A dropshipping risk guide for acquirers and PSPs covering dispute drivers, core checks (supplier, fulfillment, delivery claims, returns, support), and evidence to collect for underwriting and ongoing monitoring.
Dropshipping as a business model carries manageable risk when properly verified. The real exposure comes from merchants who obscure their fulfillment arrangements, misrepresent delivery capabilities, or lack operational control over the customer experience. For payment providers, acquirers (entities that enable merchants to accept card payments), and risk teams, the challenge is distinguishing between transparent dropshippers with solid operations and merchants running high-risk fulfillment setups that generate chargebacks, consumer complaints, and regulatory scrutiny. This guide outlines what we verify when evaluating dropshipping merchants, what signals indicate operational control versus risk, and how to structure evidence-based underwriting for this merchant segment.
The Business Model
Dropshipping is a retail fulfillment method where a merchant sells products without holding inventory. When a customer places an order, the merchant purchases the item from a third-party supplier who ships directly to the customer. The merchant never sees or handles the product.
Revenue model:
Customer pays merchant retail price (example: $50)
Merchant pays supplier wholesale price (example: $25)
Merchant keeps margin ($25 in this example)
Why it attracts new merchants:
Low startup costs (no inventory investment)
No warehouse or fulfillment infrastructure required
Easy to test products and markets
Scalable without physical expansion
Why it creates payment risk:
Merchant has no control over product quality
Delivery times are dependent on supplier reliability
Return processing is logistically complex
Customer service requires coordination with external parties
Ship orders within the timeframe stated in their advertising
Ship within 30 days if no timeframe is specified
Notify customers of delays and offer the option to cancel for full refund
Provide prompt refunds if the order is canceled
For dropshippers sourcing from overseas suppliers, meeting these requirements without operational control is challenging.
The European Union Consumer Rights Directive similarly mandates delivery within 30 days unless otherwise agreed, and grants consumers a 14-day right of withdrawal for distance contracts.
The Scenario: New E-commerce Brand with Outsourced Fulfillment
Consider a typical underwriting case that arrives in merchant acquisition queues:
Merchant Profile
Business details:
New online store selling consumer electronics, fashion accessories, or home goods
Website launched within the past 3 to 6 months
Domain registered recently (check WHOIS data)
Business entity incorporated within the past year
No physical storefront or showroom
Stated operations:
No physical inventory or warehouse listed on the website
Delivery times stated as 15 to 30 business days
Ships from "various warehouses" or location not specified
Supplier and fulfillment partner not disclosed on website
Business registration shows a residential address or virtual office
Processing volume projected at $50,000 to $150,000 per month
Average order value: $30 to $80
Website characteristics:
Product images appear to be stock photos or supplier catalog images
Product descriptions are generic or copied from other sites
Limited "About Us" information
No physical contact address, only email or contact form
Social media accounts are new with minimal followers
Few or no genuine customer reviews
Payment processing request:
Applying for card-not-present (CNP) merchant account
May request high processing limits immediately
Growth projections may be aggressive
May have been declined by other processors
Why This Profile Requires Enhanced Due Diligence
This profile appears regularly in merchant underwriting queues. The merchant is not necessarily fraudulent or intentionally deceptive, but the setup creates information asymmetry. Without verification, you cannot assess whether they can fulfill orders, handle returns, manage customer disputes, or sustain operations beyond the first few months.
Key vulnerabilities:
No operational track record: New merchants lack historical performance data
Unknown supplier relationship: No evidence of established, reliable fulfillment
Delivery expectation mismatch: Website promises may not align with supplier capabilities
Financial instability: Thin margins and no inventory buffer create cash flow risk
Customer service gaps: Merchants underestimate support requirements
Scalability questions: Can they handle volume spikes or supplier issues?
Consumer complaints escalating to regulatory authorities
Card network fines if chargeback thresholds are exceeded
Reputational risk from association with problematic merchants
What We Verify: The Five Core Control Points
When underwriting dropshipping merchants, we focus on five areas that reveal operational control and the ability to deliver on customer promises. Each area requires documentary evidence, not just representations.
Supplier Identity and Relationship Verification
Why It Matters
Knowing who fulfills the orders allows you to assess capability, reliability, and recourse. If the merchant cannot or will not disclose their supplier, they lack operational transparency. This is different from protecting competitive information. We are not asking for supplier pricing, exclusive product sources, or competitive intelligence. We are confirming that a real, identifiable entity is handling fulfillment and that the merchant has an established relationship with them.
Risk scenarios without supplier verification:
Supplier disappears: Merchant accepts orders they cannot fulfill
Quality issues: No accountability for defective or misrepresented products
IP infringement: Supplier provides counterfeit or unauthorized products
Delivery failures: No recourse when shipments are delayed or lost
Financial disputes: Merchant cannot recover funds from unreliable supplier
What We Look For
Supplier legal identity:
Full legal business name
Business registration number or tax identification
Physical business address (not a drop box or forwarding service)
Country of incorporation and operation
Years in business (established suppliers preferred)
Relationship documentation:
Written supplier agreement, contract, or terms of service
Purchase orders from the past 3 to 6 months
Payment transaction history showing regular purchases
Communication records (email threads, order confirmations)
Supplier references or testimonials
Supplier operational capabilities:
Product catalog or inventory list
Stated shipping methods and delivery timeframes
Order fulfillment process documentation
Quality control procedures
Return and defect handling policies
Supplier reputation and verification:
Business registration verification via public registry
Website presence with verifiable domain age
Third-party reviews or ratings (Alibaba, Global Sources, industry directories)
Trade association memberships
Export or import licenses if applicable
Verification Process
Step 1: Request supplier disclosure
Ask the merchant to provide:
Supplier company name and registration details
Contact information (phone, email, physical address)
Description of products supplied
Length of relationship
Most recent invoices or purchase orders (3 to 6 months)
Step 2: Independent verification
Do not rely solely on merchant-provided documents:
Business registration confirmed via Chinese government database
Supplier listed on Alibaba with Gold Supplier status (3+ years)
Supplier has 200+ positive reviews on Alibaba
Phone number listed on website is answered by company representative
Representative confirms business relationship with merchant
Google Street View shows industrial facility at listed address
Assessment: Low risk. Supplier is established, verifiable, and confirms relationship.
Example B: Inadequate supplier verification
Merchant provides:
Supplier name: "Global Electronics Network"
Address: "Kowloon, Hong Kong" (no specific street address)
States "we work with multiple suppliers, this is our main one"
Provides single invoice from last month only
Supplier has no website or online presence
Cannot provide supplier contact information, states "we communicate via WeChat"
We verify:
Cannot locate business registration for "Global Electronics Network" in Hong Kong
Name is generic and yields no search results
No presence on B2B platforms
Provided address is non-specific (Kowloon is a large district)
Assessment: High risk. Supplier identity cannot be verified. Merchant may be using a middleman or agent, sourcing from multiple unknown sources, fabricating supplier information, or planning to fulfill orders without secured supply.
Red Flags: Supplier Verification
Immediate decline indicators:
Merchant refuses to disclose supplier identity when directly asked
Claims supplier information is "confidential" or "proprietary" without legitimate reason
Supplier cannot be contacted or does not acknowledge relationship
Multiple merchants using same "supplier" that shows signs of being a shell company
Enhanced due diligence triggers:
Supplier is located in high-risk jurisdiction
Supplier has been in business less than 1 year
Merchant-supplier relationship is less than 3 months old
Purchase order volume is inconsistent or shows single large order (not ongoing relationship)
Supplier specializes in goods commonly associated with fraud (luxury goods, electronics with high resale value)
Supplier has negative reviews or complaints about quality or delivery
Special Cases: Multi-Supplier and Aggregator Models
Some dropshipping merchants work with multiple suppliers or use dropshipping aggregation platforms (examples: Oberlo, DSers, Spocket, CJ Dropshipping).
Verification approach:
Request list of all suppliers used in past 90 days
Verify top 3 suppliers by volume (following same verification process)
If using aggregation platform, verify:
Platform provider identity and legitimacy
Merchant's account status on platform
Platform's supplier vetting procedures
How platform handles disputes and quality issues
Aggregation platform verification for merchants using platforms like Oberlo or CJ Dropshipping:
Confirm platform integration (request screenshots or API documentation)
Verify merchant account is active and in good standing
Understand platform's supplier vetting process
Review platform's policies on order fulfillment, tracking, and disputes
Note that platform is an intermediary, not the actual supplier
Risk assessment:
Aggregation platforms provide some operational oversight but merchant still lacks direct supplier relationship
Platform failure or policy changes can disrupt merchant's entire operation
Quality control is still limited
Consider as moderate risk, require ongoing monitoring
Shipping Times and Delivery Promise Verification
Why It Matters
Misrepresented delivery times are a primary driver of item-not-received (INR) chargebacks in dropshipping. Merchants who promise 5 to 10 business day delivery but source from overseas suppliers using standard international shipping (14 to 30 days) create a structural mismatch between customer expectations and reality.
Regulatory compliance:
The FTC Mail Order Rule requires merchants to:
Have a reasonable basis for stated delivery times
Ship within the stated time or within 30 days if no time is stated
Notify customers promptly if unable to ship as promised
Offer option to cancel with full refund if delayed
Violations can result in FTC enforcement actions and fines, state attorney general consumer protection actions, private lawsuits under state consumer protection statutes, and payment processor termination.
What We Look For
Website policy consistency:
Shipping policy page with clear delivery timeframes
Product page delivery estimates (do they match shipping policy?)
Checkout flow delivery messaging (what does customer see at payment?)
FAQ or customer service pages addressing shipping
Any countdown timers or urgency messaging (are they misleading?)
Delivery timeframe realism:
Stated timeframes align with supplier location and shipping method
Differentiation between processing time and shipping time
Buffer for holidays, weekends, customs clearance
Communication about potential delays
Shipping method documentation:
What carriers are used (USPS, DHL, ePacket, China Post, etc.)
What service levels (express, standard, economy)
Tracking availability and timing
Insurance and signature requirements
Historical performance data (if available):
Average actual delivery time by destination
Percentage of orders delivered within promised timeframe
Delayed order rate and reasons for delays
Customer complaints about delivery
Verification Process
Step 1: Website audit
Manually review merchant's website to document all delivery-related representations:
Shipping policy page:
Screenshot the full policy
Note stated timeframes for each shipping method or destination
Identify any disclaimers or exceptions
Check if origin location is disclosed
Product pages:
Check 10 to 15 random products for delivery estimates
Note any variance in stated times across products
Look for urgency tactics ("Order in next 2 hours for delivery by Friday")
Screenshot any delivery promises
Checkout flow:
Place test order (do not complete payment) to see checkout experience
Document shipping options and stated delivery times
Check if estimated delivery date is provided
Note any automatic selection of shipping method
Marketing materials:
Review email campaigns, ads, social media for delivery claims
Check if advertising promises differ from website policies
Look for "fast shipping" or "quick delivery" claims
Step 2: Supplier shipping capability analysis
Cross-reference merchant's promised delivery times with supplier's location and typical shipping times:
Supplier location to destination shipping times:
Origin
Destination
Shipping method
Typical delivery time
China
U.S. (East Coast)
ePacket
10-20 business days
China
U.S. (West Coast)
ePacket
7-15 business days
China
U.S.
Standard Air Mail
15-30 business days
China
EU
Standard
20-40 business days
China
EU
Express
5-10 business days
U.S. (domestic)
U.S.
USPS Priority
2-3 business days
U.S. (domestic)
U.S.
USPS Ground
2-8 business days
Reality check calculation:
If merchant promises: "Delivery in 10 to 14 business days" And supplier is located in: Shenzhen, China And shipping method is: ePacket to U.S. East Coast (typical range: 10 to 20 days) And processing time is: 2 to 3 days before shipment
Total realistic timeframe: 12 to 23 business days Merchant's promise: 10 to 14 business days
Assessment: Merchant's promise is optimistic and will likely be missed on a significant portion of orders, leading to customer dissatisfaction and disputes.
Step 3: Historical delivery data analysis
For merchants with operating history, request delivery performance report (past 90 days):
Total orders shipped
Average delivery time by destination region
Percentage delivered within promised timeframe
Delayed shipments (defined as exceeding promise by 5+ days)
Customer complaints about delivery
Chargeback rate for INR disputes
Tracking data sample:
Request 20 to 30 recent tracking numbers
Independently verify using carrier tracking websites
Calculate actual delivery times from order date to delivered date
Compare to merchant's stated timeframes
What good looks like:
85%+ of orders delivered within stated timeframe
Average delivery time is at midpoint or better of stated range
Orders show 30+ day delivery when 15 days was promised
Tracking numbers are invalid, delayed, or show unusual patterns
Step 4: Test orders (for new merchants)
When merchant lacks historical data, consider commissioning test orders:
Test order protocol:
Order 2 to 3 products to different U.S. regions
Use genuine residential addresses
Track elapsed time from order to delivery
Document all customer communications received
Verify tracking information accuracy
Assess packaging quality and product condition
Cost: $100 to $300 for sample orders Value: Direct evidence of operational capability Timeline: Must wait full delivery cycle (15 to 30+ days) before making underwriting decision
Example Verification: Good vs. Poor
Example A: Realistic and transparent delivery promises
Website states:
Shipping policy page: "Orders ship from our partner warehouse in Asia within 2 to 3 business days. Delivery to U.S. addresses typically takes 18 to 25 business days via standard international mail. Express shipping (5 to 10 business days) available for additional fee. You will receive tracking information within 3 business days of your order."
