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What are Merchant Frauds: Types of Merchant Frauds and Measures to Tackle it

merchant fraud

As we enter a time of extremely high technical growth, it becomes clear that fraud is becoming common. 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 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 trouble 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.

This article examines the many types of merchant fraud and offers some helpful advice to tackle them.

What are Merchant Frauds?

Compared to the previous year, merchant fraud and phishing increased by an unbelievable 220% in 2020.

You need to comprehend how a card-based digital payment operates before we discuss merchant fraud:

Without a merchant account, a credit card or debit card payment cannot be handled. 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 is fine. 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

So, what causes Merchant Fraud?

The vast majority of these transactions, which are also referred to as fake merchant frauds, do not involve actual merchants. Instead, fraudsters or criminals illegally manage and run the merchant account. These accounts handle credit card transactions with the intention of stealing the data of credit card holders and using it to make false purchases.

Merchant vs Transaction Fraud

Transaction fraud is a part of merchant fraud, but they are not the same. Fraudulent transactions, chargebacks, and other types of transaction fraud occur at the user’s end. Here, the fraudster generates the financial information necessary for carrying out transaction fraud through phishing or data from a leaked database

Nonetheless, 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 Merchant Frauds

Frauds committed against merchants can have many types and forms; among them, the following are the most common and likely to be encountered by you:

Merchant Fraud

1. Identity swap

Here, the criminal opens a real online store using the merchant account in order to get around AML (Anti-Money Laundering) regulations. They utilise it as a front to do dubious business and raise money. As the name implies, the criminal accesses another person’s account and does the necessary transactions in their place.

2. Bust-out fraud

Bust-out fraud describes situations in which merchant accounts are formed to deceive customers rather than to conduct a legal business. The majority of these accounts are short-term, and the fraudster makes a number of purchases before closing the account without paying back the money.

3. Business remodelling

To avoid inquisitive eyes and acquirer inspection in these situations, the fraudster constructs a low-risk merchant category business. The fraudsters redesign their business and begin selling the goods of their choice after the account is set up. It is among the simplest forms of merchant fraud to commit.

4. Factoring or transaction laundering

Secure merchant processing is required for a number of 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 numerous other transactions the merchant makes each day, such transactions are much more challenging to track.

Tips for managing Merchant Fraud Risk

Merchant Fraud

Because the risk of merchant fraud is so great, you need to take the necessary procedures to ensure that fraudulent activity is detected and prevented in a timely manner. You can avoid falling into the trap by following these suggestions:

  • When you acquire sensitive information about clients, such as their payment card numbers, bank account details, identification, and names, you should inquire about how you intend to retain it to ensure that the highest level of security is maintained.
  • In addition, make sure that you thoroughly investigate who has access to the data and whether or not they have the same requirements as you have.
  • If the information is not essential to the operation of your company, you should make sure that it is not stored redundantly on the server. Eliminating sensitive information from sites that can be accessed by cybercriminals can make it simpler to prevent merchant fraud.
  • To the extent that it is practicable, always opt to use tokenization rather than linking loyalty programmes to the individual card numbers of customers. It would make it possible for you to operate your incentive programme without storing any sensitive information about your customers.
  • Perform severe checks on a regular basis to determine who among your employees has access to your payment servers and why they do so.
  • If you are going to use remote access, you need to make sure that it is safe so that unauthorised users cannot log in.
  • Be certain that the third-party integrator or reseller you are working with complies with the PA-DSS.


A merchant account comes with a significant amount of responsibility. Therefore, you have an obligation to exercise maximum diligence and make certain that the sensitive data you keep is protected from unauthorised access. In addition, because the potential for financial losses caused by merchant fraud threats rises with each passing year, it is imperative that you implement a stringent security system and make use of BIG data in order to sort out potential fraudsters and reduce the chances of fraud.

Ultimately, if you want to prevent being a victim of merchant fraud, the most effective approach to handle this situation is to use a protected payment gateway on your online store. However, You do not need to be concerned about fraudulent actions thanks to the additional security measures and the many other features offered by payment gateways.


1. What is the meaning of merchant ID?

Ans: A merchant ID, also known as a merchant identity number (MID), is a one-of-a-kind identifying number that is associated with a company and used by the payment processing systems that are involved in a transaction to determine where payments should be sent.

2. What is fraudulent transaction meaning?

Ans: The unauthorised use of an individual’s financial accounts or payment information is the definition of a fraudulent transaction. Transactions that are fraudulent can lead to the victim losing their money, their personal belongings, or their personal information.

3. What is the meaning of Merchant Fraud?

Ans: Merchant fraud is when a fraudster pretends to be a merchant in order to process transactions and steal money.

4. What are the common types of Merchant Fraud?

Ans: The following are examples of major types of merchant fraud:

1. Bust out fraud
2. Identity swap
3. Business remodelling
4. Factoring Or Transaction Laundering

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