Merchant Account Fraud & Scams: A Guide for Businesses

Our world revolves around—and is increasingly reliant on—digital payment processing solutions to facilitate business transactions. The trade-off for the convenience and ubiquity of eCommerce, however, is increased risk. According to a LexisNexis study on the cost of fraud, since 2021, there’s been an explosive 4.2% rise in retail merchant fraud perpetrated against businesses.[1]LexisNexis. “Explosive Growth of Ecommerce and Retail Fraud“.Accessed on January 2, 2024. So, now more than ever, it’s crucial to stay vigilant. In this guide, we’ll break down what merchant protection looks like, the various scams businesses may come across, and what you can do to stay protected against merchant fraud.

A person sitting at their computer in disbelief as they fall victim to merchant fraud. There is a hand with a credit card on the computer in front of them.

What is Merchant Fraud?

Merchant fraud refers to the deceptive practices that exploit businesses in the financial payment processing industry. Fraudsters often employ careful techniques to gain unauthorized access to merchant accounts. They then use that access to manipulate transactions and siphon money away from unsuspecting businesses.

Merchant fraud can impact your customers directly and even target entire industries. Because of this, payment processors often charge higher fees if they perceive increased risk in a specific industry.

How Does Merchant Account Fraud Work?

Merchant account fraud involves a range of scams and tactics that take advantage of weaknesses and vulnerabilities in various payment systems. Understanding these methods is key for small business owners looking to accept payments online.

Merchant fraud can take many forms. Sometimes, ‘merchant fraud’ refers to a merchant perpetrating some sort of financial crime against a consumer. Other times, it refers to fraud being perpetrated against merchants themselves.

Fraud can also come in the form of fake online storefronts or social media accounts that look like legitimate businesses. These ads offer hard-to-find items at extremely low prices, duping consumers into making purchases. Or, it can involve counterfeit versions of products sold through an online marketplace. The fake listings oftentimes use stock photos to appear genuine. But once a customer makes a purchase, the scammers will send a counterfeit or inferior product, or even disappear altogether. Sometimes even worse, they go on to use the customer’s credit card information to make additional unauthorized purchases.

All forms of merchant fraud cause financial harm to the industry, to your business, and to your customers. Below, we’ll go over the most common types of fraud against merchants.

Common Merchant Service Scams

Merchant fraud is a growing problem, with new scams emerging every day. Let’s look at some of the most common fraud schemes:

Orange magnifying glass.

Hidden Fee Scams

This involves dishonest merchants introducing hidden fees in payment processing services. These fees may be obscured in long, complex contracts, leaving businesses paying more than they bargained for. Be vigilant with all service agreements to avoid hidden fee scams.

Blue X symbol.

Fake Merchant Service Providers

Merchant fraudsters often pose as legitimate merchant service providers, luring businesses with promises of unbeatable rates. But once they’ve secured your trust, they disappear with sensitive information or start charging exorbitant fees. Ensure the authenticity of any provider you do business with.

Orange magnifying glass hovering over a credit card.

Identity Theft

Identity theft involves the fraudulent acquisition and use of a business’s (or their customer’s) identity to carry out unauthorized transactions by others. Implement robust identity verification measures to prevent this type of fraud.

Blue "I" symbol in a green bubble.

Transaction laundering

This occurs when merchants use legitimate businesses to process illicit transactions. Regularly audit your transaction records to detect any irregularities, or work with a merchant service provider that can keep careful tabs on this for you.

A blue envelope opens to reveal a new email with an orange @ sign.

Employee Phishing Scams

Targeting unsuspecting and well-intentioned employees, phishing scammers go after sensitive business or customer information (like passwords or log in credentials, credit card numbers, etc.). These are often slick, sophisticated manipulations; even the most savvy can be duped. Phishing scams continue to be a significant, pervasive threat to all businesses, employees, and their customers.

Blue telephone with orange chat bubble.

