Affiliate Summit West 2020 is only a few days away, and it got us thinking about affiliate fraud.
In spite of affiliate fraud, many of our clients rely on affiliate marketing – some very heavily – to grow and boost online sales. Affiliates can help drive traffic that is high converting to many highly competitive consumer segments.
So, like Neil Patel, co-founder of Neil Patel Digital says:
If you want to scale your marketing, you can’t just rely on your own efforts. You need affiliates, and Affiliate Summit is a great place to meet them!
We know that the #ASW2020 conference always has awesome speakers and actionable information. Plus, it’s a great space to network and find new affiliates. But there is also the other side of the coin of performance marketing. Some of our merchants have experienced negative effects on their merchant account from rogue affiliates who send fraudulent sales.
So, a quick question for you? Have you ever been a victim of affiliate fraud, and what did you do to prevent it from happening again?
If not, have you ever thought about the full repercussions of affiliate fraud on your online business? Don’t lose the company you’ve worked so hard to build to unscrupulous affiliate actions. This is important, especially if you’re struggling to find quality affiliates. With a few preventative steps, affiliates can be a valuable source of traffic and sales to your offer.
The state of performance marketing
Digital ad spend was over $57 billion for the first half of 2019 according to IAB. And though it has slowed down a bit, it isn’t expected to decrease any time soon. e-Commerce markets are rapidly expanding. Likewise, the ways and means of executing affiliate fraud.
So, no, affiliate marketing isn’t fraud-proof. And certain types of scams could impact your ability to process payments online. Here’s a quick look at them.
Affiliate fraud that impacts your merchant account (think high chargebacks)
The goal of lot of the affiliate fraud scams is to defraud affiliates or buyers. This includes diverting traffic from legitimate affiliates, circumventing their websites, cookie stuffing. These scams mean that affiliates lose out on commission that was rightfully theirs.
Also, there’s fraud that is targeted to online business owners. And in this respect, you – and your merchant account – will be affected. You can find out more in our post on 8 Ways Affiliate Traffic Might Hurt Your Merchant Account.
What kinds of affiliate fraud could cause you to lose your merchant account?
Dodgy affiliates with bad quality traffic tend to refer illegal transactions. Persons create fake identification information and accounts. Afterward, they purchase your products or services with stolen credit card details. The affiliate that referred them receives your commission payout. In the end you’re left with chargebacks. And, you lose money from the paid commission, because the fraudulent transaction is reported.
Scams like this often target high-ticket affiliate products and services – often in the high-risk business categories such as supplements and dating offers. They like products and services with high commission rates and short payout times. Meaning, you may be offering commissions above 50% or a CPA over $100, and you payout affiliates weekly or every two weeks.
Bait and Switch
Affiliates advertise promises and claims about your products or services that you never agreed to. Customers legitimately sign up through your affiliate’s links expecting these promises to be filled – unbeknown to you. You pay the affiliate his/her commission. After, the customer learns the truth, as you’re not meeting the promises made by the affiliate. So, they initiate a chargeback.
If you fall victim to one of these two scams, you could end up in the red after paying out affiliate commissions, chargebacks, and fees. Then, if your chargeback ratio hits above the allowable threshold, you’re in trouble with your merchant account provider.
You can find out more about the threshold in this post on new Visa rules that came into effect in 2019. Or, you could contact DirectPayNet to review your merchant account processing to see if you’re heading in the wrong direction with your merchant account.
As a merchant facing affiliate fraud, you can expect:
- Lost revenues: Chargebacks result in drained funds from your bank account. You’ll also lose out on the service or product which may not be returned.
- Higher chargeback ratios: More chargebacks mean higher chargeback ratios. This can lead to your business exceeding the allowable threshold of your merchant account. You may be subject to fines and fees if you go over allowable thresholds.
- Chargeback fees: A fee comes with each chargeback. So, that’s eating into your profits as well.
- Payout of unearned commissions: Affiliates receive unearned commissions, which you can’t always recall.
- Higher merchant account requirements: Your merchant account provider may demand withholding payments or higher reserves (e.g. going from 10% to 20%), or a security balance. This will significantly impact your cashflow.
- Lost merchant accounts: High chargeback rates can lead to payment providers terminating your merchant account. Even worse, they can place your business on a MATCH list or TMF (Terminated Merchant File). You may be unable to open another merchant account due to being blacklisted by Visa and/or Mastercard.
Limiting affiliate fraud in performance marketing – what you can do
Affiliate fraud is inevitable. What you can do is to take steps to prevent it. (That’s part of our risk management services at DirectPayNet).
1. Validate new affiliates
Better to be safe than sorry. That means putting in the work at the frontend, so you have less of a cleanup at the backend. Put in place comprehensive affiliate screening processes to weed out potential fraudsters. A manual review of new affiliates is always a good option. It may be time-consuming. But it has better long-term results. Having a live skype or zoom call can help weed out the fraudsters as many of them will not want to get on a video call with you.
You could also consider putting new affiliates through a probationary period of say 60-90 days where payouts are made after probation is done. You can incentivize affiliates by offering a higher payout for their patience.
2. Remove dormant affiliates
Fraudsters can hack and reuse dormant affiliate accounts. If several of your partners haven’t been active for more than a year, consider removing them.
3. Review your affiliate data regularly
Checking the data can show you early warning signs. For example, have you noticed sudden peaks in transaction activity for no reason? Are you noticing affiliate conversions from one source converting much faster than average? Are they responsible for a higher number of refunds than others? Check your affiliates sales stats to ensure chargebacks and refunds are within acceptable norms and immediately highlight any issues to your affiliates so they are aware you are keeping track.
Also check the URLs of referring websites for any suspicious sites. Track IP addresses to ensure multiple purchases aren’t originating from the same IP address. When you notice spikes and surges in traffics and purchases, ensure there is some human involvement to verify the metrics and check for fraud. Manually review sample orders from random affiliates as a human review can highlight any inconsistencies.
4. Increase payout times
If you notice, most affiliate programs for large companies are normally on a monthly payout cycle. This allows them to prevent the payout of commission on items that have a chargeback or refund. So, you can consider changing from biweekly to monthly commission payouts. This can be a temporary measure if your affiliate program has unusual activity.
Or, you can pay on a next month schedule. For example, commissions on high-ticket sales made in January could have a February pay out date. This gives you a window of 30+ days to detect chargebacks and suspected fraud. We know it’s unpopular, but you can use it to monitor questionable affiliate activities. Consider this if you can offer higher affiliate commission to reward affiliates’ patience.
5. Implement anti-fraud measures
Set up fraud management filters or system alerts to screen suspicious activity. There are plenty of robust third-party tools in the market to help. This could be alerting you if there are multiple orders from the same person using different credit cards or from the same IP address.
New year, new rules, take charge
Affiliate fraud will eat into your ROI. Therefore, as the new year gets underway, make the necessary business investments to limit risks. High chargeback ratios are often the results of affiliate fraud for high-risk merchants selling products such as supplements or offering digital content with a continuity component. That’s you. And that’s putting your business in jeopardy. So, make the changes that will limit the chances of affiliate fraud in your business.
Are you attending #ASW20 or any other affiliate marketing conferences for 2020? We encourage you to seek out experts in affiliate fraud and learn how to combat them. Look up presentations on new trends in digital marketing. Take stock of what other companies are doing to improve affiliate marketing in their businesses.
You can also email DirectPayNet for consultation. Perhaps you’ve been the victim of affiliate fraud. Maybe you want to be proactive and limit its damage to your business. We can help you reduce risks and set up the necessary systems – both automated and manual. These help identify, prevent and stop affiliate fraud in its track.