Product pages display: "Ships from Asia: 18-25 day delivery"
Checkout shows estimated delivery date range based on current date + 20 to 28 days
Supplier capabilities:
Located in Guangzhou, China
Uses China Post and ePacket for standard shipments
Offers DHL express upgrade
Provides tracking numbers within 48 hours
Historical performance:
Past 90 days: 88% delivered within 25 business days
Average delivery time: 21 business days to U.S.
Customer complaints: 2% of orders
INR chargeback rate: 0.4%
Assessment: Low risk. Delivery promises are realistic, transparent, and supported by historical performance.
Example B: Misleading delivery promises
Website states:
Shipping policy page: "Standard shipping 15-30 business days"
Product pages display: "Fast Shipping Available!" with countdown timer "Order in next 4 hours for quick delivery"
Checkout shows: "Standard Shipping (3-5 business days)" in dropdown (copied from template, not updated)
Marketing emails: "Get it fast! Order now for delivery this week"
Supplier capabilities:
Located in Shenzhen, China
Uses standard China Post (20 to 40 day typical delivery)
No express option available
Tracking is delayed by 7 to 10 days
Actual performance (merchant refuses to provide data, but review sites checked):
Trustpilot reviews show complaints: "ordered 3 weeks ago, still not here"
Reddit mentions: "took 6 weeks to arrive"
BBB complaints: "promised 2 weeks, took over a month"
Assessment: High risk. Delivery promises are inconsistent across touchpoints, misleading at checkout, and not supported by supplier capabilities or customer experience reports.
Red Flags: Delivery Promises
Critical violations (likely decline):
Promises domestic U.S. delivery times (2 to 5 days) when supplier is in Asia
Uses countdown timers implying immediate shipment but processes orders days later
Checkout shows incorrect shipping times that contradict shipping policy
Refuses to disclose shipping origin or methods
Marketing explicitly claims "ships from U.S." when it does not
Has regulatory warning letters or consumer protection actions for delivery misrepresentation
Enhanced due diligence triggers:
Stated times are at the optimistic edge of possible (example: "7 to 10 days" for China to U.S.)
No distinction between processing time and shipping time
Vague language like "ships soon" or "fast delivery" without specifics
Different promises on different parts of website
Customer reviews mention unexpected long delivery
Policy Language Best Practices
We recommend risk teams look for this level of clarity:
Good policy example:
"Our products ship directly from our manufacturing partner in Shenzhen, China. Orders are typically processed and handed to the carrier within 2-3 business days. Shipping to the United States takes 18-25 business days via standard international mail service (China Post/ePacket). Express shipping (5-10 business days via DHL) is available for an additional $15. Tracking information will be emailed within 3 business days of your order and can take 5-7 days to show movement. Delivery times do not include weekends, holidays, or customs clearance delays. International orders may be subject to customs duties which are the customer's responsibility."
This policy discloses shipping origin, separates processing time from shipping time, provides realistic timeframe ranges, explains tracking delays, sets expectations for customs, and offers express alternative.
Returns Process and Policy Verification
Why It Matters
Returns are where dropshipping operations break down. If the merchant has no physical location and the supplier is overseas, processing a return becomes logistically complex and expensive for both merchant and customer. International return shipping can cost $30 to $80, exceeding the product's value in some cases. Merchants who cannot handle returns efficiently default to refund denials or ignore return requests, which leads to chargebacks and negative reviews.
Consumer protection regulators view return policies as a critical consumer right. The European Consumer Rights Directive mandates a minimum 14-day withdrawal right for distance sales. While U.S. federal law does not mandate returns for non-defective goods, card network rules effectively require reasonable return policies.
What We Look For
Published return policy:
Clear return window (example: "30 days from delivery")
Conditions for returns (unused, original packaging, tags attached, etc.)
Return shipping responsibility (who pays?)
Return address provided (domestic or international?)
Refund processing timeline (example: "within 5 business days of receiving return")
Restocking fees or return shipping deductions (if any)
Exceptions (final sale items, personalized products, etc.)
Return logistics capability:
Return shipping address (P.O. Box, residential, warehouse, or freight forwarder?)
Return processing facility and staff
Inspection and restocking procedures
Inventory disposition (resell, return to supplier, dispose?)
Return fraud prevention measures
Historical return data:
Return rate (percentage of orders)
Reasons for returns (defective, wrong item, customer changed mind, etc.)
Return processing time (days from return shipment to refund issued)
Return denial rate and reasons
Chargeback rate among customers whose returns were denied
Refund processing:
Method of refund (original payment method, store credit, other)
Screenshot merchant's published return policy from website
Verify return policy is easily accessible (linked in footer, FAQ, product pages)
Check if policy is clear and specific (not vague like "returns accepted at our discretion")
Identify return window (30 days is industry standard)
Note return shipping cost allocation
Verify return address is provided
Comparison to industry standards:
Element
Consumer-friendly standard
Acceptable
High-risk
Return window
30-60 days
14-30 days
<14 days or "no returns"
Return shipping cost
Merchant pays or free labels
Customer pays (reasonable)
Customer pays + restocking fee
Return address
Domestic (same country as customer)
International with clear instructions
No address provided or P.O. Box only
Refund timeline
3-5 business days after receipt
5-10 business days
>10 days or "up to 30 days"
Condition requirements
Reasonable (unused, tags attached)
Strict but clear
Vague or impossible
Restocking fee
None
$5-10 or <15%
>15% or variable
Step 2: Return address verification
The return address is critical for assessing operational control.
Address types and risk assessment:
Domestic warehouse or 3PL (Low Risk):
Address is a warehouse, distribution center, or third-party logistics provider
Located in same country as majority of customers
Verifiable via Google Maps, Street View, or property records
Merchant can demonstrate relationship with facility (contract, invoices)
Example: "Returns: ABC Fulfillment Center, 123 Warehouse Lane, Suite 500, City, State ZIP"
Verification: Google search shows commercial warehouse facility. Call to confirm they handle returns for merchant.
Residential address (Medium Risk):
Address is merchant owner's home or apartment
Common for small, early-stage dropshippers
Indicates lack of professional fulfillment infrastructure
May be acceptable if volume is low and merchant is transparent
Example: "Returns: 456 Main Street, Apartment 2B, City, State ZIP"
Verification: Property records show residential property. Merchant confirms they process returns at home.
Risk mitigation: Acceptable for merchants with <$50K monthly volume and clear growth plan to transition to professional returns facility.
International return address (High Risk):
Return address is in different country than customer
Returns go back to supplier (example: returns to China)
Return shipping cost is prohibitive ($40 to $80 from U.S. to China)
Customs forms required, long return shipping times
Creates economic barrier to returns
Example: "Returns: Supplier Name, Shenzhen, Guangdong, China 518000"
Assessment: High risk. Most customers will not pay $60 to return a $30 item. Merchant is effectively discouraging returns through prohibitive logistics. Expect elevated chargeback rate when customers realize return is impractical.
P.O. Box or mail forwarding service (High Risk):
P.O. Box, PMB (Private Mail Box), or commercial mail receiving agency
No physical facility to receive and process returns
May indicate merchant does not actually process returns
Used by transient operations
Example: "Returns: P.O. Box 789, City, State ZIP" or "Returns: c/o Mail Center Plus #456"
Assessment: High risk. Request explanation of how returns are physically processed. If merchant admits returns are forwarded back to supplier overseas, same concerns as international returns apply.
No address provided (Critical Risk):
Return policy exists but provides no address
States "contact customer service for return authorization" without further detail
Creates obstacle to exercising return right
Assessment: Likely decline. Indicates merchant is avoiding or discouraging returns.
Step 3: Return processing verification
For merchants with operating history, request documentation of actual return handling:
Verify merchant provided return instructions and address
Check refund was issued and timeline
Assess customer service quality
What good looks like:
Return rate: 5% to 15% (typical for e-commerce)
Most returns approved (>90% approval rate)
Return instructions provided within 24 hours of request
Refunds issued within 5 business days of receiving returned item
Clear communication throughout process
Return fraud detection without excessive denial of legitimate returns
Red flags:
Return rate >20% (may indicate quality issues or misrepresentation)
Return rate <2% with no returns infrastructure (suggests returns are being denied or discouraged)
High denial rate (>20% of returns denied)
Refund processing time >10 business days
Customer complaints about difficulty returning items
No evidence of actual returns being received and processed
Step 4: Customer experience verification
Check third-party sources for customer return experiences:
Review site analysis:
Trustpilot, Better Business Bureau, Google Reviews, Reddit
Search for mentions of returns, refunds, customer service
Note complaints about return difficulties
Look for patterns: "wouldn't accept my return", "made it impossible to return", "charged huge return shipping"
Social media monitoring:
Search merchant name + "return" on Twitter, Facebook, Instagram
Check merchant's own social media for customer service interactions
Note responsiveness to return inquiries
Chargeback data:
If merchant has processing history, review chargeback reason codes
High rate of "product not as described" or "customer dispute" chargebacks suggests return process failures
Customers who cannot return successfully will file chargebacks
Example Verification: Good vs. Poor
Example A: Professional returns handling
Return policy states:
"We accept returns within 30 days of delivery for any reason. To initiate a return, email support@merchant.com with your order number. We will provide a prepaid return label within 24 hours. Refunds are issued to the original payment method within 3-5 business days of our receiving the returned item. Items must be unused and in original packaging with all tags attached."
Return address:
Domestic U.S. 3PL facility: "Returns Processing, ShipBob Warehouse, 1234 Logistics Parkway, City, State ZIP"
Verification:
3PL relationship confirmed (merchant provides contract with ShipBob)
Past 90 days: 120 returns out of 1,000 orders (12% return rate)
Average refund processing: 4 days from return receipt
Customer reviews mention easy return process: "returned with no hassle"
Zero BBB complaints about returns
Assessment: Low risk. Professional returns infrastructure, reasonable policies, and positive customer feedback.
Example B: Inadequate returns handling
Return policy states:
"All sales are final. Returns are only accepted for defective items within 14 days. Customer must pay return shipping to our facility in China. Refunds take 20-30 days to process. Restocking fee of 20% applies."
Return address:
International: "Returns: [Supplier Name], Shenzhen, China" (address in Chinese characters)
Verification:
Merchant provides no return data, claims "very few returns"
Customer reviews show complaints: "wouldn't let me return", "said I had to ship to China at my cost"
BBB has 15 complaints about refused returns and no refunds
Chargeback data (if available from previous processor): 2.8% chargeback rate, majority are "product not as described"
Assessment: High risk. Return policy is consumer-unfriendly and creates barriers. International return address makes returns economically impractical. Customer complaints confirm return issues drive chargebacks.
Red Flags: Returns Process
Critical violations (likely decline):
"All sales final" or "no returns" policy for non-defective goods
Return address is offshore with no domestic alternative
No return address provided at all
Return policy buried or difficult to find on website
Merchant has regulatory warnings or consumer protection actions related to returns
Enhanced due diligence triggers:
Return window <14 days
Customer must pay return shipping to international address
Restocking fees >15%
Vague conditions ("returns at our discretion", "items must be in perfect condition")
Return refund processing time >10 business days
Pattern of customer complaints about return difficulties
High chargeback rate with SNAD (significantly not as described) reason codes
Customer Support Capacity Verification
Why It Matters
Dropshipping introduces longer delivery times, variability in product quality, and complex fulfillment chains. Without responsive and capable customer support, minor issues escalate to chargebacks. We see this pattern repeatedly: merchant has a functional website and processes payments smoothly, but when customers have questions about delivery, product issues, or returns, they encounter no phone number, email auto-replies, 48+ hour response delays, or generic responses that do not address their concerns. Frustrated customers file chargebacks as the only recourse.
Card networks and payment processors evaluate merchants based partially on customer service quality. Acquirers may require specific support standards (example: phone support during business hours, <24 hour email response time) as a condition of approval.
What We Look For
Contact methods available:
Email address (monitored regularly?)
Phone number (answered during stated hours?)
Live chat (real-time or delayed?)
Contact form (response time?)
Social media responsiveness (Twitter, Facebook, Instagram)
Helpdesk or ticketing system
Support availability:
Hours of operation (24/7, business hours, limited hours?)
Time zones covered
Holiday and weekend support
Response time commitments (example: "we respond within 24 hours")
Support staffing and infrastructure:
Number of support staff
In-house vs. outsourced
Staff training and knowledge base
Escalation procedures for complex issues
Multilingual support (if serving international customers)
Support performance metrics:
Average first response time
Average resolution time
Ticket volume and trends
Customer satisfaction scores (if measured)
Percentage of tickets resolved on first contact
Verification Process
Step 1: Contact method audit
Website review:
List all customer contact methods displayed on website
Customer satisfaction scores (if measured via post-ticket survey)
Escalated tickets (requiring manager or specialized handling)
Sample ticket review:
Request sanitized examples of 10 to 15 recent tickets
Review merchant's responses for quality and helpfulness
Assess if issues were resolved or customer was dismissed
Check response time for each ticket
Evaluate tone and professionalism
What good looks like:
Average first response time: <24 hours for email, <1 hour for chat
Average resolution time: 2 to 3 days for most issues
High first-contact resolution rate (>60%)
Customer satisfaction score >80% (if measured)
Evidence of proactive support (following up on delayed orders, checking customer satisfaction)
Red flags:
Average first response time >48 hours
Generic responses that do not address customer's specific question
High volume of repeat contacts (customer has to contact multiple times for same issue)
Evidence of dismissive or defensive responses
No resolution for common issues (customer told to "wait" without specific timeline)
Step 4: External reputation monitoring
Check third-party sources for customer service experiences:
Review sites and forums:
Trustpilot, Better Business Bureau, Google Reviews, Sitejabber
Search for mentions of customer service, support, "can't reach them", "no response"
Calculate percentage of reviews mentioning support issues
Note recent trends (getting better or worse?)
