The Dark Side of Fast and Easy Onboarding: Combating Merchant Initiated Fraud

May 10, 2023

By Nathan Trousdell:

The increased competition in the merchant services marketplace has led to a surge in fast and easy onboarding. While this can attract more clients, it also creates a vulnerability to fraud. In this blog post I will explore the reasons behind fast and easy onboarding, the rise of merchant initiated fraud, and how businesses can use sophisticated technology and collaboration to combat this issue.

Why Fast and Easy Onboarding is Prevalent

The influx of money from venture capital, private equity, and sovereign wealth funds has fueled growth in the merchant services industry. With the increased investment, businesses are focusing on customer acquisition and moving into underserved markets. To attract more clients and compete with innovators like Stripe and Square, many companies have reduced the friction in their onboarding process.

The Rise of Merchant Initiated Fraud

Fraudsters have taken advantage of the lowered barriers in the onboarding process. In merchant initiated fraud, the merchant is either the perpetrator of fraud, or collaborates with the perpetrators to defraud consumers and the merchant service businesses themselves. Due to fast and easy onboarding, this type of fraud has proliferated, and if not stopped in a timely manner, can cause losses in the millions.

How Fraudsters Get Through

Fraudsters use various methods to infiltrate the onboarding process, such as setting up merchant accounts with fake or stolen identities, paying people to act as Ultimate Beneficial Owners (UBOs), blackmailing or coercing existing merchants, or even buying legitimate businesses themselves.

Combating Merchant Initiated Fraud

To fight this type of fraud, businesses need to employ sophisticated technology, analytics, and alerts, while also training and educating their teams on how to use these tools effectively. Working with vendors who use network effects can also help protect organisations and stay ahead of fraudsters.

Using AI and Machine Learning

The latest AI and machine learning technologies, such as Chat GPT-4 and Google's Lambda, are already being used by fraudsters for sophisticated phishing attacks and scams. To combat this, businesses need to fight fire with fire and work with the latest in AI and machine learning.

A case study for merchant initiated fraud

The Importance of Collaboration

Collaborating with other businesses and sharing data can be beneficial in identifying and addressing emerging fraud patterns. This collaboration can help protect clients and enable better fraud detection strategies.

Growth-Enabling Fraud Detection Strategy

A good fraud detection strategy is not just about preventing losses; it can also enable growth. By effectively combating fraud, businesses can enter new markets and launch new products with confidence. This approach allows companies to make progress towards ambitious growth goals in a fast and safe manner, staying ahead of fraudsters and creating a more secure environment for their customers.

Fast and easy onboarding has created an opportunity for fraudsters to exploit vulnerabilities and defraud consumers and merchant service providers, creating losses in the millions for individual businesses. By leveraging sophisticated technology, collaboration, and well-trained teams, businesses can stay ahead of fraudsters and enable growth while keeping their customers and organisations safe.

About Fraudio

A pioneering cloud-based SaaS solution, Fraudio connects payment service providers, merchant acquirers, issuers, and other players in the payments chain to a powerful, centralised, AI / smart brain. Using this Plug & Protect technology platform, designed to fight complex payment fraud and financial crime, Fraudio protects clients from payment fraud, merchant-initiated fraud and money laundering.

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