Ecommerce Fraud
There are a host of fraud types that dropshippers need to be on the lookout for – below are just a few of the more common schemes:
Refund fraud
For online businesses, return fraud looks something like this – a purchase is made of an item with a stolen card, but then asks that the item be refunded to a different card. They might even claim that the old card can’t be used for the refund because it’s been shut down or the number was stolen.
Card Not Present (CNP) fraud
CNP fraud is a catchall term for illegitimate purchases made when the card isn’t physically present – something that every online transaction qualifies as. The numbers used in ecommerce CNP fraud may have been bought off the dark web, acquired in a phishing scheme, taken as part of an identity theft, through a data breach, or by some other means.
The criminals use these cards over and over until the consumer reports them as having been stolen. Online retailers with more basic fraud protection may let some of these transactions through, while more sophisticated systems may decline them.
In either case, it’s the retailer or dropshipper that will end up footing the bill. When the charges are inevitably disputed, the credit card company goes back to the seller, not the consumer, to cover the costs. Too many chargebacks and an online seller could be looking at high transaction fees to process all their credit card transactions.
Friendly fraud
On the opposite side of the spectrum from CNP fraud, friendly fraud is a very specific type that is the result of a legitimate customer taking advantage of the rules to their advantage. These customers order items and then report the purchase as lost, stolen, or as having arrived damaged or not matching the description. The customer keeps the product, and the retailer loses the cost of the item and all of the other associated fees – including chargeback fees.
Unfortunately, once a consumer has committed friendly fraud, many realize how easy it is. Research has shown that half of the consumers that successfully commit friendly fraud will do it again within 60 days.
Ecommerce Fraud Red Flags
So, when it comes to ecommerce fraud, what should you be looking out for? Some of the signals are very clear. Others, not as much. Some of these red flags can show up in a legitimate transaction as well, but certainly, if a purchase displays questionable signs, it’s time to take a closer look.
Rush shipping for high-value purchases
Fraudsters want to realize their gains quickly, and at the end of the day, they aren’t the ones paying. Rush shipping is a win-win for them and a lose-lose for you.
Package re-routing
There are legitimate reasons a customer might want to change the shipping address after the purchase. More often than not, though, this is a sign of fraud.
The shipping address doesn’t match the payment
Fraudsters will often use the original cardholder’s address for the billing address while having the item shipped to themselves or to a third party.
Buying multiples of the same product
If a fraudster knows they can move or resell a particular, high-value item, they may try to buy multiples of that item.
Similar cards, multiple purchases
This is when in-sequence or near in-sequence cards are used for a series of transactions. It could be that the criminals have gotten their hands on a batch of numbers from a card company database and are simply working their way through the list before the cards are turned off.
Multiple purchases with different cards
Card testing is when fraudsters make small purchases to see if the card works before going for bigger fish. These transactions fly under the radar for most alerts and show that the way is clear to try for bigger ticket items.
Order data misalignment
Are multiple orders shipping to different addresses coming in at the same time? Is the billing address the same for all of them? Someone could be sending a lot of gifts, or a fraudster could be using a stolen card to make purchases.
Using multiple cards
Most Americans have, on average, six credit cards. If a consumer has far more than that on their account, it might be a good idea to watch for other red flags, too.
Ways Dropshippers Can Limit Online Shopping Fraud
Set clear return policies
Return policies protect you in two ways. First, they can make it more difficult for a fraudster to exploit if you have clear and concise policies that are easy to understand and readily available.
The second reason is that clear return policies can keep good customers from leveraging chargebacks as a means of getting their money back. If customers don’t understand or can’t find your rules about returns, they may turn to friendly fraud without realizing the impact it has on your business. And, as we’ve seen, once friendly fraud is successful, it’s more likely that the consumer will use it again.
Use package tracking
Package tracking gives you a means of proving that an item arrived at its destination. This might not be helpful if a criminal is stealing packages after they arrive, for instance, but it can help in disputes regarding if an item arrived or not. Roughly 19% of chargebacks are filed claiming an item or service arrived late or not at all.
When an order is large or for high ticket items, it’s advisable to go one step further and require a signature. That way it becomes impossible to claim that an item wasn’t received and easier to prove whose hands the package ended up in.
Review orders that show red flags
If an order exhibits warning signs, it may still be legitimate. Remember, false declines are an expensive mistake that can ruin future sales and your reputation.
Instead, an order that includes red flags should be manually reviewed. In some cases, you should consider even calling the buyer and asking them to validate information on the order. If they can’t quickly answer straightforward questions, like their zip code or the last few digits of their credit card number, it’s probably not a good purchase.
Use high-quality fraud prevention and protection tools
You may not have the resources to employ your own fraud team, but you don’t need to. Modern fraud detection and prevention tools are sophisticated, flexible, and scalable so that you’re able to affordably get as much or as little protection as you need.
Not all prevention and detection toolsets are created equal, however. It’s critical that you invest time in researching and reviewing your options. You’ll likely want one that integrates with your existing ecommerce system. What you don’t want is a fraud prevention platform that only uses basic filters to weed out bad transactions. These tools either let too many fraudulent transactions through or have a high rate of false declines, both of which are detrimental to your business.
In addition to looking for a full-featured and flexible solution, you may want to consider a platform provider that offers chargeback protection in addition to fraud detection and prevention. This protection is like insurance, where the provider will pay you back for transactions that they approve but that later becomes a fraud-related chargeback.
Protect Your Dropshipping Business from Ecommerce Fraud
Dropshippers have to juggle a lot of variables to stay profitable. Dealing with a lot of fraudulent purchases shouldn’t be one of them. Regardless of your business size, you can get high-quality fraud protection with a best-in-breed solution that integrates with your ecommerce platform. That way, fraud can be one less thing to worry about while you work to meet your customer’s needs.
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