Social media monitoring:
Check merchant's social media accounts for unanswered customer inquiries
Look for complaints about unresponsive support
Assess merchant's public response to complaints (do they engage or ignore?)
Chargeback data analysis:
Review chargeback reason codes for "merchant dispute" or "service not rendered"
High rates of these chargebacks suggest customers cannot resolve issues through support
Example Verification: Good vs. Poor
Example A: Responsive professional support
Contact methods:
Email: support@merchant.com (monitored 24/7)
Phone: 1-800-XXX-XXXX (answered 9am-7pm EST Mon-Fri)
Live chat: Real-time chat 9am-9pm EST daily
Social media: Active responses on Twitter and Facebook
Support system:
Uses Gorgias helpdesk integrated with Shopify
3 full-time support staff + 1 part-time
Internal knowledge base with 50+ articles
SLA: <12 hours first response, <48 hours resolution
Performance (past 90 days):
450 tickets received
Average first response: 8 hours
Average resolution: 2.1 days
Customer satisfaction: 87% positive ratings
Sample tickets show helpful, specific responses
External reputation:
Trustpilot 4.2/5 stars
Several reviews specifically praise customer service: "replied within hours", "very helpful"
Few complaints about responsiveness
Assessment: Low risk. Professional support infrastructure with good performance metrics and positive customer feedback.
Example B: Inadequate support
Contact methods:
Email: info@merchant.com (generic address)
Contact form only (no phone or chat)
Social media accounts exist but show no recent activity
Support system:
Merchant states "I handle all emails myself"
No helpdesk system
No stated response time commitment
Performance:
Merchant cannot provide support metrics ("I respond to everyone")
When pressed, admits email volume is "overwhelming"
Test email sent Monday at 10am, received response Friday at 3pm (5 days)
Response is generic: "Thank you for contacting us, your order is being processed"
External reputation:
BBB rating: F, with 20 complaints about non-responsive customer service
Trustpilot 2.1/5 stars
Reviews state: "impossible to reach", "never answer emails", "no phone number"
Reddit thread warning others about this merchant
Chargeback data:
Previous processor terminated merchant for >2% chargeback rate
Majority of chargebacks were "merchant dispute" where customer claimed they tried to contact merchant but received no response
Assessment: High risk. Inadequate support infrastructure and documented history of unresponsiveness. Chargebacks are direct result of support failures.
Red Flags: Customer Support
Critical violations (likely decline):
No phone number or contact method except generic email or form
Email goes unanswered for 5+ days
Phone number is disconnected or rings without answer
Merchant has BBB complaints or negative reviews specifically about support
Previous processing history shows chargebacks driven by support failures
Enhanced due diligence triggers:
Support email is personal email account (Gmail, Yahoo) not company domain
No live support during business hours
Support is entirely outsourced to offshore provider with language barriers
Merchant admits support is "just me" but projects high processing volume
Response time commitments are vague ("we try to respond quickly")
No support system or ticket tracking
High volume of customer complaints about responsiveness in reviews
Inventory Visibility and Availability Control
Why It Matters
If the merchant lists products they cannot reliably source, they will collect payment and then experience long delays, order cancellations, or need to source from alternative suppliers at higher cost. Order cancellations after payment create customer friction, refund requests, and chargeback risk. Even when refunds are processed promptly, cancellations damage merchant reputation and customer lifetime value.
Real-time or near-real-time inventory visibility is a key indicator of operational maturity and supplier relationship quality. Merchants with inventory sync systems demonstrate they have structured integrations with suppliers and take availability seriously.
What We Look For
Inventory management system:
What system does merchant use to track product availability?
How does inventory data flow from supplier to merchant's website?
What is the sync frequency (real-time, hourly, daily, manual)?
Stockout handling procedures:
How are out-of-stock items displayed on website?
Are backorders accepted? How are they communicated?
What happens when customer orders unavailable item?
Product sourcing backup:
Does merchant have alternative suppliers for key products?
What is the plan if primary supplier is out of stock?
How quickly can merchant source from alternatives?
Historical availability performance:
Order cancellation rate due to stockouts
Average time from discovering stockout to notifying customer
Percentage of products listed that are actually available
Customer complaints about canceled orders
Verification Process
Step 1: Inventory system documentation
Website platform and inventory integration:
For merchants using e-commerce platforms:
Shopify:
Check if inventory tracking is enabled
Verify integration with supplier or dropshipping app (Oberlo, DSers, Spocket, CJ Dropshipping)
Review sync settings and frequency
Verify inventory levels are actually synced (not all set to "999")
WooCommerce:
Check inventory management settings
Verify product import method
Review inventory sync process
Custom or standalone site:
Request technical documentation of inventory management
API integration with supplier (if any)
Database schema showing inventory tracking
Request from merchant:
Screenshots or documentation of inventory sync configuration
Sync frequency (real-time, hourly, daily, weekly, manual)
What happens if sync fails? (alerts, fallback procedures)
How stockouts are handled (product hidden, marked "out of stock", backorder option)
For aggregation platform users (Oberlo, DSers, etc.):
Verify merchant's account status on platform
Review platform's inventory sync capabilities
Understand platform's supplier vetting and reliability
Check if platform guarantees inventory accuracy
Step 2: Stockout management verification
Website testing:
Browse merchant's product listings
Check inventory status indicators (if shown)
Look for "out of stock" or "backorder" labels
Note if inventory quantities are displayed
Attempt to add unavailable item to cart (is it prevented?)
Stockout policy review:
Request merchant's written stockout handling procedures
How quickly are customers notified?
Are refunds processed immediately?
Alternative product suggestions offered?
Compensation for inconvenience (discount on future order)?
What good looks like:
Product availability syncs at least daily (hourly or real-time preferred)
Out-of-stock items are clearly marked or hidden from search results
Customers cannot checkout with unavailable items
If stockout discovered after order, customer is notified within 24 hours
Full refund processed immediately
Apology and perhaps discount offered
Red flags:
Inventory quantities all show "999" or "100" (fake availability)
No inventory tracking system
Manual process: "I check with supplier after receiving order"
Products remain listed long after supplier discontinued them
No clear stockout handling policy
Step 3: Historical cancellation data review
For merchants with operating history:
Order cancellation report (past 90 days):
Total orders
Orders canceled due to stockout or unavailability
Cancellation rate (cancellations divided by total orders)
Average time from order to cancellation notification
Refund processing time for canceled orders
Customer complaints or negative reviews related to cancellations
Industry benchmarks:
Excellent: <2% cancellation rate
Acceptable: 2% to 5%
Concerning: 5% to 10%
High risk: >10%
Cancellation rate analysis:
If cancellation rate is high, investigate:
Is it concentrated in specific products? (supplier reliability issue)
Is it seasonal? (holiday inventory strain)
Is it trending up or down? (improving or deteriorating)
How long until customer is notified? (<24 hours is acceptable)
Step 4: Supplier inventory verification
For direct supplier relationships:
Request supplier's inventory list or stock levels for key products
Cross-reference with merchant's website listings
Verify merchant is not listing products supplier doesn't carry
Check if supplier has minimum order quantities that might create availability issues
For platform or aggregator users:
Understand platform's inventory accuracy
Check if platform has reputation for stockout issues
Review platform's seller or supplier ratings
Test order scenario:
Consider placing test order for 2 to 3 products to verify:
Order is confirmed promptly
Order is not canceled due to stockout
Tracking is provided within stated time
Products are actually shipped
Cost: $50-$150 for test orders Value: Direct evidence of inventory management effectiveness
Example Verification: Good vs. Poor
Example A: Professional inventory management
System:
Merchant uses Shopify with DSers integration
Inventory syncs every 24 hours from AliExpress supplier accounts
Merchant has 150 products listed
All products show accurate stock levels (not generic "999")
Out-of-stock items are automatically hidden from catalog
Procedures:
Written stockout policy: "If item becomes unavailable after order, customer is notified within 12 hours via email and full refund is issued immediately"
Merchant has backup suppliers for top 20 best-selling products
Performance (past 90 days):
850 orders
18 orders canceled due to stockout (2.1% cancellation rate)
Average notification time: 8 hours
All refunds processed within 24 hours
Customer reviews mention 2 cancellations but praise fast refund
Assessment: Low risk. Professional inventory management with low cancellation rate and customer-friendly handling of stockouts.
Example B: Inadequate inventory management
System:
Merchant uses WooCommerce
"Inventory is updated manually every few weeks"
All products show "In stock" regardless of actual availability
Merchant states "I check with supplier after customer orders"
Procedures:
No written stockout policy
Merchant admits "sometimes it takes a few days to find out if supplier has it"
If unavailable, merchant tries to find alternative supplier, causing delays
Performance:
Merchant refuses to provide cancellation data
BBB complaints include: "ordered weeks ago, finally told item not available", "paid for product, then told they don't have it"
Trustpilot reviews: "canceled my order after 10 days", "never received order and took forever to get refund"
Test order commissioned: Order placed Monday, no shipment by Friday, inquiry sent, response Monday: "sorry, that item is not available, refund will process in 5-7 days"
Assessment: High risk. No inventory management system. High likelihood of cancellations and customer frustration. Order-to-cancellation delays create negative experience even when refunds are issued.
Red Flags: Inventory Management
Critical violations (likely decline):
No inventory management system
Merchant checks availability only after customer orders
High cancellation rate (>10%)
Long delays (>48 hours) to notify customers of stockouts
Pattern of customer complaints about canceled orders
Enhanced due diligence triggers:
Manual inventory updates (not automated sync)
All products show generic availability ("In stock", "Available")
Large product catalog (>500 products) with questionable sourcing capability
Merchant cannot explain inventory sync process
New merchant with no track record, listing hundreds of products
Products appear to be scraped from other sites or marketplaces
What Good Looks Like: Operational Control and Transparency
A well-run dropshipping operation demonstrates operational control through documentation, systems, and performance. We look for evidence, not promises.
Documentation Completeness
At application, merchant provides:
Supplier verification package:
Supplier legal name and registration details
Supplier contact information (verified independently)
Supplier agreement or purchase orders (3-6 months)
Provides comprehensive documentation without evasion
Transparent about business model and challenges
Realistic about growth and capabilities
Open to site visit or inspection if requested
Willing to implement improvements or additional controls if needed
Red flags:
Slow to respond or requires multiple follow-ups
Provides incomplete information
Evasive when asked about supplier or operations
Overly optimistic projections without supporting data
Defensive or dismissive when concerns are raised
Pressures for quick approval
Common Misses: What We See When Controls Are Weak
1. Inconsistent Policies Across Touchpoints
We see merchants with policy documentation that contradicts itself across different pages or customer journey stages.
Example scenario:
Shipping policy page: "Orders ship from our partner warehouse in Asia and typically arrive in 15 to 30 business days."
Product pages: Display "Fast Shipping" badge and countdown timer "Order in next 4 hours for fast delivery"
Checkout page: Shipping option dropdown shows "Standard Shipping (3-5 business days)" (copied from template, never updated)
Email marketing: "Get it fast! Order today and receive within a week!"
Impact:
Customer's expectation is set by the most optimistic representation they encounter. If checkout says "3-5 business days" but actual delivery takes 21 days, the customer bases their complaint on the checkout promise, even though the shipping policy page technically disclosed longer times.
The result: item-not-received chargebacks with reason code "product not received" because customer expected delivery within 5 days based on checkout experience.
Card network perspective:
When merchant representment includes conflicting policy screenshots, the chargeback may be upheld in favor of the cardholder because merchant failed to clearly communicate delivery expectations.
2. Fake or Misleading Tracking Practices
Some dropshipping merchants provide tracking numbers that are real but do not correspond to the customer's actual order or destination.
Common problematic practices:
Generic tracking numbers:
Merchant provides same tracking number to multiple customers
Tracking shows delivery, but to a different address
Customers never receive their packages
Partial shipment tracking:
Tracking number is for a small portion of order (one item when customer ordered three)
Customer sees "delivered" but received incomplete order
Brushing scheme tracking:
Merchant ships lightweight, low-value item to customer's address or nearby address in same postal code
Provides tracking number showing "delivered"
Customer never receives the actual ordered product
Merchant uses tracking as "proof" of delivery to fight chargebacks
Wrong carrier tracking:
Tracking number is valid but for different carrier than stated
Customer cannot track package with information provided
By the time customer realizes issue, chargeback timeframe is expiring
Why merchants do this:
Primarily to avoid item-not-received chargebacks. If merchant can show "proof of delivery" via tracking, some acquiring banks will rule in merchant's favor on INR disputes.
Why it's high-risk:
Payment networks have become aware of fake tracking schemes
Systematic use of fake tracking can be considered fraud
Acquirers may be held liable if pattern emerges across multiple merchants
Our verification approach:
For merchants with processing history:
Request 20-30 recent tracking numbers
Independently verify via carrier websites
Cross-reference tracking delivery address with order shipping address
Calculate percentage of "delivered" tracking that actually matches customer address
Check for patterns: multiple orders with same tracking, tracking delivered to different city or state, delivery time impossibly fast or slow
Red flags:
Merchant unable to provide tracking numbers
Tracking numbers are invalid or not found in carrier systems
Delivery addresses on tracking don't match order addresses
Customer complaints: "tracking shows delivered but I never received it"
3. Unclear or Unresponsive Support Channels
Merchants may list customer support contact methods on their website but fail to actually monitor or respond to them in a reasonable timeframe.
