Why Online Dropshipping Businesses Are Considered High Risk | DirectPayNet

Why Online Dropshipping Businesses Are Considered High Risk

E-commerce businesses have never looked so attractive. 

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Subscription platforms such as Shopify and BigCommerce offer prospective online business owners a website infrastructure in a mere matter of minutes. Just a few days spent browsing Aliexpress can find you several dropshipping suppliers selling all kinds of products.  Within a week, you can graduate from a complete novice to having a profitable business operating as a middleman between customers and wholesale suppliers.

But not so fast.

Dropshipping businesses are viewed as high risk by acquiring banks and payment processors. Many business owners don’t realize this until it’s too late and struggle to scale their dropshipping stores. Many get shut down. Others go out of business.

So before you throw everything into building your dropshipping empire, here’s what you need to know about taking payments and scaling your business.

Continuing Boom in E-Commerce Drives Interest in Dropshipping Businesses

The early 2020s have been dominated by e-commerce so far. While the global pandemic did boost e-commerce sales, the trend toward online over in-person shopping was already there. Before 2020, global e-commerce revenue was growing by over 10% per year.

Since the pandemic, growth remains strong. Global revenue is expected to show an annual growth rate of 7.4% over the next five years, resulting in a projected market volume of $34.77 billion by 2025. That’s over double what the volume was in 2017 ($13.85 billion).

To wannabe dropshippers, the fact that you would only need to capture the tiniest slice of those figures to have a very successful business is encouraging. With so many online tutorials led by SEO marketers teaching entrepreneurs how to set up an online store, it’s never been easier.

Once they’ve learned the basics, it’s up to newbie online retailers to find products from wholesalers. The number one dropshipped product used to be t-shirts. However, that’s all changed. It’s now all about consumer electronics. American and European merchants can source cheap Chinese-made electronic products, but their own branding on them, and then sell them on to customers in the Western world for huge profit margins.

Bluetooth speakers, earphones, phone accessories, and even home assistants are all available to dropship. The problem? Dropshipping is little more than outsourcing order fulfillment. While it might be the easiest business model for your new e-commerce store, several issues will make it difficult for you to get your home electronics dropshipping business off the ground.

Let’s look at why online dropshipping businesses are considered high risk by banks and credit card processing providers.

Why Banks and Payment Processors View Online Dropshipping Businesses as High Risk

Several issues make those processing your online payments twitchy. Firstly, as a dropshipping business owner, you are not in control of your own products. While you might control pricing, customer support services, and marketing, you do not control your products’ quality. You can’t sell products that you can personally vouch for in the middleman position. This worries banks.

More traditional online retailers have quality control measures at their domestic warehouse to ensure quality products are being dispatched to customers. Inferior products are a magnet for chargebacks and refunds. Two things acquiring banks and payment processors don’t want to be on the hook for.

Another issue is the supply chain. In most instances, when an online order comes in the US or Europe, it’s immediately pulled through to the factory of specialist dropshipping companies based in Asia and then fulfilled. The issue is that shipping times from Asia can last weeks. In today’s world of Amazon Prime, customers expect their products within a couple of days.

These are just a few of the factors that cause the dropshipping industry to be associated with high chargeback ratios, above-average refund rates, and numerous fraud cases. Refund fraud is a particular problem because most merchants dropshipping products can’t afford the shipping costs associated with door-to-door tracking services. When a customer orders and subsequently issues a refund claiming they never received the item, it’s difficult for a merchant to prove the sent item was received.

These factors put off acquiring banks, payment processors, and merchant account providers. Merchants operating in this space need a special high-risk merchant account to begin credit card processing. Providers will demand high cash reserves since the dropshipping business model is such a low risk for the merchant. They will also charge higher processing fees on each transaction and often set restrictive processing limits.

So what steps can home electronics dropshippers take to lower the risk associated with their business and secure better payment processing?

Are you a consumer electronics merchant who’s been affected by the ongoing tariff wars between the US and China? Read our step-by-step guide to protecting your online electronics business from geopolitical disputes.  

Top Tips for Reducing Risk as a Dropshipping Merchant

Thankfully you can still operate a successful dropshipping business by taking some, if not all, of the following steps.

