Merchant Fraud and Abuse Detection
Understanding Merchant Fraud
Merchant fraud encompasses deceptive practices by sellers to exploit payment systems, evade policies, or steal from customers and payment processors. Unlike customer fraud (stolen cards, account takeovers), merchant fraud involves businesses deliberately misrepresenting their operations to process illicit transactions or avoid compliance.
The Cost of Merchant Fraud
- Direct Losses: Chargebacks, refunds, and fraudulent payouts
- Regulatory Penalties: Card network fines for high chargeback rates and policy violations
- Operational Costs: Investigation time, legal fees, account recovery
- Reputational Damage: Brand harm from facilitating scams and counterfeit sales
Common Merchant Fraud Patterns
1. Fake Product Schemes
Merchants create professional-looking storefronts selling products they never ship, or ship drastically different items than advertised.
Common indicators:
- Limited seller verification imagery
- Prices significantly below market rates
- New accounts with unexpectedly high volumes
- Generic product descriptions
- Incomplete business contact information
2. Rapid Account Cycling
Fraudsters create merchant accounts, process high volumes quickly, then disappear before chargebacks arrive.
Common indicators:
- High transaction volumes immediately after account approval
- Shared infrastructure across multiple merchant accounts
- Duplicate contact information or payment details
- Minimal or recently established web presence
3. Prohibited Product Sales
Merchants sell prohibited items while misrepresenting their business category to avoid detection.
Common indicators:
- Category classifications don't match actual products
- Product descriptions indicating prohibited categories
- Suspicious communication patterns
- High-risk shipping patterns
4. Refund Fraud Schemes
Merchants collude with customers to file fraudulent chargebacks, keeping both the product and refund.
Common indicators:
- Elevated chargeback rates
- Patterns in chargeback sources
- Inconsistencies between reviews and chargeback data
- Suspicious shipping information
5. Price Manipulation
Merchants dramatically inflate prices for low-value items to maximize fraudulent payouts.
Common indicators:
- Prices significantly above market rates
- Synthetic or misleading product imagery
- Price changes coinciding with volume spikes
- Inconsistent product descriptions and valuations
SafetyKit's Fraud Detection System
Multi-Signal Analysis
SafetyKit combines transaction data, business intelligence, and behavioral patterns:
- Transaction Monitoring: Analyzes volume patterns, transaction characteristics, and chargeback rates
- Business Intelligence: Reviews merchant operations, content, and public information
- Network Analysis: Identifies shared infrastructure and coordinated fraud operations
- Behavioral Profiling: Compares merchant patterns against known fraud schemes
Automated Risk Scoring
Each merchant receives comprehensive risk scores based on:
- MCC classification accuracy
- Transaction pattern anomalies
- Website legitimacy assessment
- Product compliance violations
- Historical behavior and account age
- Network connections to known fraud
Enterprise Features
Team Collaboration
- Multi-user access with role-based permissions
- Investigation notes and internal communication
- Case assignment and workload distribution
- Audit trails for all decisions and actions
Customizable Policies
- Configure risk thresholds per business line
- Custom policy definitions for specific compliance requirements
- Allowlists and blocklists for special merchant categories
- Integration with internal risk scoring models
Customer Success Story
Underwriting team discovered $22M in unknown exposure:
An underwriting team faced mounting credit losses with little insight. Luckily, SafetyKit had already been integrated by their T&S team. SafetyKit discovered $22M in unknown exposure, with 10X greater accuracy than previous automated models.
Results:
- 10% credit model precision → 85% credit model precision
- $22M in previously unknown exposure identified
- Proactive risk mitigation before losses materialized
- Integration with existing T&S workflows
Scale and Efficiency
Process thousands of merchant investigations daily with consistent quality. SafetyKit eliminates the manual work of web research, policy cross-referencing, and report generation—freeing compliance teams to focus on edge cases and strategic risk management.
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