Fraud Prevention Strategies for High-Risk Merchants: Protecting Your Business

Introduction

In today’s digital economy, high-risk merchants face significant challenges in securing their payment processes against fraud. High-risk payment processing—often associated with industries such as online gaming, adult entertainment, CBD sales, and cryptocurrency exchanges—attracts a higher incidence of fraudulent transactions, chargebacks, and cyberattacks.

According to the 2023 Global Fraud Report, businesses worldwide lost over $41 billion to fraud, with high-risk industries accounting for a significant portion of these losses. The combination of high transaction volumes, global reach, and regulatory scrutiny makes these businesses prime targets for fraudsters.

This article explores proven fraud prevention strategies that high-risk merchants can implement to safeguard their businesses, minimize losses, and ensure compliance with industry regulations.

1. Understanding Fraud in High-Risk Payment Processing

Fraud in high-risk payment processing comes in many forms, including:

A. Card-Not-Present (CNP) Fraud

Since high-risk businesses operate mostly online, they are vulnerable to CNP fraud, where fraudsters use stolen credit card details for unauthorized transactions. The Nilson Report estimates that CNP fraud will cost businesses over $50 billion by 2025.

B. Chargeback Fraud (Friendly Fraud)

A customer makes a purchase and later disputes the charge with their bank, falsely claiming the transaction was unauthorized. Studies suggest that 60-80% of chargebacks are actually friendly fraud, with high-risk merchants experiencing chargeback rates as high as 3% per transaction.

C. Account Takeover (ATO) Fraud

Hackers gain unauthorized access to customer accounts, often through phishing or credential stuffing attacks. ATO fraud increased by 300% in 2022, costing businesses billions.

D. Transaction Laundering

Fraudsters disguise illegal transactions as legitimate business purchases, making it difficult for merchants to detect. This is a growing concern in high-risk industries where regulatory oversight is strict.

2. Fraud Prevention Strategies for High-Risk Merchants

To protect against fraud, high-risk merchants must adopt a multi-layered security approach. Below are the key strategies:

A. Implement Advanced Payment Authentication Measures

1. 3D Secure 2.0 (3DS2) – An upgraded version of 3D Secure that enhances transaction verification by using biometric and AI-based authentication. It reduces fraud and friction during checkout.
2. Two-Factor Authentication (2FA) – Requires customers to verify their identity using an additional step, such as an SMS code or email verification.
3. Tokenization – Converts sensitive payment data into a token, reducing the risk of card data theft.

B. Leverage Artificial Intelligence & Machine Learning

AI-powered fraud detection systems analyze transaction patterns in real-time to identify anomalous activities. A 2024 Juniper Research study revealed that AI-driven fraud detection could reduce fraud losses by up to 30% in high-risk industries.

🔹 Example: PayPal employs AI-based fraud prevention tools that analyze over 20,000 data points per transaction, helping them detect fraudulent activity with high accuracy.

C. Monitor and Analyze Transactions in Real-Time

1. Risk-Based Transaction Scoring – Assigns a risk score to each transaction based on customer behavior, geolocation, and device data.
2. Velocity Checks – Flags unusual transaction patterns, such as multiple high-value purchases from the same IP address within minutes.
3. Geo-Blocking – Restricts transactions from high-risk countries known for fraudulent activity.

D. Strengthen Chargeback Prevention Strategies

1. Clear Billing Descriptors – Ensure customers recognize transactions on their bank statements, reducing accidental chargebacks.
2. Chargeback Alerts & Prevention Tools – Services like Ethoca and Verifi notify merchants of disputes before they escalate into chargebacks.
3. Improved Customer Communication – Offering 24/7 customer support and clear refund policies can deter friendly fraud.

E. Maintain PCI DSS Compliance

The Payment Card Industry Data Security Standard (PCI DSS) is mandatory for businesses handling card transactions. High-risk merchants should:

• Regularly update security patches and software.
• Encrypt customer data during transmission and storage.
• Conduct regular penetration testing to identify vulnerabilities.

F. Use Fraud Prevention Solutions & Third-Party Risk Management

Many high-risk payment processors offer built-in fraud prevention tools, such as:

• Fraud.net – Uses AI-powered risk detection for high-risk businesses.
• Kount – Provides an identity trust platform that reduces fraud rates.
• Signifyd – Specializes in chargeback protection for e-commerce merchants.

3. Case Studies: How High-Risk Merchants Fight Fraud

Case Study 1: An Online Gambling Platform’s AI-Powered Fraud Prevention

A UK-based online gambling company faced $500,000 in fraud-related losses annually. By integrating machine learning fraud detection, they reduced fraud rates by 40% within six months.

Case Study 2: A CBD Business Using Chargeback Alerts

A CBD retailer struggled with 2.5% chargeback rates, leading to processor restrictions. After adopting Verifi’s chargeback alerts, they successfully prevented 70% of chargebacks, bringing their chargeback ratio down to below 1%.

Conclusion: Future Trends & Final Thoughts

High-risk merchants must continuously evolve their fraud prevention strategies to combat increasingly sophisticated cyber threats. Emerging technologies like biometric authentication, blockchain-based payments, and AI-driven fraud prevention are set to revolutionize high-risk payment processing.