Combating Illegal Merchant: Innovative Approaches To Getting Bad Actors Out Of The Payment Ecosystem

By Banji Kayode

It’s no longer news that the digital economy is rapidly evolving, and the payment ecosystem has long joined the trend to enable seamless transactions across borders and platforms. However, this intricate network is increasingly threatened by illegal merchants – bad actors who exploit its channels for fraudulent activities.

From chargeback laundering to transaction laundering, these illegal merchants employ various deceptive practices to infiltrate the payment ecosystem. The former is a concerning tactic that they adopt in processing payments for illegal products, using legitimate payment gateways. This process masks their true operations, making it seem like a genuine business deal. On the other hand, transaction laundering involves how bad actors funnel illicit transactions through legitimate-looking websites, making it challenging to detect. According to a report by EverC, transaction laundering was the most common form of online financial fraud in 2022, leading all other fraud types by 39% in the first quarter of 2023. The rate at which financial crimes grow is reflected in how it shockingly contributes 3.6% to global GDP.

These defrauding acts not only exploit payment processors but also expose consumers to unauthorised transactions. This results in significant financial losses for customers and businesses, as well as massive declines in the trust level for global commerce. Addressing this issue is not impossible, but it will require innovative approaches and collaborative efforts to safeguard the integrity of the payment platforms.

Innovative Ways to Combat Illegal Merchants

Although the payment industry has been adopting some strategies towards alleviating illegal merchants to counter these bad actors effectively, there is a need for a collective adoption of innovative schemes throughout the payment ecosystem. Some of these are explored below:

Machine Learning and Artificial Intelligence (AI) Algorithms: In an advanced setting, AI algorithms can analyse the patterns of transactions in real time. By leveraging these smart devices, suspicious and abnormal activities that indicate fraud can be easily identified. For instance, Stripe implemented an AI-driven fraud detection system – Radar – and was able to reduce the fraud rate in its operations by 25% within the first year of integrating the tool. This single move prevented millions of people from potential financial losses. AI and machine learning typically detect anomalies, score risks, analyse texts and verify the identities of payment service users to reduce fraudulent activities. This is, therefore, an important innovative solution that should be embraced.

Collective Combat Through Sharing of Intelligence: All payment companies in the nation’s financial sector need to collaborate towards improving payment processors. Also, the regulatory bodies need to improve to build a strong defence against fraud. The battle is nationwide, not institutional. Sharing intelligence on threats and suspicious set-ups that are springing up can help stakeholders proactively mitigate the risk of financial theft. For instance, the UK has proposed an initiative to slow down on fast payments. This effort is geared towards combating fraud. It also demonstrates the level of collaborative efforts that are required to successfully combat illegal merchants while emphasising the need for shared intelligence and end-user education.

Regulatory Measures and Compliance:
Another innovative way to combat bad actors is to strengthen the regulatory frameworks of the payment ecosystem. This way, payment providers are compelled to implement more robust fraud prevention measures and automatically curb bad actors. Take, for instance, The European Union’s Revised Payment Services Directive (PSD2), which is a law that mandates strong customer authentication in the region, which has so far led to a drastic reduction of the risk of unauthorised transactions. Likewise, the U.S. Department of Justice’s antitrust lawsuit against Visa highlights the importance of regulatory oversight in maintaining a fair and secure payment ecosystem.

Biometric Authentication: Equally important is the integration of biometric data in getting bad actors out of the payment system. Biometrics like fingerprints and facial recognition can be leveraged to add an extra layer of security to payment processes and frustrate the efforts of bad actors. This would, in turn, reduce the reliance of customers on passwords, which are known to be prone to infiltration. As such, the likelihood of fraudulent transactions occurring is largely reduced to the barest minimum.

Real-Time Payment Tracking: Surveillance systems that monitor and supervise transactions in real time can be implemented in the payment sector. If done right, it would allow for immediate detection and response to suspicious activities on payment platforms. Payment merchants that adopt this strategy have experienced such benefits and have also been able to enhance their fraud detection capabilities.

Leverage Consumer Awareness: It is not enough for financial institutions to fight this battle without carrying the risk bearers of financial fraud – the customers. As earlier stated, this fight is not exclusive to the institutions, and it is therefore essential that customers are educated to join the ongoing battle. In this fight against illegal merchants, it is vital to empower consumers with knowledge about potential fraud and the various schemes they employ in perpetuating those crimes. When customers know their schemes, they are more likely to identify and avoid suspicious activities. This naturally cuts down the success rate of fraudulent schemes. So, initiatives that promote awareness about fraud and provide guidance on secure transaction practices should be popularised to foster a safer payment environment.

The battle against illegal merchants in the payment ecosystem is an ongoing challenge that requires continuous innovation and collaboration. The leverage of advanced technologies will no doubt foster cooperative intelligence sharing, enforce stringent regulations, and enhance consumer awareness such that the industry can create a resilient payment landscape. These comprehensive efforts will ensure that the digital economy remains a secure and trustworthy environment for all legitimate participants.

About the Author

Banji A. Kayode is a seasoned expert in merchant acquiring and financial technology, with a strong background in payment system infrastructure for banks and major operators. With extensive experience in digital payments, he has played a pivotal role in driving financial inclusion and fostering innovation within the fintech ecosystem. A recognized thought leader, Banji provides insightful commentary on digital financial services, emerging payment technologies, and industry trends.