Merchant Bust Out Fraud Explained


February 25, 2022

By David O’Brien, CEO of Agreement Express

“As far back as I can remember, I always wanted to be a gangster.” A classic line from the movie, Goodfellas. The movie comes with a valuable lesson about fraud in the payments business, specifically merchant bust outs.

What Is Merchant Bust Out Fraud?

One of the fastest growing fraud schemes today is fraudulent merchants that rack up transactions, steal money, and then close down shop before being caught. This is called Merchant Bust Out. An example would be setting up online stores “selling” goods, only to accept consumers’ payments but never fulfilling the order. Another is leasing a storefront for a short period of time, getting a terminal from an acquirer, running transactions and then disappearing.

This type of merchant fraud exposes acquirers to the liability of facilitating criminal activity. This will ultimately place merchant acquirers at risk of chargebacks, fines, regulatory sanctions, and a potential for legal action.

Rapidly Increasing Cases Of Merchant Bust Out 

In todays’ world, merchant fraud like Bust Out is a rapidly growing risk. It is becoming easier to set up false identities and fake accounts. Now you might be thinking, I don’t have that kind of risk in my portfolio, but the ugly truth is it can happen at any time with the smallest change. A doctors office would appear to be low risk. Just last month, Surgery Center Management of California was just found guilty of $355 million in fraud billing. Bust-out merchant schemes can range in complexity, but the idea remains the same – generate a high volume of transactions within a short amount of time before the merchant disappears from the scene, stealing large sums of money in the process.

The reality is, in today’s world, if you are managing merchants, this could happen at any time to any one of them. A great example can be found in the movie Goodfellas. A situation changes like a new owner (connected to the mob certainly doesn’t help) is added and the merchant you thought you had (The Bamboo Lounge) changes into a rapidly inflating risk. Henry Hill is quoted:

As soon as the deliveries are made in the front door, you move the stuff out the back and sell it at a discount. You take a $200 case of booze and sell it for a hundred. It doesn’t matter. It’s all profit. And finally, when there’s nothing left, when you can’t borrow another buck or buy another case of booze, you bust out the joint. You light a match.


Why should Merchant Acquirers Care?

The first person to detect a problem is usually the card holder or the issuing bank that flags the purchase as fraudulent, initiating a chargeback. However, the life cycle of a chargeback before it reaches the merchant, who is responsible for the chargeback is so long, it gives time for the merchant to have already shut down and move on to their next target. As a result of this type of merchant fraud, the acquiring bank is responsible for the chargebacks and any additional fees that may ensue.

While merchant fraud is a rapidly growing and scary risk to stay on top of, today’s ISOs have the ability to automate monitoring this risk so you never have to worry about it. At Agreement Express, we take great pride in helping our customers protect their business, quickly and easily. When a situation with a merchant changes, like adding a new partner of dubious origin, be the first to know about it.

Schedule a free, no-strings-attached 15 minute demo to see how our merchant monitoring can dramatically minimize your risk of working with fraudulent merchant accounts.