Merchant Fraud Is On The Rise – Learn The 3 Most Common Scams

March 28, 2022

Merchant fraud is nothing new, but a recent spike in financial crime has industry experts sounding the alarm.

In a recent survey from the Association of Certified Fraud Examiners, over 50% of organizations said they’d noticed an uptick in fraud since the onset of the pandemic. Analysts report fraud losses of $10.24 billion in 2020 in the US alone, and predict that the global credit card industry will lose $408.5 billion over the next decade.

Merchant acquirers looking to navigate this difficult landscape must determine how to meet the growing demand for online payment services, while effectively managing their risk. Merchant scams may be difficult to detect but acquirers can’t become complacent. The repercussions of an incident go beyond financial loss, harming their reputation and even exposing them to legal action, fines, and other sanctions.

When assessing their risk, acquirers need to know what they’re facing. Acquirers should be alert to these three common, but costly, types of merchant fraud.

The 3 Types of Merchant Fraud

1. Identity Swap 

Individuals in bad standing, such as those on Anti-Money Laundering watchlists or from sanctioned countries, can evade Know Your Customer (KYC) controls simply by forging a new identity.

Regulators take a dim view of acquirers who let these imposters sneak through their defenses, expecting them to have done their due diligence. Acquirers who fail to spot identity fraud can be held liable and face severe penalties. Last year, regulators fined financial institutions $1.9 billion for AML violations.


2. Transaction laundering

Also known as factoring or undisclosed aggregation, transaction laundering occurs when authorized merchants use their accounts to process illegal payments. This type of merchant account fraud is generally used to facilitate black market business such as illegal gambling or counterfeit goods.

Laundering is similar to another form of fraud – business remodeling. This is when fraudsters open an approved account but then, unknown to the acquirer, switch over to selling an unauthorized product or service.


3. Bust out fraud

This type of fraud occurs when a merchant opens an approved account simply to gain lines of credit. Attempting to build an attractive credit history, these fraudsters never miss a payment and appear to be completely above board. Eventually, however, they will max out the credit available to them and disappear, leaving acquirers to deal with the resulting financial fall out. 

Merchant fraud prevention
: how acquirers can protect themselves

As perpetrators become more adept at tricking the complex payments ecosystem, acquirers have to match them in sophistication and innovation, using the latest tech tools to strengthen their defenses. Acquirers can start by honing in on the following areas:

Risk management

If you’re only monitoring individual transactions, you’re merely collecting information on credit card use, without gaining any insight into the identities and businesses behind these payments. 

The most effective risk management frameworks provide a holistic overview of all merchant activity – scrutinizing the type and frequency of their transactions, their internet presence, and any connections they have to other businesses. 

Merchant monitoring

Acquirers should continually monitor their merchants to reduce the risk of transaction laundering and business remodeling. Piecemeal approaches, dependent on semi-regular audits, run the risk of letting fraudsters slip through the cracks. 

Again, this monitoring should be done on both a micro and a macro level, looking at each individual transaction within the context of their entire payment ecosystem. 

Data analytics & automation

Acquirers need a clear line of sight into their merchant portfolio but, without the right technology, analyzing all that information puts pressure on time, staff, and resources. 

Leveraging automation tools can help. These provide the most cost-effective and efficient merchant monitoring – instantly sifting through hundreds of data points in real-time to flag high-risk merchants and suspicious activity.

The Agreement Express
Fraud Prevention Solution

Agreement Express’ innovative onboarding and underwriting platform, Merchant ScanXpress, contains everything an acquirer needs to protect themselves against all kinds of merchant fraud. Our market-leading toolkit provides:

Automated KYC/AML checks
– Our streamlined onboarding process offers automated underwriting so acquirers can stay fully compliant with the latest Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. Our platform uses KYC SiteScan to comb through a merchant’s website, quickly assessing their risk by collecting information on their company, social media, legal compliance, corporate news, and more. Red flags are identified in minutes, protecting acquirers from identity fraud and other scams.

 Finely-tuned merchant monitoring – Our MonitorX software gives acquirers complete visibility into the merchant lifecycle with continuous scrutiny via automated risk monitoring checks. Instant alerts notify acquirers of negative trends that may indicate bust out fraud, irregular payments that could be transaction laundering or unusual activity around business remodeling.

Customized risk scoring – When you onboard a merchant with Merchant ScanXpress, you build a risk scorecard tailored to their individual profile and customized with over 100 data points. Criteria can be altered as merchants grow or change, and the scorecard runs in the background to provide discreet but round-the-clock protection.

Interested in finding out more? Contact our team today to schedule a demo.