Avoid Using Payment Aggregators

One of the most common mistakes those setting up electronics dropshipping businesses make is using non-specialized payment solutions. Merchants often opt to start with payment aggregators (sometimes known as payment facilitators) such as Stripe (who support Shopify payments) or PayPal, even though they deem dropshipping to be too high-risk in most markets outside of the US.

However, these solutions are costly. Worse, these companies often freeze or shut your processing down as soon as you start incurring a few chargebacks. You will also have to share a Merchant Identification Number (MID) with other businesses. That means you could have your processing shut down through the actions of other devious merchants.

It always makes sense to approach a specialist high-risk merchant services provider such as DirectPayNet, who can pair you with acquirers and processors more familiar with your industry and are going to more understanding of the specific issues affecting the electronics trade.

Partner with a Local Order Fulfillment Warehouse to Offer Express Shipping

The number one cause for chargebacks, refund requests, and disputes is slow shipping. When looking at suppliers in China and beyond, many small business owners review the wholesale price and don’t dig any deeper. However, you need to find a supplier with a long track record (no less than two years) of providing a good service and with fast shipping times (five days or less).

But even five days is too long these days. You need to offer express shipping of a few days. So how can you do that with a supplier in the Far East? Order in bulk and partner with a local order fulfillment warehouse to get your electronic items bought on your e-commerce platform shipped to customers sooner. With two-day shipping, you can compete with e-commerce giants such as Amazon and eBay. Better yet, you can use tracked and signed-for deliveries to combat refund fraud.

Offer Superior Customer Service

Chargebacks often arise because customers can’t easily cancel or return their order. That’s why you need to have easy-to-find cancellation and returns policy so that you can avoid the negative consequences associated with chargebacks. For instance, have a dedicated customer support social media account so that disgruntled consumers can find quick resolutions before initiating a chargeback out of anger or frustration.

A dropshipper should answer all email inquiries within 24 hours, and you can partially automate the customer service process by using AI-powered chatbots and virtual assistants. It’s also a good idea to have a phone number clearly visible on your site so that customers can call to get their issues resolved quickly before they turn into refund requests and chargebacks.

Ramp Up Anti-Fraud Measures Through Technology

Fraudulent chargebacks continue to plague this industry. Scammers continue to test payment gateways via card-not-present transactions for weaknesses. Thus, you must work with a payments partner with the latest technology (such as 3DS2) built-in. This technology helps shift the burden onto customers to prove that the transaction was fraudulent and analyses dozens of data points before deciding whether to approve or decline a transaction.

But you can also partner up with specialist anti-fraud and chargeback-protection technology companies such as Ethoca and Verifi. They stop chargebacks before they ever reach the dispute stage (which will cost you roughly $25 per filing), protecting your credit card processing and repaying their upfront investments incredibly quickly.

Scale Your Consumer Electronics Dropshipping Business to 2025 and Beyond with a High-Risk Merchant Services Provider

Many would rightly argue that’s there’s never been a better time to start an online consumer and home electronics dropshipping store. E-commerce platforms are easy to use, wholesale suppliers are easy to find, and internal order fulfillment remains robust despite recent challenges.

However, you need to understand that you are operating a high-risk business. You need specialist help from payment experts in high-risk business verticals. That’s where we come in. Here at DirectPayNet, we’ve been helping dropshipping businesses for over a decade to find long-term credit card processing and merchant account solutions that work.

So whether you’re new to the dropshipping game or you’re an experienced middleman operation looking for better payment processing options, talk to DirectPayNet today about securing solutions that can help to scale your online store! 

 

 

 

 

 

About the author

As President of DirectPayNet, I make it my mission to help merchants find the best payment solutions for their online business, especially if they are categorized as high-risk merchants. I help setup localized payments modes and have tons of other tricks to increase sales! Prior to starting DirectPayNet, I was a Director at MANSEF Inc. (now known as MindGeek), where I led a team dedicated to managing merchant accounts for hundreds of product lines as well as customer service and secondary revenue sources. I am an avid traveler, conference speaker and love to attend any event that allows me to learn about technology. I am fascinated by anything related to digital currency especially Bitcoin and the Blockchain.