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Putting a Stop to the Cyclical Life of Bust-Out Fraud

Post Categories: Blog

A Look at Merchant Bust-Out Fraud

Highlighted by the breaches at Target, P.F. Chang’s and most recently StubHub, it seems the frequency of merchant fraud increasingly is making headlines. With that surge, it’s important to take a closer look at the different types of fraud you may encounter in order to be better prepared to combat them. Bust-out merchants, for instance, can be hard to spot as they have learned and adapted in order to go longer unnoticed.

What Is a Bust-Out Merchant?

A bust-out could be any type of merchant, online or brick-and-mortar. They start their business, processing normal transactions for months or even years, before they start using either stored or stolen card data and begin processing high volumes of fraudulent transactions. They generate these transactions quickly and then disappear, seemingly without a trace. Therefore, the longer the fraud goes unnoticed, the more money is taken.

Many times you won’t notice anything strange with these merchant transactions until the chargebacks start coming in. The chargebacks tend to take the shape of a customer never receiving an order, receiving something that is poor quality, or being charged for items that they never purchased. Then, when you go back to investigate further, only to find the bust-out merchant business gone, and you are left responsible.

How Can You Prevent a Bust-Out Merchant?

Due diligence and monitoring play a critical part in identifying bust-outs and continuing to have your portfolio filled with profitable merchants.

Due diligence connects key data points and helps stop fraudsters from continuing to set up multiple businesses, preventing them from repeating fraudulent activity under different business aliases. Equally important is the need to persistently monitor your merchants, regularly checking their compliance status and business practices. Ongoing monitoring of merchants can raise red flags along the way, helping you to spot bust-out merchants before they close up shop and disappear.

The Future of Prevention

However, monitoring and due diligence are no longer enough to ensure your merchants are not fraudulent and continue to remain profitable. It has become increasingly critical that this fraud data also be shared.

If another financial institution identifies a fraudulent merchant, you want to know promptly so you can investigate (and potentially terminate) said merchant, minimizing fraud reach potential. By collaborating and sharing information, fraudulent merchants have fewer escape routes. That is why a neutral form of sharing information with one another is by far the best way to protect the integrity of the payment system: leading to stronger merchant portfolios and increased revenue.

The sharing of knowledge is the future of preventing fraudulent merchants from entering your portfolio, and stopping the bust-outs that may already be there.

See an example of how finding one fraudulent merchant led to the identification of a bust-out fraud ring.

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