Common patterns:
Email black hole:
Email address is provided but goes to unmonitored inbox
Auto-reply confirms receipt but no human ever follows up
Customer sends multiple emails over weeks with no response
Merchant claims "we respond to all emails" but evidence shows otherwise
Disconnected phone:
Phone number listed on website
Number is disconnected, or rings endlessly without answer or voicemail
If voicemail exists, it's full and won't accept messages
No callback provided even if message is left
Outsourced support with no training:
Customer support is outsourced to third-party call center
Support representatives have no information about merchant's specific products, policies, or order status
Generic responses: "Your order is being processed", "Please wait", "We will check and get back to you"
Issues are never escalated or resolved
Language barriers create additional friction
Social media inquiries ignored:
Customers try to reach merchant via Facebook, Instagram, Twitter
Messages are sent but never read or replied to
Merchant's social media accounts appear active (posting content) but customer service inquiries are ignored
Impact:
When customers cannot resolve issues through support channels, they escalate to their bank. We observe correlation between poor support responsiveness and elevated chargeback rates.
4. No Contingency for Supplier Failures
Dropshipping merchants are inherently vulnerable to supplier disruptions. Single-supplier dependence creates catastrophic risk when that supplier experiences issues.
Common supplier failure scenarios:
Production or inventory disruption:
Supplier runs out of stock on popular item
Factory shutdown due to holiday, inspection, or closure
Quality control issue requires production halt
Supplier goes out of business
Shipping disruption:
Carrier delays due to weather, strikes, capacity constraints
International shipping disruptions (pandemic lockdowns, port congestion)
Customs issues holding shipments
Supplier relationship breakdown:
Payment dispute between merchant and supplier
Supplier increases prices suddenly
Supplier stops accepting orders from merchant
Supplier begins selling directly to consumers, competing with merchant
Fraud or supplier misconduct:
Supplier accepts payment but fails to ship orders
Supplier ships wrong or inferior products
Supplier provides fake tracking numbers
Supplier disappears
Impact on merchant without contingency plan:
Scenario: Merchant sources all products from single supplier in Shenzhen. Supplier experiences production delay due to regulatory inspection. Merchant has 200 pending orders with no ability to fulfill them.
Merchant's options (all problematic):
Cancel all orders and issue refunds (generates 200 refund requests, reputation damage, potential chargebacks)
Promise delays and hope customers wait (some will file chargebacks after 30 days)
Source from expensive alternative supplier at a loss (unsustainable financially)
Go silent and hope it blows over (worst option: leads to mass chargebacks, regulatory complaints, and acquirer termination)
What we look for to assess supplier contingency:
Backup supplier relationships:
Alternative sources identified for top-selling products
Documentation of secondary supplier contacts
Tested backup fulfillment (has merchant successfully ordered from alternative supplier?)
Supplier monitoring:
Does merchant track supplier performance and reliability?
Early warning system for supplier issues (order delays, quality problems)
Regular communication with supplier about capacity and inventory
Financial reserves:
Does merchant have cash reserves to cover refunds if fulfillment fails?
Can merchant absorb loss of sourcing from higher-cost alternative in emergency?
Communication plan:
How will merchant notify customers of delays?
Proactive communication strategy to prevent chargebacks
For new merchants (no history):
We assess:
Does merchant understand supplier risk?
Has merchant identified backup sourcing options?
Does merchant have realistic expectations about supplier reliability?
Financial runway to survive supplier disruption
Red flags:
Merchant has only one supplier and no alternatives identified
Merchant dismisses supplier risk
Merchant has no plan for supplier failures
Merchant cannot afford to refund orders if fulfillment fails
Evidence-Based Underwriting: Documentation Request List
When underwriting a dropshipping merchant, we request specific documentation at different stages. Each document serves to verify operational capability and identify risk.
At Application Stage
Business and legal documentation:
Business registration or incorporation documents
Employer Identification Number (EIN) or tax identification
Beneficial owner identification for all 25%+ owners
Business bank account information (account must be in business name)
Website URL and social media accounts
Business plan or merchant questionnaire
Supplier documentation:
Supplier name, registration, and location (full address)
Supplier agreement, contract, or terms of service
Recent purchase orders or invoices (3-6 months if available)
Supplier contact information (phone and email, independently verified)
Policy documentation:
Shipping policy as displayed on website (screenshot or URL)
Return policy as displayed on website
Refund policy
Terms of service
Privacy policy (if collecting customer data)
Operations documentation:
Description of order fulfillment process (from order to delivery)
Inventory management method and sync frequency
Customer support contact methods and staffing
Estimated monthly processing volume and average ticket size
Projected growth plan (next 12 months)
During Onboarding (For Merchants with Operating History)
Performance documentation:
Sample tracking numbers from recent orders (20-30 examples)
Delivery performance data: - Average delivery time by destination - Percentage delivered within promised timeframe - Delayed shipment rate and reasons
Return processing data: - Number of returns (past 90 days) - Return rate (percentage of orders) - Return approval or denial breakdown - Refund processing time
Order cancellation data: - Cancellation rate due to stockouts - Cancellation notification timing
Customer support performance: - Support ticket volume (past 90 days) - Average first response time - Average resolution time - Sample tickets (sanitized)
Financial documentation:
Bank statements showing business transactions (3-6 months)
Supplier payment history
Chargeback history (if processed cards previously)
Current chargeback rate and reason code breakdown
System and infrastructure documentation:
E-commerce platform and version
Inventory management system documentation
Customer support helpdesk system
Order management system
Payment gateway currently used (if any)
For New Merchants (No Operating History)
When merchant has no transaction history, verification shifts to capability assessment:
Enhanced supplier verification:
Independent verification of supplier identity and capacity
Supplier references or testimonials
Third-party supplier assessment (if high-risk)
Financial stability verification:
Personal financial statements of owners (for individual ownership)
Funding sources and runway
Reserve capacity to cover potential refunds
Test order commission:
Payment processor may commission test orders to verify fulfillment
Cost borne by processor or merchant depending on underwriting agreement
New supplier added: Full supplier verification package
Consumer protection complaint received: Incident report and resolution
Risk Scoring and Segmentation Framework
Not all dropshipping merchants present the same risk. We segment based on multiple control factors to apply appropriate underwriting standards and monitoring requirements.
Dimension
Weight
Scoring factors
Supplier Verification
25%
Supplier identity verifiedRelationship documentedSupplier reputationDomestic vs. international sourcing
Health supplements (regulatory risk, efficacy claims)
Adult products (reputational risk, age verification)
Lower risk categories may receive benefit:
Low-value items (<$20 average order)
Non-controversial commodity goods
Products with low return rates
Red Flags: When to Decline or Escalate
Certain patterns indicate high likelihood of operational failure, intentional misrepresentation, or fraud. These trigger immediate decline or escalation to senior underwriting review.
Immediate Decline Indicators
These signals warrant immediate decline without further consideration:
Supplier disclosure refusal:
Merchant explicitly refuses to disclose supplier identity when directly asked
Claims supplier information is "proprietary" or "confidential" without legitimate reason
Provides obviously fabricated supplier information (non-existent company, fake address)
Supplier cannot be contacted or denies relationship with merchant
Stolen or misrepresented content:
Website displays stolen product images (reverse image search reveals images from major brands or other retailers without proper licensing)
Product descriptions copied verbatim from other sites
Website uses trademarked brand names without authorization
Counterfeit goods suspected or confirmed
Inventory misrepresentation:
Merchant claims to have physical inventory but cannot provide warehouse address or access
Warehouse address is fake or does not exist
"Warehouse" is a residential address and merchant cannot explain
Previous account terminations:
Multiple previous merchant accounts with same beneficial owners terminated for excessive chargebacks
Previous termination for fraud, money laundering, or illegal activity
Beneficial owners on MATCH list (terminated merchant file)
Regulatory or legal issues:
Active regulatory investigation or enforcement action
Cease-and-desist letter from state attorney general or FTC
Pending or recent litigation related to consumer fraud or deceptive practices
Criminal charges against beneficial owners for fraud or financial crimes
Deceptive practices:
Website includes fabricated testimonials, fake reviews, or false endorsements
Misleading certifications or affiliations (example: "BBB Accredited" when not)
False scarcity or urgency tactics (fake countdown timers, "only 2 left in stock" that never changes)
Bait-and-switch tactics discovered during underwriting
High-risk ownership:
Beneficial owners have prior fraud convictions
Beneficial owners appear on OFAC or other sanctions lists
Beneficial owners use false identities or provide fake identification documents
Ownership structure is intentionally obscured (multiple layers of entities, offshore registration without legitimate reason)
Escalation Indicators (Senior Review Required)
These signals require escalation to senior underwriting or compliance review rather than automatic decline:
Delivery time impossibility:
Merchant's stated delivery times are physically impossible given supplier location and shipping method
Example: promises 5-day delivery when supplier is in China and uses standard mail (actual time: 15-30 days)
Merchant may not be intentionally deceptive but has unrealistic understanding of logistics
Decision: Escalate. May be approved with required policy corrections and enhanced monitoring.
Problematic returns setup:
Return address is mailbox service or virtual office with no evidence of fulfillment operations
International return address creates significant barrier for customers
Return policy is present but very restrictive (could be legitimate business decision or red flag)
Decision: Escalate. Assess whether returns infrastructure is inadequate or intentionally designed to prevent returns.
Copied or templated website:
Website terms of service, privacy policy, or other legal content copied from another site
Includes incorrect company names, addresses, or references to other businesses
Suggests lack of attention to detail or rush to launch
Decision: Escalate. May be approved if merchant corrects content and demonstrates legitimacy.
Tracking irregularities:
Tracking numbers provided for sample orders show delivery to addresses not matching stated customer addresses
Pattern of tracking delivered to nearby but incorrect addresses
Some tracking numbers are invalid or not found
Decision: Escalate. Investigate whether this is systematic fake tracking (decline) or isolated supplier errors (may approve with monitoring).
Quality complaints suggesting counterfeits:
Customer complaints or reviews reference quality issues that suggest counterfeit or unauthorized goods
Products are branded goods sold at suspiciously low prices
Supplier is located in region known for counterfeit production
Decision: Escalate. Requires investigation of product sourcing and legitimacy. May request proof of authorized distribution.
Poor but not catastrophic external reputation:
Reviews are negative but not universally so (2.5-3.0 out of 5 star range)
BBB has complaints but merchant is responding and attempting resolution
Some customer complaints about delivery or quality but not systemic failure
Decision: Escalate. May be approved as High Risk (Tier 3) with intensive monitoring and required improvements.
Aggressive growth projections:
New merchant projects very high volume ($200K+ per month) immediately
Projections are not supported by funding, infrastructure, or market analysis
May indicate unrealistic expectations or attempt to secure high processing limits
Decision: Escalate. May approve with conservative initial limits and phased increase based on performance.
Escalation Review Process
When application is escalated:
Senior underwriter review:
Comprehensive review of all documentation
Additional information requests to merchant
Independent verification of questionable elements
Risk assessment and recommendation
Possible outcomes:
Approve with conditions: Merchant can proceed with specific requirements (policy corrections, enhanced monitoring, lower limits)
Approve as High Risk (Tier 3): Intensive monitoring and probationary period
Request additional information: Cannot make decision without further documentation
Decline: Risk is too high even with mitigating controls
Escalation criteria should be documented:
Why was application escalated?
What additional information was obtained?
What factors supported decision?
What conditions or monitoring requirements were imposed?
The Underwriting Question: What Is Your Single Best Fulfillment Proof?
When underwriting dropshipping merchants, we have found value in focusing on one key question that surfaces the most critical evidence:
"Can you demonstrate that your fulfillment process works as described?"
This question cuts through documentation and representations to assess actual operational capability.
Why This Question Matters
Merchants with genuine operational control can provide concrete evidence:
Focus on future plans rather than current capability
Answering the Question: Evidence Hierarchy
We typically advise teams to accept evidence in this priority order:
Tier 1 Evidence (Strongest): Historical Performance Data
For merchants with operating history:
90 days of delivery performance data showing >85% on-time delivery
Sample tracking numbers (20-30) showing actual fulfilled orders
Customer reviews or feedback demonstrating successful fulfillment
Return processing records showing functional returns system
Bank statements showing regular supplier payments
Assessment: Direct evidence of working fulfillment process. Strongest indicator of future performance.
Tier 2 Evidence: Test Order Demonstration
For new merchants without history:
Place test orders (2-3 products to different addresses)
Verify orders are fulfilled within stated timeframe
Confirm tracking is accurate
Assess product quality and packaging
Evaluate customer communication during process
Assessment: Direct observation of capability. More reliable than documentation alone. Requires time (15-30 days) and cost ($100-$300) but provides high confidence.
Tier 3 Evidence: Supplier Verification
For new merchants unable to demonstrate through test orders:
Independent verification that supplier exists and has stated products
Supplier confirms they will fulfill orders on merchant's behalf
Repeated poor performance results in account restrictions or suspension
Top-performing sellers receive badges or other recognition
Performance metrics are visible to buyers
Platform-level controls:
Automated tracking number validation
Delivery time monitoring
Customer complaint aggregation
Assistance with supplier verification
Ballerine's Role
Dropshipping underwriting requires collecting, verifying, and continuously monitoring dozens of data points for each merchant. Manual execution does not scale and produces inconsistent results.
We provide infrastructure to make this process manageable: automated supplier verification across international business registries, policy extraction and consistency checking across merchant websites, real-time delivery performance monitoring with carrier API integration, and risk scoring models that calculate merchant risk tiers automatically.
Our workflow automation handles evidence collection through structured underwriting checklists, while ongoing monitoring dashboards track chargeback rates, delivery performance, and customer complaints in real time. When regulatory requirements change or card network rules update, our system distributes alerts and policy recommendations to risk teams.
The result: risk teams can underwrite dropshipping merchants consistently, detect problems before they become chargeback crises, and scale operations without proportional headcount increases. Dropshipping becomes a manageable merchant segment rather than a risk exposure.
