Merchant Fraud

Merchant Fraud: What It Is And How to Deal With It

Fraud is inevitable! A business is always at the risk of falling victim to a variety of frauds that eat up its profits and result in heavy losses. E-commerce businesses are especially vulnerable to all kinds of fraud and abuse as the criminal is disguised as one of the buyer or seller and is able to commit fraud from the comfort of his home, or place of choice. One such type of e-commerce fraud is Merchant Fraud.

What is Merchant Fraud?

In Merchant Fraud, a fraudster establishes a fake merchant account in the pretence of doing legitimate business. The fraudster charges multiple credit/ debit cards which are stolen and takes the proceeds before being detected or reported, and/or the transaction moving to the point of being reversed. 

With advancement in technology, criminals are now able to find newer methods of hiding their identity or assuming fake ones. The e-commerce aggregator, or the payment facilitator, is unable to accurately verify the very same identity of the online ‘seller’. The imposter provides all required documents that make him/her seem like a legitimate party to the business, and in effect, hides their true identity.

The intention of such fake merchants is to create as many fake transactions as possible, with the aim of abandoning the associated account as soon as they’ve transferred the entire profit amount to another account. The traditional KYC or Know-Your-Customer programmes fail to accurately identify such merchants and once the fraudsters have got into the system, they immediately begin to process illicit transactions.

The bank or payment facilitator may even attempt to recover the lost funds, but the fraudster works extremely fast, making the payment facilitator eventually liable for all the losses incurred, including the additional charges related to the chargebacks.

In some cases, the criminal steals the identity of a genuine business and sets up a fake account with the e-commerce aggregators and payment facilitators. The ultimate outcome is that e-commerce platforms like Amazon, Flipkart, Snapdeal, etc. and payment gateways like CCAvenue, Citrus Pay, Instamojo, etc. suffer extreme losses due to such lost businesses and excess chargebacks.

How to Tackle Merchant Fraud?

In addition to strict registration policy for merchants and secure payment gateways, fighting merchant fraud requires advanced solutions. An e-commerce aggregator or payment facilitator operating on a large scale needs to integrate technically advanced fraud prevention measures to identify and prevent merchant fraud.

Each merchant registering with an e-commerce business needs to be evaluated on multiple yardsticks to check for their authenticity. This is when Artificial Intelligence comes into the scenario. AI-based fraud prevention tools can easily scan every registration application and transaction performed by the merchant account on hundreds of benchmarks like the device, IP Address, business address, business name, PIN Code, and many more.

E-commerce fraud prevention software companies like ThirdWatch have enabled e-commerce businesses to easily detect frauds and abuses, merchant fraud being one. The machine learning-based fraud prevention tool segregates each merchant registration request and every order received by the merchant into ‘real’ and ‘fake’ transactions, thereby enabling the e-commerce seller to block any fraudulent merchant and reject all fake transactions.

Fraud prevention measures for e-commerce businesses have become the building blocks of the entire industry, as they not only detect fraudulent transactions and merchant frauds, they block such illicit activities in real time, leaving no scope for the criminals to cause damage to the business.

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