How Acquirers Can Defeat Merchant Fraud with Holistic Fraud Management

Merchant fraud is an ongoing concern for acquirers. It’s usually more sophisticated than consumer fraud, and it’s often more difficult to track. Some fraud schemes are employed exclusively by merchants, or fraudsters posing as merchants, and present serious challenges to acquirers:

  • Bust out fraud – Using stolen identities to open merchant accounts, process transactions and then apply for credit cards before abandoning the account. It’s then up to the acquirer to sort out the mess.
  • Transaction laundering – Unknown businesses use an approved merchant’s payment credentials to process illicit payments without the acquirer’s knowledge.
  • Identity swapping – Fraudsters use fake identities to open accounts with major acquirers from which they would otherwise be banned, creating situations where acquirers don’t really know who they’re working with.

These attacks are particularly difficult to detect because they are less common than other types of fraud. This low frequency means that acquirers can’t rely on traditional fraud detection solutions for monitoring merchants, which use supervised machine learning techniques, to train models to protect them. However, machine learning can be leveraged when onboarding merchants and monitoring transactions.

The Dangers of Undetected Fraud

Merchants’ transaction activity needs to be monitored. If it isn’t, it can cause significant damage.

Federal fines, losses and fees imposed by credit card processors on acquiring banks can be substantial, ranging from $5,000 to $100,000 per month until the retailer reaches compliance. The financial penalties alone can be more than some acquirers can bear. But fines are just one of the numerous risks.  

What’s harder to quantify is the damage done to a merchant’s reputation when they get caught, particularly if they were engaging in illegal activities. The damage can be catastrophic, and acquirers often get caught in the crossfire.

Add in the risk that acquirers face when merchants unexpectedly go bankrupt and it’s clear that acquirers need to take a closer look at what their merchants are up to.

Current Solutions Lack a Holistic Approach

These aren’t issues that acquirers can leave to chance.

In terms of solutions, acquirers typically focus on a single approach: monitor transactions, monitor merchants or just screen merchants during onboarding. None of the options on its own is sufficient:

  • If the focus is solely on merchant monitoring, it’s easy for individual fraudsters to slip through the cracks due to lack of transaction details.
  • If the focus is solely on transaction scoring, merchant fraud themes can be easily missed.

These solutions are limited—and risk exposure is increasing as new (and unfamiliar) payment channels enter the picture, such as Apple Pay, WePay and Amazon Payments. Acquirers need fraud detection strategies that let them address fraud across every one of these interaction channels — whether it comes from their merchants or their merchants’ customers.

Feedzai’s Approach: Holistic Monitoring

Rather than using disjointed systems to manage merchant fraud, Feedzai offers an approach that encompasses the complete merchant journey, from onboarding to monitoring both transactions and merchant behavior.

This is a fraud detection strategy built on our years of experience working with merchants and refining our own transaction scoring tools. In a single platform, Feedzai leverages powerful machine learning techniques that maximize fraud detection and monitor all merchant activity, no matter what it is.

360º  Merchant View

Feedzai’s platform combines merchant onboarding, merchant monitoring and transaction scoring to create a unified view of all merchant activity and behavior. It:

  • Examines every activity down to the transaction level
  • Compares new/suspicious behaviors to typical behaviors for each merchant profile
  • Compares merchant behaviors to similar merchant providers in their industry
  • Assesses whether each behavior matches known fraud/risk patterns
  • Provides a view of the details of signed agreements to better ensure that merchants adhere to their agreed upon behaviors

Our years of experience working with merchants and acquirers have given us the insight we need to bring these solutions to work in the fight against fraud.

Systemwide Efficiency

Feedzai’s solution supports efficiency across every aspect of an acquirer’s business:

  • Improved portfolio scaling through holistic monitoring that lets acquirers build and support larger portfolios with confidence
  • Reduce decision-making time in fraud management and focus on higher value tasks
  • Make confident merchant decisions for onboarding and terminations, and provide clear documentation explaining the logic behind the decision

All together, this process empowers acquirers with deeper, more accurate insights that take a proactive approach to fraud detection. It drives transparency and efficiency, and most importantly, it gives acquirers a way to confront fraud head on and identify issues before they arise.

Diogo Rendeiro

Diogo Rendeiro

Product ManagerFeedzai
Diogo Rendeiro

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