Dropshipping as a business model carries manageable risk when properly verified. The real exposure comes from merchants who obscure their fulfillment arrangements, misrepresent delivery capabilities, or lack operational control over the customer experience. For payment providers, acquirers (entities that enable merchants to accept card payments), and risk teams, the challenge is distinguishing between transparent dropshippers with solid operations and merchants running high-risk fulfillment setups that generate chargebacks, consumer complaints, and regulatory scrutiny. This guide outlines what we verify when evaluating dropshipping merchants, what signals indicate operational control versus risk, and how to structure evidence-based underwriting for this merchant segment.
The Business Model
Dropshipping is a retail fulfillment method where a merchant sells products without holding inventory. When a customer places an order, the merchant purchases the item from a third-party supplier who ships directly to the customer. The merchant never sees or handles the product.
Revenue model:
Customer pays merchant retail price (example: $50)
Merchant pays supplier wholesale price (example: $25)
Merchant keeps margin ($25 in this example)
Why it attracts new merchants:
Low startup costs (no inventory investment)
No warehouse or fulfillment infrastructure required
Easy to test products and markets
Scalable without physical expansion
Why it creates payment risk:
Merchant has no control over product quality
Delivery times are dependent on supplier reliability
Return processing is logistically complex
Customer service requires coordination with external parties
Ship orders within the timeframe stated in their advertising
Ship within 30 days if no timeframe is specified
Notify customers of delays and offer the option to cancel for full refund
Provide prompt refunds if the order is canceled
For dropshippers sourcing from overseas suppliers, meeting these requirements without operational control is challenging.
The European Union Consumer Rights Directive similarly mandates delivery within 30 days unless otherwise agreed, and grants consumers a 14-day right of withdrawal for distance contracts.
The Scenario: New E-commerce Brand with Outsourced Fulfillment
Consider a typical underwriting case that arrives in merchant acquisition queues:
Merchant Profile
Business details:
New online store selling consumer electronics, fashion accessories, or home goods
Website launched within the past 3 to 6 months
Domain registered recently (check WHOIS data)
Business entity incorporated within the past year
No physical storefront or showroom
Stated operations:
No physical inventory or warehouse listed on the website
Delivery times stated as 15 to 30 business days
Ships from "various warehouses" or location not specified
Supplier and fulfillment partner not disclosed on website
Business registration shows a residential address or virtual office
Processing volume projected at $50,000 to $150,000 per month
Average order value: $30 to $80
Website characteristics:
Product images appear to be stock photos or supplier catalog images
Product descriptions are generic or copied from other sites
Limited "About Us" information
No physical contact address, only email or contact form
Social media accounts are new with minimal followers
Few or no genuine customer reviews
Payment processing request:
Applying for card-not-present (CNP) merchant account
May request high processing limits immediately
Growth projections may be aggressive
May have been declined by other processors
Why This Profile Requires Enhanced Due Diligence
This profile appears regularly in merchant underwriting queues. The merchant is not necessarily fraudulent or intentionally deceptive, but the setup creates information asymmetry. Without verification, you cannot assess whether they can fulfill orders, handle returns, manage customer disputes, or sustain operations beyond the first few months.
Key vulnerabilities:
No operational track record: New merchants lack historical performance data
Unknown supplier relationship: No evidence of established, reliable fulfillment
Delivery expectation mismatch: Website promises may not align with supplier capabilities
Financial instability: Thin margins and no inventory buffer create cash flow risk
Customer service gaps: Merchants underestimate support requirements
Scalability questions: Can they handle volume spikes or supplier issues?
Consumer complaints escalating to regulatory authorities
Card network fines if chargeback thresholds are exceeded
Reputational risk from association with problematic merchants
What We Verify: The Five Core Control Points
When underwriting dropshipping merchants, we focus on five areas that reveal operational control and the ability to deliver on customer promises. Each area requires documentary evidence, not just representations.
Supplier Identity and Relationship Verification
Why It Matters
Knowing who fulfills the orders allows you to assess capability, reliability, and recourse. If the merchant cannot or will not disclose their supplier, they lack operational transparency. This is different from protecting competitive information. We are not asking for supplier pricing, exclusive product sources, or competitive intelligence. We are confirming that a real, identifiable entity is handling fulfillment and that the merchant has an established relationship with them.
Risk scenarios without supplier verification:
Supplier disappears: Merchant accepts orders they cannot fulfill
Quality issues: No accountability for defective or misrepresented products
IP infringement: Supplier provides counterfeit or unauthorized products
Delivery failures: No recourse when shipments are delayed or lost
Financial disputes: Merchant cannot recover funds from unreliable supplier
What We Look For
Supplier legal identity:
Full legal business name
Business registration number or tax identification
Physical business address (not a drop box or forwarding service)
Country of incorporation and operation
Years in business (established suppliers preferred)
Relationship documentation:
Written supplier agreement, contract, or terms of service
Purchase orders from the past 3 to 6 months
Payment transaction history showing regular purchases
Communication records (email threads, order confirmations)
Supplier references or testimonials
Supplier operational capabilities:
Product catalog or inventory list
Stated shipping methods and delivery timeframes
Order fulfillment process documentation
Quality control procedures
Return and defect handling policies
Supplier reputation and verification:
Business registration verification via public registry
Website presence with verifiable domain age
Third-party reviews or ratings (Alibaba, Global Sources, industry directories)
Trade association memberships
Export or import licenses if applicable
Verification Process
Step 1: Request supplier disclosure
Ask the merchant to provide:
Supplier company name and registration details
Contact information (phone, email, physical address)
Description of products supplied
Length of relationship
Most recent invoices or purchase orders (3 to 6 months)
Step 2: Independent verification
Do not rely solely on merchant-provided documents:
Business registration confirmed via Chinese government database
Supplier listed on Alibaba with Gold Supplier status (3+ years)
Supplier has 200+ positive reviews on Alibaba
Phone number listed on website is answered by company representative
Representative confirms business relationship with merchant
Google Street View shows industrial facility at listed address
Assessment: Low risk. Supplier is established, verifiable, and confirms relationship.
Example B: Inadequate supplier verification
Merchant provides:
Supplier name: "Global Electronics Network"
Address: "Kowloon, Hong Kong" (no specific street address)
States "we work with multiple suppliers, this is our main one"
Provides single invoice from last month only
Supplier has no website or online presence
Cannot provide supplier contact information, states "we communicate via WeChat"
We verify:
Cannot locate business registration for "Global Electronics Network" in Hong Kong
Name is generic and yields no search results
No presence on B2B platforms
Provided address is non-specific (Kowloon is a large district)
Assessment: High risk. Supplier identity cannot be verified. Merchant may be using a middleman or agent, sourcing from multiple unknown sources, fabricating supplier information, or planning to fulfill orders without secured supply.
Red Flags: Supplier Verification
Immediate decline indicators:
Merchant refuses to disclose supplier identity when directly asked
Claims supplier information is "confidential" or "proprietary" without legitimate reason
Supplier cannot be contacted or does not acknowledge relationship
Multiple merchants using same "supplier" that shows signs of being a shell company
Enhanced due diligence triggers:
Supplier is located in high-risk jurisdiction
Supplier has been in business less than 1 year
Merchant-supplier relationship is less than 3 months old
Purchase order volume is inconsistent or shows single large order (not ongoing relationship)
Supplier specializes in goods commonly associated with fraud (luxury goods, electronics with high resale value)
Supplier has negative reviews or complaints about quality or delivery
Special Cases: Multi-Supplier and Aggregator Models
Some dropshipping merchants work with multiple suppliers or use dropshipping aggregation platforms (examples: Oberlo, DSers, Spocket, CJ Dropshipping).
Verification approach:
Request list of all suppliers used in past 90 days
Verify top 3 suppliers by volume (following same verification process)
If using aggregation platform, verify:
Platform provider identity and legitimacy
Merchant's account status on platform
Platform's supplier vetting procedures
How platform handles disputes and quality issues
Aggregation platform verification for merchants using platforms like Oberlo or CJ Dropshipping:
Confirm platform integration (request screenshots or API documentation)
Verify merchant account is active and in good standing
Understand platform's supplier vetting process
Review platform's policies on order fulfillment, tracking, and disputes
Note that platform is an intermediary, not the actual supplier
Risk assessment:
Aggregation platforms provide some operational oversight but merchant still lacks direct supplier relationship
Platform failure or policy changes can disrupt merchant's entire operation
Quality control is still limited
Consider as moderate risk, require ongoing monitoring
Shipping Times and Delivery Promise Verification
Why It Matters
Misrepresented delivery times are a primary driver of item-not-received (INR) chargebacks in dropshipping. Merchants who promise 5 to 10 business day delivery but source from overseas suppliers using standard international shipping (14 to 30 days) create a structural mismatch between customer expectations and reality.
Regulatory compliance:
The FTC Mail Order Rule requires merchants to:
Have a reasonable basis for stated delivery times
Ship within the stated time or within 30 days if no time is stated
Notify customers promptly if unable to ship as promised
Offer option to cancel with full refund if delayed
Violations can result in FTC enforcement actions and fines, state attorney general consumer protection actions, private lawsuits under state consumer protection statutes, and payment processor termination.
What We Look For
Website policy consistency:
Shipping policy page with clear delivery timeframes
Product page delivery estimates (do they match shipping policy?)
Checkout flow delivery messaging (what does customer see at payment?)
FAQ or customer service pages addressing shipping
Any countdown timers or urgency messaging (are they misleading?)
Delivery timeframe realism:
Stated timeframes align with supplier location and shipping method
Differentiation between processing time and shipping time
Buffer for holidays, weekends, customs clearance
Communication about potential delays
Shipping method documentation:
What carriers are used (USPS, DHL, ePacket, China Post, etc.)
What service levels (express, standard, economy)
Tracking availability and timing
Insurance and signature requirements
Historical performance data (if available):
Average actual delivery time by destination
Percentage of orders delivered within promised timeframe
Delayed order rate and reasons for delays
Customer complaints about delivery
Verification Process
Step 1: Website audit
Manually review merchant's website to document all delivery-related representations:
Shipping policy page:
Screenshot the full policy
Note stated timeframes for each shipping method or destination
Identify any disclaimers or exceptions
Check if origin location is disclosed
Product pages:
Check 10 to 15 random products for delivery estimates
Note any variance in stated times across products
Look for urgency tactics ("Order in next 2 hours for delivery by Friday")
Screenshot any delivery promises
Checkout flow:
Place test order (do not complete payment) to see checkout experience
Document shipping options and stated delivery times
Check if estimated delivery date is provided
Note any automatic selection of shipping method
Marketing materials:
Review email campaigns, ads, social media for delivery claims
Check if advertising promises differ from website policies
Look for "fast shipping" or "quick delivery" claims
Step 2: Supplier shipping capability analysis
Cross-reference merchant's promised delivery times with supplier's location and typical shipping times:
Supplier location to destination shipping times:
Origin
Destination
Shipping method
Typical delivery time
China
U.S. (East Coast)
ePacket
10-20 business days
China
U.S. (West Coast)
ePacket
7-15 business days
China
U.S.
Standard Air Mail
15-30 business days
China
EU
Standard
20-40 business days
China
EU
Express
5-10 business days
U.S. (domestic)
U.S.
USPS Priority
2-3 business days
U.S. (domestic)
U.S.
USPS Ground
2-8 business days
Reality check calculation:
If merchant promises: "Delivery in 10 to 14 business days" And supplier is located in: Shenzhen, China And shipping method is: ePacket to U.S. East Coast (typical range: 10 to 20 days) And processing time is: 2 to 3 days before shipment
Total realistic timeframe: 12 to 23 business days Merchant's promise: 10 to 14 business days
Assessment: Merchant's promise is optimistic and will likely be missed on a significant portion of orders, leading to customer dissatisfaction and disputes.
Step 3: Historical delivery data analysis
For merchants with operating history, request delivery performance report (past 90 days):
Total orders shipped
Average delivery time by destination region
Percentage delivered within promised timeframe
Delayed shipments (defined as exceeding promise by 5+ days)
Customer complaints about delivery
Chargeback rate for INR disputes
Tracking data sample:
Request 20 to 30 recent tracking numbers
Independently verify using carrier tracking websites
Calculate actual delivery times from order date to delivered date
Compare to merchant's stated timeframes
What good looks like:
85%+ of orders delivered within stated timeframe
Average delivery time is at midpoint or better of stated range
Orders show 30+ day delivery when 15 days was promised
Tracking numbers are invalid, delayed, or show unusual patterns
Step 4: Test orders (for new merchants)
When merchant lacks historical data, consider commissioning test orders:
Test order protocol:
Order 2 to 3 products to different U.S. regions
Use genuine residential addresses
Track elapsed time from order to delivery
Document all customer communications received
Verify tracking information accuracy
Assess packaging quality and product condition
Cost: $100 to $300 for sample orders Value: Direct evidence of operational capability Timeline: Must wait full delivery cycle (15 to 30+ days) before making underwriting decision
Example Verification: Good vs. Poor
Example A: Realistic and transparent delivery promises
Website states:
Shipping policy page: "Orders ship from our partner warehouse in Asia within 2 to 3 business days. Delivery to U.S. addresses typically takes 18 to 25 business days via standard international mail. Express shipping (5 to 10 business days) available for additional fee. You will receive tracking information within 3 business days of your order."
Product pages display: "Ships from Asia: 18-25 day delivery"
Checkout shows estimated delivery date range based on current date + 20 to 28 days
Supplier capabilities:
Located in Guangzhou, China
Uses China Post and ePacket for standard shipments
Offers DHL express upgrade
Provides tracking numbers within 48 hours
Historical performance:
Past 90 days: 88% delivered within 25 business days
Average delivery time: 21 business days to U.S.
