Preventing fraud in your DropShipping business

With so many misconceptions about whether DropShipping is fraud, it makes sense that those misconceptions came from somewhere. The DropShipping model isn’t a fraudulent practice, of course – it has been around for decades, and way before the internet grew into being!

Fraud is a serious threat, and when you’re running any kind of business, whether in retail or not – you need to protect yourself, and your customers from it. But fraud comes in so many different guises that it can be hard to know where to even start – so in this post, we’re taking a look at fraud in eCommerce, and some of the steps that you can take to avoid fraud as far as possible.

What is eCommerce fraud?

Shopify defines eCommerce fraud as:

In many cases, eCommerce fraud is definitely going to have a negative impact on the business, and in the worst case, it can be utterly catastrophic. But since fraudsters are going to keep doing what they can to get their hands on your money – or that of your customers – then you have to be aware of what they are doing, and what you can do to help prevent fraud from having an impact on your business.

What types of eCommerce fraud are there?

Credit card fraud – also known as card not present fraud, this happens when criminals access credit or debit card information. This is targeting the customer for most retailers, but some businesses that are DropShipping will be using a credit card to place customer orders with suppliers until the marketplace releases their funds.

Chargebacks – sometimes referred to as friendly fraud or a reversal. Usually this is used by card owners when they don’t recognise the transaction, such as if they lost their card, but it is sometimes used by fraudsters in order to get a free product. They simply contact their card company, disputing the transaction (they may say they don’t recognise it, or their card was stolen) and then the bank claws the money back from the business. This can have a negative impact on retailers, since payment gateways may penalise the business, restricting payments from some card companies, as well as charging the business for each chargeback requested.

Account takeover fraud – this is where criminals get their hands on login details for customers – usually via phishing practices – and buy products using the victim’s card. They might also change passwords and addresses, and they may also sell that personal data. For retailers, it can result in chargebacks, and it can lead to customers complaining publicly on their social media and review websites.

Interception fraud – this sounds similar to account takeover fraud, but is used by criminals to intercept the delivery –often by contacting the store’s customer service team, or the shipping company, to reroute the package to their delivery address instead. If the fraudster lives close to their victim, they might wait for the package, pretending to be the victim, or stealing the package from a drop-off location.

Triangulation fraud – as you’d imagine, this involves three parties. Fraudsters set up a fake store, the customer buys from this store, and with the personal details, the fraudster buys the items from a legitimate to send to them, but then continues to use their personal information. The customer may not notice, because they actually receive their goods – and this type of fraud can continue for quite some time.

Affiliate fraud – this impacts businesses more than it does customers, since they are using legitimate affiliate techniques, but use fraudulent means to earn more money from the businesses they target. Customers aren’t targeted in this situation, but if you’re at the point of working with affiliate marketers, you definitely don’t want to end up paying out more when you don’t need to.

Refund fraud – this one will cost businesses too. Essentially, fraudsters will try and get a refund from you for false reasons, such as saying they didn’t receive the order, claiming it was faulty, or returning the shipping label with junk mail or an empty box in order to qualify for their refund. You might also encounter stolen credit cards being used, and then the fraudster requests a refund to a different method, saying that they cancelled the card the item was bought with.

Avoiding eCommerce fraud

There are plenty of things you can do to help protect your business from eCommerce fraud – although none of them are 100% reliable, they’ll certainly help. Let’s take a look at some of the things you can do to shield your business from being scammed.

Look for tools to protect your website

Most of the major online stores have tools to help you identify fraud – so make use of them! If you’re using BigCommerce, then you can find information from them about how to avoid fraud here, and Shopify has fraud analysis inbuilt too. In addition to that, most of the payment gateways that you might use will offer you fraud tools such as AVS (Address Verification System) and CVV (Card Verification Value), while others will offer additional, more advanced verification tools as well.

Don’t forget that online scams are always evolving though, so keep an eye on the tools you have, make sure they are all enabled and up to date.

Find a service to help cover fraudulent chargebacks

This is a type of insurance that will help to keep your business covered in case of fraudulent chargebacks. Shopify Protect is an example of this, and you’ll be covered if you are targeted.

Ensure your website is PCI compliant

All online stores that receive credit card payments need to comply with PCI security standards. If you don’t meet these requirements, you’re at risk of fees, suspension of credit cards, being monitored, needing to accept liability for fraud charges, as well as risks of GDPR fines too.

If you work with these requirements, the chances of your business encountering fraud will be much lower. Working with hosted eCommerce store solutions such as Shopify and BigCommerce means that you are much more likely to be covered – but always double check with the provider.

Set up workflows to tackle fraud

Knowing the steps that you need to take if you end up being targeted by fraudsters means you’ll be able to tackle it much quicker when you do. So don’t wait until you need it – set up your to-do list before you lose money. This is even more important to have prepared ahead of quarter four when your business is the most busy.

Fake wholesale setups

It isn’t just online fraud that you need to watch out for – there are also other businesses that will be attempting to scam you out of your money. The biggest issue here that you’re likely to encounter is fake wholesale, or DropShipping suppliers – find out how to avoid them next.

How to spot a fake DropShipping supplier

They deal directly with the public. This is a big red flag that should alert you to the fact this business is a regular retailer – and there’s a good chance that you’re going to be competing with them for customers. There really isn’t any reason that your customers won’t find their prices, and want to pay those cheaper prices, so you won’t be able to make the margins that you want to.

There is a lack of contact details. This should always be a cause for concern, whatever business you’re dealing with. If they don’t have their address, and contact details on their website, or there is just a mobile number and an email address (especially if it is a generic Gmail or Outlook account) then steer clear.

They have claims about high margins. There are times in DropShipping that you will make decent margins, but in general, DropShipping is about low margins and high volume of sales. If you’re seeing claims about high margins, chances are the ‘wholesaler’ will have low quality products, or there will be very few products with decent margins on offer.

They charge a monthly payment to ‘hold stock’. Legitimate wholesalers that serve DropShipping businesses don’t charge fees to hold stock for you – that simply isn’t how DropShipping works. You’re going to be paying per order, so a real supplier won’t be asking you to pay to hang onto stock for you up-front.