March 4, 2021

Merchant Fraud Protection: A Guide for Merchant Acquirers

Identity theft and financial fraud directed at the everyday consumer tend to capture most of the headlines these days. Which isn’t particularly surprising, given how the threat posed to the masses is more constant and complex than it has ever been.

At the same time, however, instances of merchant fraud (attempted and successful) are accelerating at a record pace. Merchant fraud is both commonplace and costly, resulting in enormous losses for merchant acquirers worldwide each year.

Merchant fraud detection can be particularly difficult, given the size, speed and complexity of the digital payments landscape. But what’s often overlooked by merchant acquirers is how effective merchant fraud protection through detection and prevention is exponentially more cost-effective than dealing with the consequences.

Fines, fees, chargebacks and so on – are all costs picked up by merchant acquirers upon falling victim to merchant fraud. Not to mention, the potentially catastrophic reputational damage that often accompanies major fraud events.

Common Forms of Merchant Fraud

Merchant fraudsters are becoming more flexible, dynamic and sophisticated in their attacks all the time, finding new and often terrifying ways of targeting their victims. However, there are three primary types of merchant fraud all acquirers should be aware of and on the lookout for:

1.   Bust Out Fraud

This refers to a type of scheme wherein a supposed merchant applies for a merchant account with no intention of running a legal business. They simply use their merchant accounts to apply for credit and/or process fraudulent transactions, after which they disappear without a trace.

Setting up a fake business and falsifying identities to fraudulently access lines of credit is surprisingly simple. More worrying, it’s the kind of attack that’s mounted and completed so fast that those targeted often have no time to detect the issue and take appropriate action.

2.   Identity Swap

Stolen and fake identities are frequently used to open merchant accounts by individuals or organisations who for any given reason are prohibited from doing so. They may be from countries where economic sanctions have been imposed or are perhaps on AML/ATF watch lists.

Either way, it’s a case of a legitimate business (in its home territory) finding ways to get around these merchant account prohibitions to open accounts and access credit through fraud.

3.   Transaction Laundering

Transaction laundering takes place when an entity that is unknown to a merchant acquirer processes payments through the facilities the acquirer is currently offering a known merchant. Doing so violates the terms and conditions the known merchant has with the acquirer, as it is forbidden for unknown entities to use the services provided without the authorisation of the acquirer.

It’s one of the most prolific forms of merchant fraud and is also one of the easiest to carry out, as those responsible for the activities often go to extremes to cover their tracks.

Protection and Preventative Measures for Merchant Acquirers

Perhaps the single biggest issue with most types of merchant fraud is that by the time an issue is detected, the damage is already done. This is why extensive efforts must be made to detect and prevent merchant fraud from occurring in the first place.

Operating in a nearly exclusive digital payments landscape, the scope for manual monitoring and detection of potential merchant fraud issues is minimal. Merchant acquirers must therefore adopt and leverage technology and, in particular, Artificial Intelligence based solutions at their disposal if they’re to stand a chance against today’s sophisticated fraudsters.

Real-Time Portfolio Monitoring

The only realistic option for companies looking to stay safe is technology that provides real-time portfolio monitoring, which goes beyond triggering basic alerts when the usual red flags are detected. Fraudsters know their way around conventional security measures better than most, continuously adapting and refining their approaches to circumvent security protocols.

This is where the potential value of AI-powered fraud detection and prevention solutions becomes evident. Rather than simply being pre-programmed with a database of red flags and suspicious activities to trigger alerts when detected, this is the kind of software that literally learns and evolves along the way.

It’s the exact opposite of a one-size-fits-all-solution, which rarely work given the unique demands of individual businesses. The whole point of AI fraud detection and prevention software is that it is able to learn, evolve and grow into something that works for your business.

In addition to this intelligent adaptation to suit any merchant acquirer’s requirements, the obvious benefit of real-time AI solutions is the ability to streamline or even automate risk mitigation, monitoring and reporting. Historical transactional data is used to create an overall behavioural profile, enabling the system to take near-total responsibility for identifying and reporting threats.

The result of which is a streamlined and simplified processes for the acquirer, along with reduced manpower requirements, and the opportunity to allocate resources more efficiently. Additionally - as the very best AI-powered fraud prevention solutions are also hosted in the cloud, there’s no need for major on-site adjustments to hardware or software resources to be able to benefit from this technology.

The Proactive Approach…

Taking a passive approach to merchant fraud is where most merchant acquirers go wrong. What’s important to remember is that just as soon as a static measure is put in place to thwart the attacks of fraudsters, strategies are devised to overcome them.

It’s only when fraud detection and prevention systems are able to intelligently adapt to the latest threats that businesses stand any chance of winning this constant ‘cat and mouse’ game.


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