Customer complaints: 2% of orders
INR chargeback rate: 0.4%
Assessment: Low risk. Delivery promises are realistic, transparent, and supported by historical performance.
Example B: Misleading delivery promises
Website states:
Shipping policy page: "Standard shipping 15-30 business days"
Product pages display: "Fast Shipping Available!" with countdown timer "Order in next 4 hours for quick delivery"
Checkout shows: "Standard Shipping (3-5 business days)" in dropdown (copied from template, not updated)
Marketing emails: "Get it fast! Order now for delivery this week"
Supplier capabilities:
Located in Shenzhen, China
Uses standard China Post (20 to 40 day typical delivery)
No express option available
Tracking is delayed by 7 to 10 days
Actual performance (merchant refuses to provide data, but review sites checked):
Trustpilot reviews show complaints: "ordered 3 weeks ago, still not here"
Reddit mentions: "took 6 weeks to arrive"
BBB complaints: "promised 2 weeks, took over a month"
Assessment: High risk. Delivery promises are inconsistent across touchpoints, misleading at checkout, and not supported by supplier capabilities or customer experience reports.
Red Flags: Delivery Promises
Critical violations (likely decline):
Promises domestic U.S. delivery times (2 to 5 days) when supplier is in Asia
Uses countdown timers implying immediate shipment but processes orders days later
Checkout shows incorrect shipping times that contradict shipping policy
Refuses to disclose shipping origin or methods
Marketing explicitly claims "ships from U.S." when it does not
Has regulatory warning letters or consumer protection actions for delivery misrepresentation
Enhanced due diligence triggers:
Stated times are at the optimistic edge of possible (example: "7 to 10 days" for China to U.S.)
No distinction between processing time and shipping time
Vague language like "ships soon" or "fast delivery" without specifics
Different promises on different parts of website
Customer reviews mention unexpected long delivery
Policy Language Best Practices
We recommend risk teams look for this level of clarity:
Good policy example:
"Our products ship directly from our manufacturing partner in Shenzhen, China. Orders are typically processed and handed to the carrier within 2-3 business days. Shipping to the United States takes 18-25 business days via standard international mail service (China Post/ePacket). Express shipping (5-10 business days via DHL) is available for an additional $15. Tracking information will be emailed within 3 business days of your order and can take 5-7 days to show movement. Delivery times do not include weekends, holidays, or customs clearance delays. International orders may be subject to customs duties which are the customer's responsibility."
This policy discloses shipping origin, separates processing time from shipping time, provides realistic timeframe ranges, explains tracking delays, sets expectations for customs, and offers express alternative.
Returns Process and Policy Verification
Why It Matters
Returns are where dropshipping operations break down. If the merchant has no physical location and the supplier is overseas, processing a return becomes logistically complex and expensive for both merchant and customer. International return shipping can cost $30 to $80, exceeding the product's value in some cases. Merchants who cannot handle returns efficiently default to refund denials or ignore return requests, which leads to chargebacks and negative reviews.
Consumer protection regulators view return policies as a critical consumer right. The European Consumer Rights Directive mandates a minimum 14-day withdrawal right for distance sales. While U.S. federal law does not mandate returns for non-defective goods, card network rules effectively require reasonable return policies.
What We Look For
Published return policy:
Clear return window (example: "30 days from delivery")
Conditions for returns (unused, original packaging, tags attached, etc.)
Return shipping responsibility (who pays?)
Return address provided (domestic or international?)
Refund processing timeline (example: "within 5 business days of receiving return")
Restocking fees or return shipping deductions (if any)
Exceptions (final sale items, personalized products, etc.)
Return logistics capability:
Return shipping address (P.O. Box, residential, warehouse, or freight forwarder?)
Return processing facility and staff
Inspection and restocking procedures
Inventory disposition (resell, return to supplier, dispose?)
Return fraud prevention measures
Historical return data:
Return rate (percentage of orders)
Reasons for returns (defective, wrong item, customer changed mind, etc.)
Return processing time (days from return shipment to refund issued)
Return denial rate and reasons
Chargeback rate among customers whose returns were denied
Refund processing:
Method of refund (original payment method, store credit, other)
Screenshot merchant's published return policy from website
Verify return policy is easily accessible (linked in footer, FAQ, product pages)
Check if policy is clear and specific (not vague like "returns accepted at our discretion")
Identify return window (30 days is industry standard)
Note return shipping cost allocation
Verify return address is provided
Comparison to industry standards:
Element
Consumer-friendly standard
Acceptable
High-risk
Return window
30-60 days
14-30 days
<14 days or "no returns"
Return shipping cost
Merchant pays or free labels
Customer pays (reasonable)
Customer pays + restocking fee
Return address
Domestic (same country as customer)
International with clear instructions
No address provided or P.O. Box only
Refund timeline
3-5 business days after receipt
5-10 business days
>10 days or "up to 30 days"
Condition requirements
Reasonable (unused, tags attached)
Strict but clear
Vague or impossible
Restocking fee
None
$5-10 or <15%
>15% or variable
Step 2: Return address verification
The return address is critical for assessing operational control.
Address types and risk assessment:
Domestic warehouse or 3PL (Low Risk):
Address is a warehouse, distribution center, or third-party logistics provider
Located in same country as majority of customers
Verifiable via Google Maps, Street View, or property records
Merchant can demonstrate relationship with facility (contract, invoices)
Example: "Returns: ABC Fulfillment Center, 123 Warehouse Lane, Suite 500, City, State ZIP"
Verification: Google search shows commercial warehouse facility. Call to confirm they handle returns for merchant.
Residential address (Medium Risk):
Address is merchant owner's home or apartment
Common for small, early-stage dropshippers
Indicates lack of professional fulfillment infrastructure
May be acceptable if volume is low and merchant is transparent
Example: "Returns: 456 Main Street, Apartment 2B, City, State ZIP"
Verification: Property records show residential property. Merchant confirms they process returns at home.
Risk mitigation: Acceptable for merchants with <$50K monthly volume and clear growth plan to transition to professional returns facility.
International return address (High Risk):
Return address is in different country than customer
Returns go back to supplier (example: returns to China)
Return shipping cost is prohibitive ($40 to $80 from U.S. to China)
Customs forms required, long return shipping times
Creates economic barrier to returns
Example: "Returns: Supplier Name, Shenzhen, Guangdong, China 518000"
Assessment: High risk. Most customers will not pay $60 to return a $30 item. Merchant is effectively discouraging returns through prohibitive logistics. Expect elevated chargeback rate when customers realize return is impractical.
P.O. Box or mail forwarding service (High Risk):
P.O. Box, PMB (Private Mail Box), or commercial mail receiving agency
No physical facility to receive and process returns
May indicate merchant does not actually process returns
Used by transient operations
Example: "Returns: P.O. Box 789, City, State ZIP" or "Returns: c/o Mail Center Plus #456"
Assessment: High risk. Request explanation of how returns are physically processed. If merchant admits returns are forwarded back to supplier overseas, same concerns as international returns apply.
No address provided (Critical Risk):
Return policy exists but provides no address
States "contact customer service for return authorization" without further detail
Creates obstacle to exercising return right
Assessment: Likely decline. Indicates merchant is avoiding or discouraging returns.
Step 3: Return processing verification
For merchants with operating history, request documentation of actual return handling:
Verify merchant provided return instructions and address
Check refund was issued and timeline
Assess customer service quality
What good looks like:
Return rate: 5% to 15% (typical for e-commerce)
Most returns approved (>90% approval rate)
Return instructions provided within 24 hours of request
Refunds issued within 5 business days of receiving returned item
Clear communication throughout process
Return fraud detection without excessive denial of legitimate returns
Red flags:
Return rate >20% (may indicate quality issues or misrepresentation)
Return rate <2% with no returns infrastructure (suggests returns are being denied or discouraged)
High denial rate (>20% of returns denied)
Refund processing time >10 business days
Customer complaints about difficulty returning items
No evidence of actual returns being received and processed
Step 4: Customer experience verification
Check third-party sources for customer return experiences:
Review site analysis:
Trustpilot, Better Business Bureau, Google Reviews, Reddit
Search for mentions of returns, refunds, customer service
Note complaints about return difficulties
Look for patterns: "wouldn't accept my return", "made it impossible to return", "charged huge return shipping"
Social media monitoring:
Search merchant name + "return" on Twitter, Facebook, Instagram
Check merchant's own social media for customer service interactions
Note responsiveness to return inquiries
Chargeback data:
If merchant has processing history, review chargeback reason codes
High rate of "product not as described" or "customer dispute" chargebacks suggests return process failures
Customers who cannot return successfully will file chargebacks
Example Verification: Good vs. Poor
Example A: Professional returns handling
Return policy states:
"We accept returns within 30 days of delivery for any reason. To initiate a return, email support@merchant.com with your order number. We will provide a prepaid return label within 24 hours. Refunds are issued to the original payment method within 3-5 business days of our receiving the returned item. Items must be unused and in original packaging with all tags attached."
Return address:
Domestic U.S. 3PL facility: "Returns Processing, ShipBob Warehouse, 1234 Logistics Parkway, City, State ZIP"
Verification:
3PL relationship confirmed (merchant provides contract with ShipBob)
Past 90 days: 120 returns out of 1,000 orders (12% return rate)
Average refund processing: 4 days from return receipt
Customer reviews mention easy return process: "returned with no hassle"
Zero BBB complaints about returns
Assessment: Low risk. Professional returns infrastructure, reasonable policies, and positive customer feedback.
Example B: Inadequate returns handling
Return policy states:
"All sales are final. Returns are only accepted for defective items within 14 days. Customer must pay return shipping to our facility in China. Refunds take 20-30 days to process. Restocking fee of 20% applies."
Return address:
International: "Returns: [Supplier Name], Shenzhen, China" (address in Chinese characters)
Verification:
Merchant provides no return data, claims "very few returns"
Customer reviews show complaints: "wouldn't let me return", "said I had to ship to China at my cost"
BBB has 15 complaints about refused returns and no refunds
Chargeback data (if available from previous processor): 2.8% chargeback rate, majority are "product not as described"
Assessment: High risk. Return policy is consumer-unfriendly and creates barriers. International return address makes returns economically impractical. Customer complaints confirm return issues drive chargebacks.
Red Flags: Returns Process
Critical violations (likely decline):
"All sales final" or "no returns" policy for non-defective goods
Return address is offshore with no domestic alternative
No return address provided at all
Return policy buried or difficult to find on website
Merchant has regulatory warnings or consumer protection actions related to returns
Enhanced due diligence triggers:
Return window <14 days
Customer must pay return shipping to international address
Restocking fees >15%
Vague conditions ("returns at our discretion", "items must be in perfect condition")
Return refund processing time >10 business days
Pattern of customer complaints about return difficulties
High chargeback rate with SNAD (significantly not as described) reason codes
Customer Support Capacity Verification
Why It Matters
Dropshipping introduces longer delivery times, variability in product quality, and complex fulfillment chains. Without responsive and capable customer support, minor issues escalate to chargebacks. We see this pattern repeatedly: merchant has a functional website and processes payments smoothly, but when customers have questions about delivery, product issues, or returns, they encounter no phone number, email auto-replies, 48+ hour response delays, or generic responses that do not address their concerns. Frustrated customers file chargebacks as the only recourse.
Card networks and payment processors evaluate merchants based partially on customer service quality. Acquirers may require specific support standards (example: phone support during business hours, <24 hour email response time) as a condition of approval.
What We Look For
Contact methods available:
Email address (monitored regularly?)
Phone number (answered during stated hours?)
Live chat (real-time or delayed?)
Contact form (response time?)
Social media responsiveness (Twitter, Facebook, Instagram)
Helpdesk or ticketing system
Support availability:
Hours of operation (24/7, business hours, limited hours?)
Time zones covered
Holiday and weekend support
Response time commitments (example: "we respond within 24 hours")
Support staffing and infrastructure:
Number of support staff
In-house vs. outsourced
Staff training and knowledge base
Escalation procedures for complex issues
Multilingual support (if serving international customers)
Support performance metrics:
Average first response time
Average resolution time
Ticket volume and trends
Customer satisfaction scores (if measured)
Percentage of tickets resolved on first contact
Verification Process
Step 1: Contact method audit
Website review:
List all customer contact methods displayed on website
Customer satisfaction scores (if measured via post-ticket survey)
Escalated tickets (requiring manager or specialized handling)
Sample ticket review:
Request sanitized examples of 10 to 15 recent tickets
Review merchant's responses for quality and helpfulness
Assess if issues were resolved or customer was dismissed
Check response time for each ticket
Evaluate tone and professionalism
What good looks like:
Average first response time: <24 hours for email, <1 hour for chat
Average resolution time: 2 to 3 days for most issues
High first-contact resolution rate (>60%)
Customer satisfaction score >80% (if measured)
Evidence of proactive support (following up on delayed orders, checking customer satisfaction)
Red flags:
Average first response time >48 hours
Generic responses that do not address customer's specific question
High volume of repeat contacts (customer has to contact multiple times for same issue)
Evidence of dismissive or defensive responses
No resolution for common issues (customer told to "wait" without specific timeline)
Step 4: External reputation monitoring
Check third-party sources for customer service experiences:
Review sites and forums:
Trustpilot, Better Business Bureau, Google Reviews, Sitejabber
Search for mentions of customer service, support, "can't reach them", "no response"
Calculate percentage of reviews mentioning support issues
Note recent trends (getting better or worse?)
