Affiliate marketing continues to be a high-growth revenue source for companies. Not only is affiliate marketing expected to grow to be an $8.2 billion market in the U.S. by 2022, but the growth trajectory over the next few years is expected to be in the double digits. Some estimates show that affiliate marketing may account for 15% of all digital media revenue.

It’s not surprising that more companies than ever are selling through affiliates. But with that much money flowing through affiliate marketing programs, there are bound to be bad actors that will try to cheat the system. One study discovered fraud in 9% of transactions amounting to $1.4 billion in fraud globally in 2020.

It’s not just money that’s at stake when affiliate fraud occurs. Bots sending spoofed traffic your way can skew your analytics. It will be more challenging to measure conversion rates and key performance indicators (KPIs). You may be spending on traffic that doesn’t exist, making your marketing dollars less effective and increasing your customer acquisition costs.

If you’re offering signup bonuses, you may be losing money there, as well as being liable for chargeback fees for fraudulent credit card charges.

You need to be aware of the potential problems and learn how to identify fraud in your affiliate program. In this guide, you’ll find out how affiliate fraud occurs and what you can do to protect yourself. Of course, the best way to approach the problem is to prevent fraud from happening in the first place.

Preventing Affiliate Fraud Before It Happens

Fraud can jeopardize your revenue and your reputation. The better you review affiliate applications and define your affiliate terms and conditions — and enforce the rules — the less likely you are to become a victim. If fraud does occur, your policies and agreements between you and affiliates will likely govern how you can deal with fraud.

Clear Policies

The policies in your terms and conditions should address acceptable behavior, legal obligations, and recourse if the policies are not followed. To reduce and manage fraud, you should consider addressing the following topics in your policies. 

Pay per click (PPC) – Clearly outline whether you allow affiliates to bid on your business name and/or related terms. Most merchants who are already engaged in PPC advertising prohibit affiliates from doing the same as it may cause confusion for the customers and may also increase the cost per click for your business. 

Trademark usage – Have a policy in place regarding the accepted use of your trademark and variations thereof. The policy should help prevent trademark bidding and impersonating your brand or website. 

Legal compliance – Consider including details related to specific legislation regarding CAN-SPAM, GDPR, California Consumer Privacy Act, data processing, and FTC affiliate disclosures. The FTC requires that affiliates disclose any relationships with merchants, brands, or products on their website. The purpose of such disclosures is to make sure it is clear to the customer if a promotion is financially driven. 

Promotional policy – If you have specific promotional methods you wish affiliates to avoid, consider adding a specific list of accepted or unacceptable promotional methods. 

Discount codes – The use of discount or promotional codes is a frequent issue for many merchants. Affiliates may share exclusive coupons or inappropriate discounts, resulting in you providing unintended discounts to customers referred by affiliates. Outline acceptable use of discount or coupon codes as part of your affiliate program. 

Self-Referrals – Some affiliates may sign up for your affiliate program only to get a discount on your product or service. To avoid any issues, always outline whether self-referrals are accepted or against your terms and conditions. 

Affiliate Application Review

The biggest thing you can do to prevent fraud is to manually approve new affiliates and review each individually. When reviewing affiliate applications consider the following factors.

Affiliate website – Confirm each affiliate has an active website with content that relates to your product. Ask yourself questions such as Does the affiliate’s website look professional? Does that affiliate have a website with some domain authority? Does the affiliate rank highly for terms related to your product or service? Is the affiliate in the same vertical? To get an idea of how an affiliate’s website ranks for specific keywords, consider using SEMRush or Ahrefs. 

Affiliate channel – Consider each affiliate’s primary channel for promoting your business. There are many types of affiliates, and you might find a specific type of affiliate that works best for your affiliate program. To better understand the promotional methods of affiliates who apply to your program, consider asking different questions on the affiliate registration page. Add custom fields to get the information you need to make decisions. 

Spotting Affiliate Fraud

Most companies launching or running affiliate marketing campaigns want them to be the “set and forget” type. Unfortunately, that opens the door for fraudulent activity. You need to check on your affiliates regularly to make sure they are operating legitimately and sticking with the terms of their agreement. One of the key affiliate program management mistakes companies make when selling through affiliates is failing to monitor for inconsistencies that may be warning signs of fraud. There are a few areas you will need to monitor. 

Traffic & Sales Data

Looking for sudden spikes in traffic or questionable sales should be part of your regular review of critical metrics and KPIs. Here are some of the warning signs that may indicate fraud:

  • Unusually large orders
  • ‌Orders or sudden increases in orders from foreign countries 
  • ‌Suspicious IP addresses or email addresses
  • ‌Multiple transactions from the same IP address
  • ‌Multiple purchases from customers
  • ‌Unusual increase in traffic
  • ‌High rates of cart abandonment
  • ‌Increase in clicks without conversions
  • ‌Data spikes from one affiliate
  • Increased Chargebacks

Paid & Organic Search Data

By reviewing your affiliates’ referring URLs, you can sometimes see where affiliates are sending traffic to your website and whether it is organic or paid traffic. One area you want to pay particular attention to is paid search. Most affiliate programs want to ensure that affiliates don’t bid on their brand name. Some affiliates will still try to cheat the system by buying keywords for search terms in which the company already ranks high, which diverts from leads and sales you would get anyway. The process of monitoring your brand sometimes just takes a periodic review of your referring URLs and sometimes a quick search for your brand name on Google to see what results show up. 

