Merchant Fee Evasion Detection
What is Merchant Fee Evasion?
Merchant fee evasion occurs when businesses deliberately misrepresent their operations to qualify for lower interchange rates or avoid payment processing fees. By selecting inappropriate Merchant Category Codes (MCCs) or structuring transactions deceptively, merchants reduce their costs while shifting fees and risk to payment processors.
The Financial Impact
- Revenue Loss: Payment processors lose legitimate interchange income
- Network Fines: Card networks penalize processors for merchant MCC violations
- Risk Exposure: Fee-evading merchants often engage in other fraudulent activities
- Compliance Burden: Regulatory scrutiny on merchant monitoring practices
Common Fee Evasion Tactics
1. Strategic MCC Miscoding
Merchants intentionally select MCCs with lower interchange rates that don't match their actual business operations.
Commonly Abused Categories:
- Utilities: Essential services rates for non-utility businesses
- Non-Profits: Charitable and religious organization rates for commercial operations
- Grocery: Food retailer rates for specialty or luxury goods
- Transportation: Essential transit rates for unrelated services
- Education: Educational institution rates for non-instructional businesses
2. Business Type Misrepresentation
Merchants claim to operate lower-fee business models while actually conducting higher-fee operations:
- Restaurant miscoding: Fine dining coded as fast food to avoid premium rates
- Retail vs. Professional Services: Consulting businesses coded as product retailers
- Card-Present vs. Card-Absent: Online businesses claiming in-person sales for better rates
3. Transaction Structuring
Breaking large transactions into smaller amounts to avoid higher fees or processing limits.
Common indicators:
- Transaction amounts just below fee thresholds
- Multiple sequential transactions from same customer
- Unusual clustering patterns in transaction sizes
4. Surcharge Manipulation
Merchants illegally pass processing fees to customers in jurisdictions where surcharging is prohibited, or exceed allowed surcharge limits.
SafetyKit's Fee Evasion Detection
Automated Category Validation
SafetyKit analyzes merchant operations to determine if declared categories match actual business activities:
- Business Analysis: Identifies merchant's true business model and products
- Category Matching: Determines appropriate classification based on actual operations
- Discrepancy Detection: Identifies mismatches between declared and appropriate categories
- Impact Assessment: Estimates fee differences and revenue impact
Transaction Pattern Analysis
- Velocity monitoring for unusual transaction clustering
- Ticket size distribution analysis
- Cross-border transaction percentage validation
- Card-present vs. card-absent ratio verification
Network Detection
Fee evasion often involves coordinated networks of merchants using the same tactics. SafetyKit identifies:
- Merchants sharing contact information or infrastructure
- Similar website templates indicating common operator
- Coordinated MCC selection patterns
- Linked bank accounts or payment routing
Red Flags for Fee Evasion
SafetyKit automatically flags these high-risk indicators:
Critical Signals
- Merchant coded as charity/religious org selling commercial products
- Utility MCC for non-essential goods or services
- Education MCC for businesses not providing instruction
- Grocery store MCC for specialty or luxury goods
- Transportation MCC for non-transit services
Moderate Signals
- Generic/miscellaneous MCC (ending in 99) when specific MCC clearly applies
- MCC changed shortly after account approval
- Business name doesn't match MCC category
- Transaction patterns inconsistent with declared business type
Prevention at Scale
Manual merchant monitoring can't keep pace with sophisticated fee evasion schemes. SafetyKit analyzes tens of thousands of merchants daily, detecting MCC manipulation and transaction structuring instantly. Protect interchange revenue while maintaining compliant merchant portfolios.
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