Social media monitoring:
Check merchant's social media accounts for unanswered customer inquiries
Look for complaints about unresponsive support
Assess merchant's public response to complaints (do they engage or ignore?)
Chargeback data analysis:
Review chargeback reason codes for "merchant dispute" or "service not rendered"
High rates of these chargebacks suggest customers cannot resolve issues through support
Example Verification: Good vs. Poor
Example A: Responsive professional support
Contact methods:
Email: support@merchant.com (monitored 24/7)
Phone: 1-800-XXX-XXXX (answered 9am-7pm EST Mon-Fri)
Live chat: Real-time chat 9am-9pm EST daily
Social media: Active responses on Twitter and Facebook
Support system:
Uses Gorgias helpdesk integrated with Shopify
3 full-time support staff + 1 part-time
Internal knowledge base with 50+ articles
SLA: <12 hours first response, <48 hours resolution
Performance (past 90 days):
450 tickets received
Average first response: 8 hours
Average resolution: 2.1 days
Customer satisfaction: 87% positive ratings
Sample tickets show helpful, specific responses
External reputation:
Trustpilot 4.2/5 stars
Several reviews specifically praise customer service: "replied within hours", "very helpful"
Few complaints about responsiveness
Assessment: Low risk. Professional support infrastructure with good performance metrics and positive customer feedback.
Example B: Inadequate support
Contact methods:
Email: info@merchant.com (generic address)
Contact form only (no phone or chat)
Social media accounts exist but show no recent activity
Support system:
Merchant states "I handle all emails myself"
No helpdesk system
No stated response time commitment
Performance:
Merchant cannot provide support metrics ("I respond to everyone")
When pressed, admits email volume is "overwhelming"
Test email sent Monday at 10am, received response Friday at 3pm (5 days)
Response is generic: "Thank you for contacting us, your order is being processed"
External reputation:
BBB rating: F, with 20 complaints about non-responsive customer service
Trustpilot 2.1/5 stars
Reviews state: "impossible to reach", "never answer emails", "no phone number"
Reddit thread warning others about this merchant
Chargeback data:
Previous processor terminated merchant for >2% chargeback rate
Majority of chargebacks were "merchant dispute" where customer claimed they tried to contact merchant but received no response
Assessment: High risk. Inadequate support infrastructure and documented history of unresponsiveness. Chargebacks are direct result of support failures.
Red Flags: Customer Support
Critical violations (likely decline):
No phone number or contact method except generic email or form
Email goes unanswered for 5+ days
Phone number is disconnected or rings without answer
Merchant has BBB complaints or negative reviews specifically about support
Previous processing history shows chargebacks driven by support failures
Enhanced due diligence triggers:
Support email is personal email account (Gmail, Yahoo) not company domain
No live support during business hours
Support is entirely outsourced to offshore provider with language barriers
Merchant admits support is "just me" but projects high processing volume
Response time commitments are vague ("we try to respond quickly")
No support system or ticket tracking
High volume of customer complaints about responsiveness in reviews
Inventory Visibility and Availability Control
Why It Matters
If the merchant lists products they cannot reliably source, they will collect payment and then experience long delays, order cancellations, or need to source from alternative suppliers at higher cost. Order cancellations after payment create customer friction, refund requests, and chargeback risk. Even when refunds are processed promptly, cancellations damage merchant reputation and customer lifetime value.
Real-time or near-real-time inventory visibility is a key indicator of operational maturity and supplier relationship quality. Merchants with inventory sync systems demonstrate they have structured integrations with suppliers and take availability seriously.
What We Look For
Inventory management system:
What system does merchant use to track product availability?
How does inventory data flow from supplier to merchant's website?
What is the sync frequency (real-time, hourly, daily, manual)?
Stockout handling procedures:
How are out-of-stock items displayed on website?
Are backorders accepted? How are they communicated?
What happens when customer orders unavailable item?
Product sourcing backup:
Does merchant have alternative suppliers for key products?
What is the plan if primary supplier is out of stock?
How quickly can merchant source from alternatives?
Historical availability performance:
Order cancellation rate due to stockouts
Average time from discovering stockout to notifying customer
Percentage of products listed that are actually available
Customer complaints about canceled orders
Verification Process
Step 1: Inventory system documentation
Website platform and inventory integration:
For merchants using e-commerce platforms:
Shopify:
Check if inventory tracking is enabled
Verify integration with supplier or dropshipping app (Oberlo, DSers, Spocket, CJ Dropshipping)
Review sync settings and frequency
Verify inventory levels are actually synced (not all set to "999")
WooCommerce:
Check inventory management settings
Verify product import method
Review inventory sync process
Custom or standalone site:
Request technical documentation of inventory management
API integration with supplier (if any)
Database schema showing inventory tracking
Request from merchant:
Screenshots or documentation of inventory sync configuration
Sync frequency (real-time, hourly, daily, weekly, manual)
What happens if sync fails? (alerts, fallback procedures)
How stockouts are handled (product hidden, marked "out of stock", backorder option)
For aggregation platform users (Oberlo, DSers, etc.):
Verify merchant's account status on platform
Review platform's inventory sync capabilities
Understand platform's supplier vetting and reliability
Check if platform guarantees inventory accuracy
Step 2: Stockout management verification
Website testing:
Browse merchant's product listings
Check inventory status indicators (if shown)
Look for "out of stock" or "backorder" labels
Note if inventory quantities are displayed
Attempt to add unavailable item to cart (is it prevented?)
Stockout policy review:
Request merchant's written stockout handling procedures
How quickly are customers notified?
Are refunds processed immediately?
Alternative product suggestions offered?
Compensation for inconvenience (discount on future order)?
What good looks like:
Product availability syncs at least daily (hourly or real-time preferred)
Out-of-stock items are clearly marked or hidden from search results
Customers cannot checkout with unavailable items
If stockout discovered after order, customer is notified within 24 hours
Full refund processed immediately
Apology and perhaps discount offered
Red flags:
Inventory quantities all show "999" or "100" (fake availability)
No inventory tracking system
Manual process: "I check with supplier after receiving order"
Products remain listed long after supplier discontinued them
No clear stockout handling policy
Step 3: Historical cancellation data review
For merchants with operating history:
Order cancellation report (past 90 days):
Total orders
Orders canceled due to stockout or unavailability
Cancellation rate (cancellations divided by total orders)
Average time from order to cancellation notification
Refund processing time for canceled orders
Customer complaints or negative reviews related to cancellations
Industry benchmarks:
Excellent: <2% cancellation rate
Acceptable: 2% to 5%
Concerning: 5% to 10%
High risk: >10%
Cancellation rate analysis:
If cancellation rate is high, investigate:
Is it concentrated in specific products? (supplier reliability issue)
Is it seasonal? (holiday inventory strain)
Is it trending up or down? (improving or deteriorating)
How long until customer is notified? (<24 hours is acceptable)
Step 4: Supplier inventory verification
For direct supplier relationships:
Request supplier's inventory list or stock levels for key products
Cross-reference with merchant's website listings
Verify merchant is not listing products supplier doesn't carry
Check if supplier has minimum order quantities that might create availability issues
For platform or aggregator users:
Understand platform's inventory accuracy
Check if platform has reputation for stockout issues
Review platform's seller or supplier ratings
Test order scenario:
Consider placing test order for 2 to 3 products to verify:
Order is confirmed promptly
Order is not canceled due to stockout
Tracking is provided within stated time
Products are actually shipped
Cost: $50-$150 for test orders Value: Direct evidence of inventory management effectiveness
Example Verification: Good vs. Poor
Example A: Professional inventory management
System:
Merchant uses Shopify with DSers integration
Inventory syncs every 24 hours from AliExpress supplier accounts
Merchant has 150 products listed
All products show accurate stock levels (not generic "999")
Out-of-stock items are automatically hidden from catalog
Procedures:
Written stockout policy: "If item becomes unavailable after order, customer is notified within 12 hours via email and full refund is issued immediately"
Merchant has backup suppliers for top 20 best-selling products
Performance (past 90 days):
850 orders
18 orders canceled due to stockout (2.1% cancellation rate)
Average notification time: 8 hours
All refunds processed within 24 hours
Customer reviews mention 2 cancellations but praise fast refund
Assessment: Low risk. Professional inventory management with low cancellation rate and customer-friendly handling of stockouts.
Example B: Inadequate inventory management
System:
Merchant uses WooCommerce
"Inventory is updated manually every few weeks"
All products show "In stock" regardless of actual availability
Merchant states "I check with supplier after customer orders"
Procedures:
No written stockout policy
Merchant admits "sometimes it takes a few days to find out if supplier has it"
If unavailable, merchant tries to find alternative supplier, causing delays
Performance:
Merchant refuses to provide cancellation data
BBB complaints include: "ordered weeks ago, finally told item not available", "paid for product, then told they don't have it"
Trustpilot reviews: "canceled my order after 10 days", "never received order and took forever to get refund"
Test order commissioned: Order placed Monday, no shipment by Friday, inquiry sent, response Monday: "sorry, that item is not available, refund will process in 5-7 days"
Assessment: High risk. No inventory management system. High likelihood of cancellations and customer frustration. Order-to-cancellation delays create negative experience even when refunds are issued.
Red Flags: Inventory Management
Critical violations (likely decline):
No inventory management system
Merchant checks availability only after customer orders
High cancellation rate (>10%)
Long delays (>48 hours) to notify customers of stockouts
Pattern of customer complaints about canceled orders
Enhanced due diligence triggers:
Manual inventory updates (not automated sync)
All products show generic availability ("In stock", "Available")
Large product catalog (>500 products) with questionable sourcing capability
Merchant cannot explain inventory sync process
New merchant with no track record, listing hundreds of products
Products appear to be scraped from other sites or marketplaces
What Good Looks Like: Operational Control and Transparency
A well-run dropshipping operation demonstrates operational control through documentation, systems, and performance. We look for evidence, not promises.
Documentation Completeness
At application, merchant provides:
Supplier verification package:
Supplier legal name and registration details
Supplier contact information (verified independently)
Supplier agreement or purchase orders (3-6 months)
Provides comprehensive documentation without evasion
Transparent about business model and challenges
Realistic about growth and capabilities
Open to site visit or inspection if requested
Willing to implement improvements or additional controls if needed
Red flags:
Slow to respond or requires multiple follow-ups
Provides incomplete information
Evasive when asked about supplier or operations
Overly optimistic projections without supporting data
Defensive or dismissive when concerns are raised
Pressures for quick approval
Common Misses: What We See When Controls Are Weak
1. Inconsistent Policies Across Touchpoints
We see merchants with policy documentation that contradicts itself across different pages or customer journey stages.
Example scenario:
Shipping policy page: "Orders ship from our partner warehouse in Asia and typically arrive in 15 to 30 business days."
Product pages: Display "Fast Shipping" badge and countdown timer "Order in next 4 hours for fast delivery"
Checkout page: Shipping option dropdown shows "Standard Shipping (3-5 business days)" (copied from template, never updated)
Email marketing: "Get it fast! Order today and receive within a week!"
Impact:
Customer's expectation is set by the most optimistic representation they encounter. If checkout says "3-5 business days" but actual delivery takes 21 days, the customer bases their complaint on the checkout promise, even though the shipping policy page technically disclosed longer times.
The result: item-not-received chargebacks with reason code "product not received" because customer expected delivery within 5 days based on checkout experience.
Card network perspective:
When merchant representment includes conflicting policy screenshots, the chargeback may be upheld in favor of the cardholder because merchant failed to clearly communicate delivery expectations.
2. Fake or Misleading Tracking Practices
Some dropshipping merchants provide tracking numbers that are real but do not correspond to the customer's actual order or destination.
Common problematic practices:
Generic tracking numbers:
Merchant provides same tracking number to multiple customers
Tracking shows delivery, but to a different address
Customers never receive their packages
Partial shipment tracking:
Tracking number is for a small portion of order (one item when customer ordered three)
Customer sees "delivered" but received incomplete order
Brushing scheme tracking:
Merchant ships lightweight, low-value item to customer's address or nearby address in same postal code
Provides tracking number showing "delivered"
Customer never receives the actual ordered product
Merchant uses tracking as "proof" of delivery to fight chargebacks
Wrong carrier tracking:
Tracking number is valid but for different carrier than stated
Customer cannot track package with information provided
By the time customer realizes issue, chargeback timeframe is expiring
Why merchants do this:
Primarily to avoid item-not-received chargebacks. If merchant can show "proof of delivery" via tracking, some acquiring banks will rule in merchant's favor on INR disputes.
Why it's high-risk:
Payment networks have become aware of fake tracking schemes
Systematic use of fake tracking can be considered fraud
Acquirers may be held liable if pattern emerges across multiple merchants
Our verification approach:
For merchants with processing history:
Request 20-30 recent tracking numbers
Independently verify via carrier websites
Cross-reference tracking delivery address with order shipping address
Calculate percentage of "delivered" tracking that actually matches customer address
Check for patterns: multiple orders with same tracking, tracking delivered to different city or state, delivery time impossibly fast or slow
Red flags:
Merchant unable to provide tracking numbers
Tracking numbers are invalid or not found in carrier systems
Delivery addresses on tracking don't match order addresses
Customer complaints: "tracking shows delivered but I never received it"
3. Unclear or Unresponsive Support Channels
Merchants may list customer support contact methods on their website but fail to actually monitor or respond to them in a reasonable timeframe.
