Some merchants may classify this behaviour as Credit Risk but there is a clear intent to profit for a event within which the cardholder will be left out of pocket.
As the language suggests this vector sees good merchant and often long term merchant experience an event in their business that makes them abuse their clients. This can be in the form card of files being run fast and often transactions of friends and family being backed into the transaction which will be all disputed with the merchant not being able to cover the merchant.
“Good merchant gone bad” fraud is a term used to describe a situation where a merchant, initially trusted and reputable, starts engaging in fraudulent activities. This type of fraud can be particularly damaging because the merchant has already established a level of trust with customers and financial institutions. Here are some common scenarios and characteristics of this type of fraud:
Common Scenarios
- Sudden Increase in Chargebacks: The merchant starts processing a high volume of chargebacks, indicating that customers are disputing transactions more frequently. This can happen when the merchant begins to process unauthorized transactions or fails to deliver products or services as promised.
- Credit Card Laundering: The merchant might start processing transactions on behalf of other entities, disguising the true origin of the sales. This is often done to facilitate illegal activities, such as money laundering or processing payments for prohibited goods and services. This could also mean the processing of large transaction for family and friends with the aim of them winning the dispute and the business not being able to fund the losses.
- Delivery of Substandard or No Products: The merchant may begin to deliver substandard products or fail to deliver any products at all, despite taking payment from customers. This could be a sign that the merchant is trying to maximize short-term profits at the expense of long-term customer trust.
Characteristics
- Established Trust: The merchant has a history of legitimate business operations, which makes it harder for customers and financial institutions to detect the shift to fraudulent activities.
- Gradual Shift: The transition from legitimate to fraudulent activities might be gradual, making it difficult to pinpoint when the fraud started.
- Sophisticated Methods: The merchant may use sophisticated methods to cover their tracks, such as using multiple merchant accounts, altering transaction details, or providing partial refunds to placate dissatisfied customers temporarily.
Prevention and Detection
- Regular Monitoring: Financial institutions and payment processors should regularly monitor merchants for unusual activity, such as sudden spikes in chargebacks or changes in transaction patterns. Often you will see significantly larger transactions that are out of the pattern of the usual transactions size and velocity.
- Enhanced Due Diligence: Regularly updating and verifying the merchant’s information and business practices can help detect early signs of fraudulent behavior.
- Customer Feedback: Encouraging customers to report any issues with transactions can provide early warning signs of potential fraud.
- Technological Solutions: Utilizing advanced fraud detection systems that use machine learning and data analytics can help identify suspicious activities and patterns that may indicate a good merchant has gone bad.
- Perpetual Monitoring: Merchants that are failing can often be detected when monitoring the business register as they usually file financials that are trending down and often fail to renew their registration
Impact
- Financial Losses: Customers and financial institutions can suffer significant financial losses due to chargebacks and refunds.
- Reputational Damage: The merchant’s fraudulent activities can damage the trust and reputation of the payment processor or financial institution associated with them.
- Legal Consequences: Merchants engaging in fraudulent activities can face legal action, fines, and sanctions from regulatory bodies.
By understanding and recognising the signs of “good merchant gone bad” fraud, businesses, customers, and financial institutions can take proactive measures to prevent and mitigate the impact of such fraudulent activities.