Customer complaints

Pay close attention to customer complaints about false advertisements, incorrect coupons, or anything that sounds like your brand may have been promoted in other ways that may have created an issue with your customers. One of your affiliates may likely be engaging in an activity that may violate your terms and conditions and/or be undesirable to your brand image. 

Identifying the Types of Affiliate Fraud

Affiliate fraud can happen in small ways or be the province of serious threat actors. Here are some of the more common ways affiliate fraud can occur.

Fraudulent Purchases

Since affiliates are generally paid quickly once a sale has been processed, stolen credit card transactions can cause big problems. You may have already paid your affiliate for a sale before you learn the transaction was fraudulent. In fact, you may not know it until you get hit with a chargeback or a customer demands a refund. Credit card fraud is a growing problem. Despite advances in security, such as chips, credit card fraud losses topped more than $28 billion in 2020 and grew substantially during the pandemic.

Solution: To avoid paying affiliates for fraudulent purchases, consider delaying payments to your affiliates. Set a 30, 60, or 90-day time delay before releasing funds to an affiliate. Typically you want your release period sometime after your returns and exchange policy. Doing so will ensure that you don’t pay affiliates for a commission for a fraudulent or returned order. 

Fake Websites / Trademark Usage

Some bad actors will register variations of a vendor’s web domain to bank on people misspelling your brand’s name and attract unsuspecting buyers. They may mimic your website or eCommerce store so that users think they’re buying directly from you when, in fact, they are directing sales to grab affiliate fees. Customers purchasing through these fake sites take away sales you’ve legitimately earned and force you to pay an affiliate commission, as well.

‌Solution: Periodically review the referring domains of your affiliates and visit any suspicious URLs. Have clear terms as to how your brand, trademark, and variations can be used when promoting your business. 

Fake Leads

Depending on your pay structure, if you’re paying for leads or actions, it can be easy to fall victim to bots, false clicks, and even conversions. Paying for leads or conversions that aren’t settled with a payment transaction is always high risk and more susceptible to fraud. 

Solution: Rewarding affiliates for non-financial transactions will require a more manual review of your data to validate the quality of the referrals. Consider delaying payments to affiliates for a given time period to give yourself enough time to validate the leads or actions sent by affiliates. 

Self-Referrals

On occasion, some affiliates join an affiliate program only to try and get a discount on their order. While this might be a relatively small amount for a one-time purchase, it adds up quickly if you have a SaaS or some type of recurring order. 

Solution: Clearly outline in your terms and conditions whether you allow for self-referrals. You may also have a setting in your affiliate software that will prevent self-referrals. 

Discount Code Abuse

When your customer sees a coupon option at checkout, they may frequently do a quick Google search for coupon options. And coupon code websites will optimize a page for your website such as “Your business discount code.” Some affiliates will display the coupon code on the page and make it readily available for your customer. In contrast, others will hide the coupon until you click a link to view the coupon. If your affiliate program rewards the last affiliate link, the coupon site will be awarded the commission.

In some cases, shady affiliate sites will pretend they have a coupon code and get the customers to click their affiliate link, but they don’t actually have a coupon code to share. This typically provides a bad experience for the customer, and the affiliate is cheating the system. With that said, not all coupon sites are bad. Just be aware of the tactics that certain affiliates do and how it impacts your customers’ experience. 

Solution: Be selective in the types of coupon affiliate websites that you allow to join your program. Have clear policies as to how coupons may be distributed and displayed to your customers. 

Dealing With Affiliate Fraud When You Detect It 

When you suspect affiliate fraud, you need to do a deep dive and see what’s really happening. Anytime you’re doing business online, it’s possible for you to see some unusual activity. When you see recurring patterns or sudden changes, that’s different.

When you see these patterns or potential problems, document your findings and contact your affiliate immediately. Ask them to explain what you’re seeing. In some cases, the warning signs may be false flags. In other cases, fraudsters may be “testing the waters” to see what they can get away with. You need to act quickly to make your affiliates know you’re watching closely.

If there is no valid explanation for what you’re seeing, you can put your affiliate on notice or terminate the agreement depending on your terms or conditions. Willful fraud attempts may warrant legal action.

To avoid paying out fraudulent charges, make sure to add a delay in releasing funds to affiliates. Consider adding a 30-45 day period after a sale before releasing any funds to an affiliate. 

Growing Your Affiliate Program

Anytime you spot suspicious activity that falls outside the norm, you need to investigate. The more diligent you are at spotting and stopping affiliate fraud, the harder it will be for fraudsters to scam you. 

Monitoring for fraud detection is just one of the many things you need to do to grow your affiliate program and revenue. You may want to review our guide on what you need to know to grow your affiliate program.

At LeadDyno, we’re committed to helping you quickly and easily set up an affiliate program — no programming skills needed — track its performance and increase sales. Increase revenue from your e-Commerce store or SaaS with our all-in-one affiliate program platform.

Contact LeadDyno today for more information or try it free for 30 days.