Common patterns:
Email black hole:
Email address is provided but goes to unmonitored inbox
Auto-reply confirms receipt but no human ever follows up
Customer sends multiple emails over weeks with no response
Merchant claims "we respond to all emails" but evidence shows otherwise
Disconnected phone:
Phone number listed on website
Number is disconnected, or rings endlessly without answer or voicemail
If voicemail exists, it's full and won't accept messages
No callback provided even if message is left
Outsourced support with no training:
Customer support is outsourced to third-party call center
Support representatives have no information about merchant's specific products, policies, or order status
Generic responses: "Your order is being processed", "Please wait", "We will check and get back to you"
Issues are never escalated or resolved
Language barriers create additional friction
Social media inquiries ignored:
Customers try to reach merchant via Facebook, Instagram, Twitter
Messages are sent but never read or replied to
Merchant's social media accounts appear active (posting content) but customer service inquiries are ignored
Impact:
When customers cannot resolve issues through support channels, they escalate to their bank. We observe correlation between poor support responsiveness and elevated chargeback rates.
4. No Contingency for Supplier Failures
Dropshipping merchants are inherently vulnerable to supplier disruptions. Single-supplier dependence creates catastrophic risk when that supplier experiences issues.
Common supplier failure scenarios:
Production or inventory disruption:
Supplier runs out of stock on popular item
Factory shutdown due to holiday, inspection, or closure
Quality control issue requires production halt
Supplier goes out of business
Shipping disruption:
Carrier delays due to weather, strikes, capacity constraints
International shipping disruptions (pandemic lockdowns, port congestion)
Customs issues holding shipments
Supplier relationship breakdown:
Payment dispute between merchant and supplier
Supplier increases prices suddenly
Supplier stops accepting orders from merchant
Supplier begins selling directly to consumers, competing with merchant
Fraud or supplier misconduct:
Supplier accepts payment but fails to ship orders
Supplier ships wrong or inferior products
Supplier provides fake tracking numbers
Supplier disappears
Impact on merchant without contingency plan:
Scenario: Merchant sources all products from single supplier in Shenzhen. Supplier experiences production delay due to regulatory inspection. Merchant has 200 pending orders with no ability to fulfill them.
Merchant's options (all problematic):
Cancel all orders and issue refunds (generates 200 refund requests, reputation damage, potential chargebacks)
Promise delays and hope customers wait (some will file chargebacks after 30 days)
Source from expensive alternative supplier at a loss (unsustainable financially)
Go silent and hope it blows over (worst option: leads to mass chargebacks, regulatory complaints, and acquirer termination)
What we look for to assess supplier contingency:
Backup supplier relationships:
Alternative sources identified for top-selling products
Documentation of secondary supplier contacts
Tested backup fulfillment (has merchant successfully ordered from alternative supplier?)
Supplier monitoring:
Does merchant track supplier performance and reliability?
Early warning system for supplier issues (order delays, quality problems)
Regular communication with supplier about capacity and inventory
Financial reserves:
Does merchant have cash reserves to cover refunds if fulfillment fails?
Can merchant absorb loss of sourcing from higher-cost alternative in emergency?
Communication plan:
How will merchant notify customers of delays?
Proactive communication strategy to prevent chargebacks
For new merchants (no history):
We assess:
Does merchant understand supplier risk?
Has merchant identified backup sourcing options?
Does merchant have realistic expectations about supplier reliability?
Financial runway to survive supplier disruption
Red flags:
Merchant has only one supplier and no alternatives identified
Merchant dismisses supplier risk
Merchant has no plan for supplier failures
Merchant cannot afford to refund orders if fulfillment fails
Evidence-Based Underwriting: Documentation Request List
When underwriting a dropshipping merchant, we request specific documentation at different stages. Each document serves to verify operational capability and identify risk.
At Application Stage
Business and legal documentation:
Business registration or incorporation documents
Employer Identification Number (EIN) or tax identification
Beneficial owner identification for all 25%+ owners
Business bank account information (account must be in business name)
Website URL and social media accounts
Business plan or merchant questionnaire
Supplier documentation:
Supplier name, registration, and location (full address)
Supplier agreement, contract, or terms of service
Recent purchase orders or invoices (3-6 months if available)
Supplier contact information (phone and email, independently verified)
Policy documentation:
Shipping policy as displayed on website (screenshot or URL)
Return policy as displayed on website
Refund policy
Terms of service
Privacy policy (if collecting customer data)
Operations documentation:
Description of order fulfillment process (from order to delivery)
Inventory management method and sync frequency
Customer support contact methods and staffing
Estimated monthly processing volume and average ticket size
Projected growth plan (next 12 months)
During Onboarding (For Merchants with Operating History)
Performance documentation:
Sample tracking numbers from recent orders (20-30 examples)
Delivery performance data: - Average delivery time by destination - Percentage delivered within promised timeframe - Delayed shipment rate and reasons
Return processing data: - Number of returns (past 90 days) - Return rate (percentage of orders) - Return approval or denial breakdown - Refund processing time
Order cancellation data: - Cancellation rate due to stockouts - Cancellation notification timing
Customer support performance: - Support ticket volume (past 90 days) - Average first response time - Average resolution time - Sample tickets (sanitized)
Financial documentation:
Bank statements showing business transactions (3-6 months)
Supplier payment history
Chargeback history (if processed cards previously)
Current chargeback rate and reason code breakdown
System and infrastructure documentation:
E-commerce platform and version
Inventory management system documentation
Customer support helpdesk system
Order management system
Payment gateway currently used (if any)
For New Merchants (No Operating History)
When merchant has no transaction history, verification shifts to capability assessment:
Enhanced supplier verification:
Independent verification of supplier identity and capacity
Supplier references or testimonials
Third-party supplier assessment (if high-risk)
Financial stability verification:
Personal financial statements of owners (for individual ownership)
Funding sources and runway
Reserve capacity to cover potential refunds
Test order commission:
Payment processor may commission test orders to verify fulfillment
Cost borne by processor or merchant depending on underwriting agreement
New supplier added: Full supplier verification package
Consumer protection complaint received: Incident report and resolution
Risk Scoring and Segmentation Framework
Not all dropshipping merchants present the same risk. We segment based on multiple control factors to apply appropriate underwriting standards and monitoring requirements.
Dimension
Weight
Scoring factors
Supplier Verification
25%
Supplier identity verifiedRelationship documentedSupplier reputationDomestic vs. international sourcing
Health supplements (regulatory risk, efficacy claims)
Adult products (reputational risk, age verification)
Lower risk categories may receive benefit:
Low-value items (<$20 average order)
Non-controversial commodity goods
Products with low return rates
Red Flags: When to Decline or Escalate
Certain patterns indicate high likelihood of operational failure, intentional misrepresentation, or fraud. These trigger immediate decline or escalation to senior underwriting review.
Immediate Decline Indicators
These signals warrant immediate decline without further consideration:
Supplier disclosure refusal:
Merchant explicitly refuses to disclose supplier identity when directly asked
Claims supplier information is "proprietary" or "confidential" without legitimate reason
Provides obviously fabricated supplier information (non-existent company, fake address)
Supplier cannot be contacted or denies relationship with merchant
Stolen or misrepresented content:
Website displays stolen product images (reverse image search reveals images from major brands or other retailers without proper licensing)
Product descriptions copied verbatim from other sites
Website uses trademarked brand names without authorization
Counterfeit goods suspected or confirmed
Inventory misrepresentation:
Merchant claims to have physical inventory but cannot provide warehouse address or access
Warehouse address is fake or does not exist
"Warehouse" is a residential address and merchant cannot explain
Previous account terminations:
Multiple previous merchant accounts with same beneficial owners terminated for excessive chargebacks
Previous termination for fraud, money laundering, or illegal activity
Beneficial owners on MATCH list (terminated merchant file)
Regulatory or legal issues:
Active regulatory investigation or enforcement action
Cease-and-desist letter from state attorney general or FTC
Pending or recent litigation related to consumer fraud or deceptive practices
Criminal charges against beneficial owners for fraud or financial crimes
Deceptive practices:
Website includes fabricated testimonials, fake reviews, or false endorsements
Misleading certifications or affiliations (example: "BBB Accredited" when not)
False scarcity or urgency tactics (fake countdown timers, "only 2 left in stock" that never changes)
Bait-and-switch tactics discovered during underwriting
High-risk ownership:
Beneficial owners have prior fraud convictions
Beneficial owners appear on OFAC or other sanctions lists
Beneficial owners use false identities or provide fake identification documents
Ownership structure is intentionally obscured (multiple layers of entities, offshore registration without legitimate reason)
Escalation Indicators (Senior Review Required)
These signals require escalation to senior underwriting or compliance review rather than automatic decline:
Delivery time impossibility:
Merchant's stated delivery times are physically impossible given supplier location and shipping method
Example: promises 5-day delivery when supplier is in China and uses standard mail (actual time: 15-30 days)
Merchant may not be intentionally deceptive but has unrealistic understanding of logistics
Decision: Escalate. May be approved with required policy corrections and enhanced monitoring.
Problematic returns setup:
Return address is mailbox service or virtual office with no evidence of fulfillment operations
International return address creates significant barrier for customers
Return policy is present but very restrictive (could be legitimate business decision or red flag)
Decision: Escalate. Assess whether returns infrastructure is inadequate or intentionally designed to prevent returns.
Copied or templated website:
Website terms of service, privacy policy, or other legal content copied from another site
Includes incorrect company names, addresses, or references to other businesses
Suggests lack of attention to detail or rush to launch
Decision: Escalate. May be approved if merchant corrects content and demonstrates legitimacy.
Tracking irregularities:
Tracking numbers provided for sample orders show delivery to addresses not matching stated customer addresses
Pattern of tracking delivered to nearby but incorrect addresses
Some tracking numbers are invalid or not found
Decision: Escalate. Investigate whether this is systematic fake tracking (decline) or isolated supplier errors (may approve with monitoring).
Quality complaints suggesting counterfeits:
Customer complaints or reviews reference quality issues that suggest counterfeit or unauthorized goods
Products are branded goods sold at suspiciously low prices
Supplier is located in region known for counterfeit production
Decision: Escalate. Requires investigation of product sourcing and legitimacy. May request proof of authorized distribution.
Poor but not catastrophic external reputation:
Reviews are negative but not universally so (2.5-3.0 out of 5 star range)
BBB has complaints but merchant is responding and attempting resolution
Some customer complaints about delivery or quality but not systemic failure
Decision: Escalate. May be approved as High Risk (Tier 3) with intensive monitoring and required improvements.
Aggressive growth projections:
New merchant projects very high volume ($200K+ per month) immediately
Projections are not supported by funding, infrastructure, or market analysis
May indicate unrealistic expectations or attempt to secure high processing limits
Decision: Escalate. May approve with conservative initial limits and phased increase based on performance.
Escalation Review Process
When application is escalated:
Senior underwriter review:
Comprehensive review of all documentation
Additional information requests to merchant
Independent verification of questionable elements
Risk assessment and recommendation
Possible outcomes:
Approve with conditions: Merchant can proceed with specific requirements (policy corrections, enhanced monitoring, lower limits)
Approve as High Risk (Tier 3): Intensive monitoring and probationary period
Request additional information: Cannot make decision without further documentation
Decline: Risk is too high even with mitigating controls
Escalation criteria should be documented:
Why was application escalated?
What additional information was obtained?
What factors supported decision?
What conditions or monitoring requirements were imposed?
The Underwriting Question: What Is Your Single Best Fulfillment Proof?
When underwriting dropshipping merchants, we have found value in focusing on one key question that surfaces the most critical evidence:
"Can you demonstrate that your fulfillment process works as described?"
This question cuts through documentation and representations to assess actual operational capability.
Why This Question Matters
Merchants with genuine operational control can provide concrete evidence:
Focus on future plans rather than current capability
Answering the Question: Evidence Hierarchy
We typically advise teams to accept evidence in this priority order:
Tier 1 Evidence (Strongest): Historical Performance Data
For merchants with operating history:
90 days of delivery performance data showing >85% on-time delivery
Sample tracking numbers (20-30) showing actual fulfilled orders
Customer reviews or feedback demonstrating successful fulfillment
Return processing records showing functional returns system
Bank statements showing regular supplier payments
Assessment: Direct evidence of working fulfillment process. Strongest indicator of future performance.
Tier 2 Evidence: Test Order Demonstration
For new merchants without history:
Place test orders (2-3 products to different addresses)
Verify orders are fulfilled within stated timeframe
Confirm tracking is accurate
Assess product quality and packaging
Evaluate customer communication during process
Assessment: Direct observation of capability. More reliable than documentation alone. Requires time (15-30 days) and cost ($100-$300) but provides high confidence.
Tier 3 Evidence: Supplier Verification
For new merchants unable to demonstrate through test orders:
Independent verification that supplier exists and has stated products
Supplier confirms they will fulfill orders on merchant's behalf
Repeated poor performance results in account restrictions or suspension
Top-performing sellers receive badges or other recognition
Performance metrics are visible to buyers
Platform-level controls:
Automated tracking number validation
Delivery time monitoring
Customer complaint aggregation
Assistance with supplier verification
Ballerine's Role
Dropshipping underwriting requires collecting, verifying, and continuously monitoring dozens of data points for each merchant. Manual execution does not scale and produces inconsistent results.
We provide infrastructure to make this process manageable: automated supplier verification across international business registries, policy extraction and consistency checking across merchant websites, real-time delivery performance monitoring with carrier API integration, and risk scoring models that calculate merchant risk tiers automatically.
Our workflow automation handles evidence collection through structured underwriting checklists, while ongoing monitoring dashboards track chargeback rates, delivery performance, and customer complaints in real time. When regulatory requirements change or card network rules update, our system distributes alerts and policy recommendations to risk teams.
The result: risk teams can underwrite dropshipping merchants consistently, detect problems before they become chargeback crises, and scale operations without proportional headcount increases. Dropshipping becomes a manageable merchant segment rather than a risk exposure.
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