The last few years have seen a sharp increase in merchant fraud. As we enter a time of historically high technical growth, it becomes clear that scams are becoming commonplace. As a result, when we learn that one merchant or another was defrauded of millions of rupees, we are no longer as shocked as we once were.
We frequently overlook the fact that merchant fraud continues to be a serious problem and causes e-commerce companies to suffer significant financial loss among the myriad of frauds that plague us.
Due to the difficulty of detecting it, merchant fraud detection has not gained the traction it deserves. In addition, the complexity of digital payments frequently obscures information about them. As a result, despite the significant effort being put into merchant fraud prevention and detection, the outcomes are not satisfactory.
How do merchant frauds work?
Incredibly, phishing and merchant fraud increased by 220% in 2020 compared to 2019. You need to comprehend how a card-based digital payment operates before we can talk about merchant fraud:
A credit card or debit card payment cannot be handled without a merchant account when a consumer puts in an order, the payment processor checks to see if there is enough money in their account and approves the transactions if everything checks out.
Once that is done, they transfer the money from the issuing bank to the merchant account. The money is paid to the seller a few days after the online retailer confirms the order.
What Consequently Causes Merchant Frauds?
Most of these transactions, often known as phony merchant frauds, don’t involve legitimate merchants. Instead, fraudsters or criminals illegally manage and run merchant accounts. These accounts handle credit card transactions to steal credit card holders’ data and use it to make false purchases.
Merchant versus Transaction Fraud:
Transaction fraud is a part of merchant fraud, but they are not the same. Unauthorized trades, chargebacks, and other transaction frauds occur at the user’s end. Here, the fraudster generates the financial information necessary for transaction fraud through phishing or data from a leaked database.
Contrarily, merchant fraud happens when the fraudster poses as someone else and takes additional precautions beyond what the end user must do. These are carried out to deceive the parties involved in the transaction or the authorities.
Types of business fraud
The following are the most prevalent types of merchant fraud that you are likely to encounter:
Bust-out fraud: Bust-out fraud describes situations where merchant accounts are formed to deceive customers rather than conduct legal business. Most of these accounts are short-term, and the fraudster makes several purchases before closing the account without paying back the money.
Factoring Or Transaction Laundering: Secure merchant processing is required for several high-risk operations. It has reduced costs and significantly less chance of coming under government scrutiny. Therefore, without their knowledge, the fraudster conducts transactions across shadow sites using the information of the merchant partner. Given the merchant’s numerous daily transactions, such transactions are much more challenging to track.
Swap identities: Here, a criminal launches a respectable internet store using a merchant account to get around AML (Anti-Money Laundering) regulations. They utilize it as a front to conduct dubious transactions and raise money. As the name implies, the criminal accesses another person’s account and does the necessary transactions in their place.
Commercial remodeling: To avoid inquisitive eyes and acquirer inspection in these situations, the fraudster constructs a low-risk merchant category business. Once KYC is finished and an account is created, fraudsters redesign their store and sell whatever they want. One of the simplest forms of merchant fraud is this one.
Advice on Reducing the Risk of Merchant Fraud
You must take the necessary actions to ensure prompt merchant fraud detection and prevention since the risk of merchant fraud is very real. Here are some pointers to help you avoid falling victim to the trap:
- Asking how you wish to preserve critical information about consumers, such as their names, payment card numbers, bank account information, and identifying details, ensures maximum security.
- Additionally, carefully examine who has access to the data and whether they need it.
- Only save data on the server redundantly if it is necessary for your company. If you remove critical information from where hackers can obtain it, merchant fraud prevention may be simpler.
- Wherever practical, use tokenization rather than tying loyalty programs to individual customers’ card numbers.
- You can operate your rewards program without having to store sensitive consumer data.
- Establish strict frequent checks to determine who has access to your payment servers and why.
- Ensure the remote access is secure if you’re using it to avoid unauthorized access.
- Check if the integrator or reseller you work with complies with the PA-DSS.
Conclusion
A merchant account comes with a lot of responsibilities. Therefore, you must exercise the utmost caution and ensure that the sensitive data you save is protected from unauthorized access. Additionally, as losses from merchant fraud threats rise yearly, you must implement a strong security system and utilize BIG data to weed out fraudsters and reduce the likelihood of scams.