Bait-and-Switch Tactics in Sales Calls

Sales representatives may use underhanded bait-and-switch tactics during sales calls, promising low rates—only to reveal higher charges later when the bill comes. Be wary of unsolicited calls, and thoroughly research any service provider before committing to their offerings.

A green magnifying glass hovering over a credit card.

Backdoor Access Scam

Here, criminals exploit vulnerabilities in a business’s online security system to gain unauthorized digital access to the merchant account. This can lead to unauthorized transactions, data breaches, and significant financial losses. Robust security measures are needed to protect against such backdoor vulnerability.

A credit card torn in half.

Account Takeover Fraud

This difficult-to-detect threat occurs when bad actors gain access to your account credentials and go on to make fraudulent purchases in your name. Carefully monitor your transactions and ensure employees don’t gain access to sensitive information.

A green dollar bill bordered by a blue and an orange arrow pointing left and right.

Triangulation Fraud

As the name suggests, triangulation fraud involves three parts: a fraudster first uses a stolen credit card to purchase goods from a business. Then, a criminal resells those goods, and when the stolen credit card owner catches wind of the fraudulent charge, your business is left to deal with chargebacks and their consequences.

How Merchant Fraud Affects Businesses and Consumers

A thief sits at a computer with a credit card in hand, ready to commit merchant fraud.

Merchant fraud is a pervasive problem affecting businesses of all kinds and throughout all sectors of the world. But while any single business could experience merchant fraud at any time, there are certain businesses and industries more at risk than others.

For example, eCommerce. Online retailers experience a much higher incidence rate of merchant fraud, as it’s harder to verify online transactions than in-person ones. Other commonly affected industries include travel and hospitality, digital goods and services, and other high-risk sectors.

Not only can these scams pose a financial risk to businesses and their customers, but they go on to damage the reputation of entire industries. Here’s how the impacts of fraud are felt most:

  • Your business reputation. Nothing costs more than winning back a customer’s trust. And when bad actors involve your business in fraudulent charges, your reputation goes down the drain (along with sales and revenue potential).
  • Chargebacks and financial losses. Businesses that fall victim to merchant fraud scams may be subject to chargebacks and other financial liabilities, resulting in financial losses in fees and penalties.
  • Legal penalties. If found to be negligent in protecting customers or lack adequate fraud prevention measures, businesses could face legal ramifications such as fines or lawsuits, for failing to prevent merchant fraud.
  • Higher payment processing fees. More incidents of merchant fraud in specific sectors can result in higher processing fees for all (even legitimate businesses not experiencing fraud). This is especially true in high-risk industries or businesses with a high incidence of chargebacks.

The repercussions of merchant fraud extend well beyond financial losses. Customers also suffer—from compromised identity and financial information, along with losing trust in your business and the broader digital payment ecosystem. To bolster a positive reputation for your small business and ensure safe online shopping, remain attentive against merchant fraud.

How to Prevent Merchant Account Fraud

Preventing merchant account fraud requires a bevy of technological solutions, as well as the adoption of diligent, proactive business practices to defend your business. These include:

  • Employ multi-layered security: Utilize advanced security measures, such as encryption, tokenization, and two-factor authentication, to secure your payment systems against unauthorized access.
  • Regularly update your systems: Keep your payment processing systems updated with the latest security patches to address potential vulnerabilities that fraudsters might exploit.
  • Conduct employee training: Educate your staff on the signs of merchant fraud activity and the importance of safeguarding sensitive information. Implement strict access controls to limit access to critical systems.
  • Use real-time transaction monitoring tools: Employ real-time monitoring tools to detect unusual transaction patterns, allowing for swift intervention in case of fraudulent activity.
  • Establish strict payment policies and follow them. Establish procedures for preventing and detecting merchant fraud at all levels of your business. Such as establishing steps for credit card authorization, identity verification procedures, how to manage chargebacks, and other such company policies. Regularly review and update as needed.
  • Vet all service providers, employees, and vendors: Before engaging with any merchant service provider, conduct thorough research. To prevent Insider fraud, check reviews, request references, and ensure they comply with industry regulations like PCI compliance. This might even include background checks for all employees and vendors to ensure they have no criminal history of fraud.

