In today's world of rapid technological advancement, we have to face the reality that fraud has become a regular feature of everyday life. As a result, we are no longer surprised to hear that some businessman has been scammed out of millions of dollars. :- www.deekpay.com

Among the many fraudulent behaviours, we tend to overlook the fact that merchant fraud remains a major pain point and causes serious financial losses to e-commerce providers. Merchant fraud detection does not get the attention it deserves because they are difficult to detect. In addition, details about merchant fraud are often lost in the complexity of digital payments. As a result, despite considerable work on merchant fraud prevention and detection, the results are far from satisfactory.

This article will look at the types of merchant fraud and some tips that may be useful to you.

What is merchant fraud?

In 2020, merchant fraud and phishing activity increased by 2,201 TP3T compared to the previous year.

Before we discuss what merchant fraud is, you must understand how card-based digital payments work:

Credit or debit card payments cannot be made without a merchant account. Once a customer places an order, the payment processor checks that they have a sufficient balance in their account and authorises the transaction once all conditions are met. They then transfer the funds from the issuing bank to the merchant account. Once the e-commerce provider confirms the order, after a few days the amount is transferred to the seller.

So what leads to merchant fraud?

Merchant fraud is also known as phony merchant fraud, and most of these transactions do not involve a real merchant. Instead, merchant accounts are illegally managed and operated by criminals or fraudsters. These accounts process credit card transactions to steal data from credit card holders, which is then used to make fraudulent purchases.

Merchant fraud and transaction fraud

While merchant fraud also involves transaction fraud, the two are different. Transaction fraud occurs at the user end and includes unauthorised transactions, chargebacks, etc. Here, fraudsters use phishing or use data from compromised databases to generate the financial details needed to commit transaction fraud.

Merchant fraud, by contrast, occurs when a fraudster becomes an impostor and takes steps beyond basic end-user due diligence to deceive authorities or individuals conducting transactions.

Types of merchant fraud

There are many types and forms of merchant fraud, here are some of the most common types you may encounter:

1. Breakthrough fraud: A situation in which a merchant account is opened for the purpose of defrauding a buyer, rather than for the purpose of conducting legitimate business. Most of these accounts are short-term and the fraudster conducts a series of transactions and then abandons the account without repaying it.

2. Transaction laundering or factorisation: Many high-risk businesses need to make payments through secure merchant processing. This reduces costs and carries a much lower risk of government scrutiny. As a result, fraudsters use the details of merchant partners to execute transactions on shadow sites, of which they have no knowledge. These transactions are even difficult to track because of the sheer volume of other transactions that merchants process on a daily basis.

3. Identity exchange: Here, criminals use merchant accounts to open legitimate online shops and use it to circumvent anti-money-laundering rules. They use it as a cover to conduct suspicious transactions and raise funds. As the name suggests, criminals take over other people's accounts and make the necessary transactions in their name.

4. Business modification: In these cases, the fraudster establishes a low-risk merchant category business to avoid attention and acquirer scrutiny. Once KYC is completed and an account is set up, the fraudster revamps their business and begins selling their chosen merchandise. This is one of the easiest types of merchant fraud to commit.

Tips for managing merchant fraud risk

With the risk of merchant fraud looming, it is important that you take the necessary steps to ensure timely merchant fraud detection and prevention. Here are some tips that can help you avoid falling into the trap:

When you collect sensitive data from your customers, such as their payment card numbers, bank account details, IDs and names, consider how you can ensure maximum security in storing this information. In addition, make sure you review who has access to this data and whether they need it. Make sure you do not store data redundantly on your servers unless it is critical to your business. Merchant fraud prevention may be easier if you destroy sensitive data at hacker-accessible locations. Wherever possible, use tokenisation rather than attaching a loyalty scheme to each customer's card number. This will allow you to seamlessly manage your rewards programme without having to store key customer information.

Regularly scrutinise who and why employees have access to your payment server. If you use remote access, make sure it is secure to prevent unauthorised access. If you work with a third-party integrator or reseller, make sure they are PA-DSS compliant.

reach a verdict

Having a merchant account is a huge responsibility. As such, you must conduct adequate due diligence to ensure that the sensitive data you store is protected from unauthorised access. In addition, with the risk of merchant fraud increasing in losses every year, it is imperative that you have a robust security system in place and utilise big data to screen for fraudsters in order to reduce the likelihood of fraud.

Ultimately, the best way to avoid merchant fraud is to choose a secure payment gateway for your e-commerce site. With PayU's extra security and many other features, fraudulent activity is no longer something you need to worry about.