Drop-shipping Clusters Pose an Elevated Fraud Risk

If you've read our Drop-shipping FAQ Guide, you know that drop-shipping merchants pose an elevated risk because of increased chargebacks and the potential for transaction laundering. But are you aware of drop-shipping clusters and the increased likelihood they are engaged in fraud? Learn about this danger that may be in your portfolio, hiding in plain sight.


The Drop-shipping Model

Drop-shipping has become an increasingly popular way to quickly launch an online business with virtually no overhead. Although drop-shipping merchants typically market innocuous products, there are inherent risks associated with drop-shipping as a business model. Since drop-shippers never control their own inventory, fulfillment problems are far more common than with other retail business models. The chain of actors involved in a drop-shipping transaction is more complex, which can also lead to issues determining responsibility in resolving a chargeback. It is frequently the case that different parties hold responsibility for the various stages of order fulfillment: processing an order, maintaining inventory, shipping a product, and managing returns. Finally, drop-shipping websites are popular among transaction launderers because their pre-built templates are easy to set up and can quickly be used to mask illegal activity.


Drop-shipping Clusters

In recent months, LegitScript analysts have observed a growing number of drop-shipping networks and clusters of merchants that appear to be operating under shared control. Such clusters pose elevated risk for several forms of fraud, from card-cashing scams to transaction laundering. In addition, due to the volume of accounts, these merchants may present elevated risk for Chargeback Monitoring Program (CMP) evasion.


The Challenge of Spotting Drop-shipping Fraud

Many drop-shipping websites are subdomains of e-commerce and drop-shipping service providers, which means that unique domain name system (DNS) and/or Whois information may not be available. Furthermore, much like merchants offering generic SEO and web development services, the legitimacy of drop-shipping merchants is often challenging to verify due to the websites' striking similarities. Common characteristics of high-risk drop-shippers include:

  • A seemingly random selection of products offered at unusual price points (e.g., $13.64);
  • Broken or missing links and an apparent neglect for external presentation;
  • Use of template content, including generic text and contact information; and
  • The absence of any additional internet presence, such as social media profiles or reviews.


The rise of drop-shipping clusters illustrates the abuse potential inherent to drop-shipping, and we predict this trend will further develop in 2019. Because of the difficulty in identifying fraud and transaction laundering, only a review by an expert analyst can ultimately determine if a drop-shipping website is engaged in problematic behavior, and if it belongs to a larger network.

What to find the problematic clusters in your portfolio? Contact us to learn more about our merchant monitoring solutions.