How to Detect Potential Merchant Fraud

Published on: 2024-08-10 18:29:56

Chief risk officers in point of sale consumer lending companies or buy now, pay later (BNPL) companies are responsible for detecting, investigating, and preventing merchant fraud. These companies need a coordinated anti-fraud team, backed by analysts and investigators, to protect the integrity of their financial services. This article outlines practical ways to identify potential merchant fraud and steps to address it, while taking into account profit-sharing bonuses offered to merchants based on risk performance.

Assumptions and Fraud Indicators

When financial companies offer profit-sharing bonuses to merchants based on risk performance, some merchants may try to manipulate the system to profit from fraud while still collecting those bonuses. Merchants do not usually manage payments, collections, welcome calls, or customer calls. Still, some may involve themselves in these processes to keep fraud hidden. Here are indicators that can help detect potential fraud:

  1. Concentration of phone numbers: Primary, secondary, and family phone numbers can reveal connected networks of potentially fraudulent activity.
  2. Suspiciously perfect welcome call results: Unusually positive welcome call outcomes in a specific segment can indicate possible fraud.
  3. Same payment channel & account/identifier: Repeated use of the same payment channel or account can signal fraudulent behavior.
  4. Repeated user account access from the same IP/browser fingerprint: This may suggest the merchant is accessing multiple customer accounts to change or monitor data.
  5. Constant monitoring of the same customers through the sales portal: This can suggest fraudulent intent if the merchant keeps tracking specific customers' statuses.

Practical Detection and Prevention Techniques

  1. Network visualization of phone numbers: Periodically export phone numbers and analyze their connections using a network visualization platform such as Gephi. This helps identify patterns and possible fraudulent links.
  2. Tracking welcome call results: Monitor individual responses to each question during welcome calls, and look for any concentration of "perfect scores." If your welcome calls are structured well, suspicious patterns should be easier to identify.
  3. Payment logs analysis: Review payment logs and analyze them for concentrations. For example, identify the number of unique customers linked to each payer's account number to find unusual patterns that may indicate fraud.
  4. Logging access to user environments and sales portals: Implement log monitoring for user environments and sales portals. This helps track access patterns and detect suspicious activity, such as repeated access to the same customers' accounts.
  5. Implement risk-performance monitoring: Continuously monitor risk-performance metrics tied to profit-sharing bonuses, and look for unusual patterns or sudden improvements in performance. Add checks and balances to make sure merchants cannot manipulate the system to receive bonuses they did not earn.

Conclusion

Detecting and preventing merchant fraud is a priority for chief risk officers in point of sale consumer lending and BNPL companies. By combining technical judgment with practical techniques, these teams can analyze fraud indicators and put stronger detection and prevention processes in place. Careful monitoring of risk-performance metrics tied to profit-sharing bonuses also helps balance merchant incentives with protection for the business and its customers from the effects of fraud. Ongoing monitoring, analysis, and process improvement help maintain the integrity of financial services.

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