Keep in mind that merchant fraud can affect businesses of all sizes and types. While the consequences can be severe, your business can fight back with the right prevention methods.

How to Stop Merchant Service Calls

Merchant service calls, particularly, can be a breeding ground for scams. You might feel pressured to do something over the phone that you wouldn’t do if you took your time to thoroughly vet your service provider. Here’s how to minimize these types of calls, and protect your business:

  • Register on Do-Not-Call lists: Add your business to official do-not-call lists to reduce unsolicited calls from fraudulent service providers.
  • Screen calls: Invest in call screening technology or services to identify and filter out potentially fraudulent calls.
  • Train staff on identifying scams: Educate your staff on the common tactics used by fraudulent service providers, enabling them to identify and report suspicious calls.
  • Implement strict data protection policies: Ensure that your business has stringent data protection policies in place to safeguard customer information and protect against merchant fraud and data breaches.

Essential Steps If You’ve Been Scammed

If your business falls victim to a merchant scam, swift action is required to mitigate the potential damage:

  • Contact law enforcement: Report the incident to local law enforcement agencies, providing as much detail as possible.
  • Notify your bank and payment processor: Inform your bank and payment processor about the fraudulent activity to freeze accounts and prevent further losses from merchant fraud.
  • Cooperate with investigations: Collaborate with authorities and any relevant industry watchdogs to aid in the investigation and prosecution of the fraudsters.
  • Communicate transparently with customers: Keep your customers informed about the situation, assuring them that you are taking steps to address the issue. Transparency is key to maintaining trust.

Don’t worry: it’s not uncommon for business owners to be duped by savvy fraudsters who know how to impersonate legitimate service providers. Understanding who and what you’re dealing with takes more effort, but can help you make a more informed decision.

Choosing a Trustworthy Merchant Services Provider

Selecting a reputable high-risk merchant services provider to handle merchant fraud threats is crucial for safeguarding your business. Consider the following when evaluating potential partners:

  • Transparent pricing: Choose a provider with clear and transparent pricing structures to avoid falling victim to hidden fee scams.
  • Security measures: Prioritize providers with robust security measures, including encryption, fraud detection, and compliance with industry standards.
  • Positive reputation: Research the provider’s reputation by checking reviews, testimonials, and industry certifications.
  • Customer support: Opt for a provider with responsive and knowledgeable customer support to address any concerns or issues promptly.
  • Evaluate scalability: Choose a provider that can scale with your business, accommodating your evolving needs without compromising on security or service quality.

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Merchant Account Fraud: FAQs

Here are the most common questions we see about merchant account fraud and scams within businesses:

Is the merchant liable for fraud?

Merchants may be held liable for certain types of fraud, especially if negligence or inadequate security measures on their part contributed to the incident. Implementing robust security measures can help mitigate liability.

How can I tell if I’m being scammed?

Be cautious of unsolicited calls, requests for sensitive information, and deals that seem too good to be true. Verify the legitimacy of service providers through independent research before committing to any agreements.

What are the top 3 types of fraud?

The top three types of merchant fraud are hidden fee scams, identity theft, and transaction laundering.

How can I report a fraudulent merchant?

Report fraudulent merchants to your local law enforcement agency, as well as relevant regulatory bodies and industry watchdogs. Provide detailed information about the incident to aid in investigations.

In conclusion, understanding the various forms of merchant account fraud and implementing proactive measures is essential for small businesses to thrive in the digital economy. By staying informed, vigilant, and selective in choosing trustworthy merchant service providers, businesses can protect themselves and their customers from the perils of scammers up to no good.

Article Sources

  1. LexisNexis. “Explosive Growth of Ecommerce and Retail Fraud“.Accessed on January 2, 2024.

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