Fraud, Compliance and Security in High-Risk

In the world of payment processing, fraud, compliance, and security are the three pillars that determine whether a high-risk business can sustain operations and grow. Fraud refers to unauthorized or deceptive transactions that can cost businesses far more than the initial amount lost.

According to the LexisNexis True Cost of Fraud Study, U.S. merchants lose an average of $3.75 for every $1 of fraud because of chargebacks, fees, and customer churn. For industries already considered high-risk, such as CBD, gaming, adult entertainment, or travel, this reality makes fraud prevention even more critical.

Compliance, meanwhile, ensures that merchants operate within the regulatory frameworks set by payment networks, financial institutions, and government agencies. Requirements like PCI DSS, KYC, and AML are not optional; they are mandatory safeguards to protect both merchants and consumers from financial crime. Failure to comply can result in account freezes, heavy fines, and even permanent blacklisting by processors.

Security ties these concepts together, encompassing both technical protections, such as tokenisation and encryption, as well as operational strategies, including multi-factor authentication and fraud monitoring. With cybercrime damages projected to reach $10.5 trillion annually by 2025, businesses can no longer afford to take a reactive stance.

This guide will examine the challenges high-risk merchants face, the regulations governing their operations, and best practices for mitigating fraud, achieving compliance, and ensuring payment security in a rapidly evolving digital economy.

Why Fraud & Compliance Matter More in High-Risk Payments

High-risk industries face disproportionate scrutiny because their business models, customer bases, and transaction patterns create elevated exposure to fraud and regulatory oversight. Payment processors and banks view these sectors as riskier not only because of higher chargeback tendencies, but also due to the complex legal and compliance frameworks.

Take CBD and nutraceuticals as an example: although legal in many regions, inconsistent state and international regulations make payment processing difficult. Fraudsters exploit these gaps by selling counterfeit products, issuing false chargebacks, and committing identity theft, thereby increasing liability for both merchants and processors.

In gaming and adult entertainment, anonymity and digital-first interactions raise the likelihood of stolen card usage and regulatory challenges, particularly around age verification and content compliance. Nutraceutical merchants face parallel issues, with recurring billing models often leading to subscription disputes if refund policies aren’t transparent.

Due to these sector-specific challenges, regulators and card networks subject high-risk businesses to tighter monitoring. This means maintaining robust compliance systems, covering PCI DSS data security standards, AML (Anti-Money Laundering), and KYC (Know Your Customer) procedures, isn’t optional; it’s critical to staying operational.

Common Types of Fraud in High-Risk Industries

Fraud takes many forms in high-risk industries, and each type can have severe financial, reputational, and regulatory consequences. Below are some of the most common fraud tactics, their working mechanisms, and the most common settings in which they are observed.

Transaction Fraud

Transaction fraud occurs when stolen credit cards, synthetic identities, or fake accounts are used to complete unauthorized purchases. According to the FTC, online shopping issues ranked as the second most commonly reported fraud category in 2023, indicating the continued prevalence of card-not-present scams for e-commerce merchants. Industries such as travel and gaming are particularly vulnerable due to the digital nature of their transactions.

Friendly Fraud

Friendly fraud happens when legitimate customers dispute valid charges, often claiming they didn’t authorize a payment or didn’t receive the product. This type of fraud accounts for a significant share of disputes across subscription businesses and the nutraceutical industry. For example, a customer may forget a recurring billing cycle and file a chargeback instead of requesting a refund from the merchant.

Chargeback Fraud

Chargeback fraud occurs when customers intentionally abuse the dispute system to avoid paying for goods or services. Unlike friendly fraud, this is a deliberate act of theft. For instance, a buyer might order CBD supplements, receive them, and then file a chargeback claiming the transaction was unauthorized. Visa’s chargeback guidelines indicate that maintaining a dispute rate below 1% is crucial for avoiding monitoring programs.

Account Takeover Fraud

Account takeover (ATO) happens when criminals gain unauthorised access to customer accounts through phishing, credential stuffing, or data breaches. Once inside, they can exploit stored payment methods or resell accounts on the black market.

Experian warns that ATO is one of the fastest-growing fraud threats, particularly in industries such as online gaming and digital marketing services, where accounts often hold both financial and personal data.

Affiliate & Marketing Fraud

Affiliate fraud involves manipulating digital marketing programs with fake traffic, bots, or fabricated leads to generate illegitimate commission payouts. This type of fraud can waste substantial portions of advertising budgets, especially in high-risk sectors such as adult entertainment or online casinos. For example, fraudulent affiliates might use click farms or bots to inflate sign-ups, driving up acquisition costs without delivering real customers.

Security Challenges for High-Risk Merchants

High-risk merchants face a unique set of security challenges that increase their exposure to fraud and intensify regulatory scrutiny. The combination of higher chargeback ratios, stricter industry-specific restrictions, and complex cross-border payments makes maintaining compliance and customer trust more difficult. Subscription-based billing introduces an additional layer of risk, as recurring transactions are particularly susceptible to disputes.

Higher Chargeback Ratios

Merchants in high-risk sectors often experience chargeback ratios that exceed the 1% threshold set by Visa and Mastercard. Crossing this threshold can result in placement in monitoring programs like Visa’s Chargeback Monitoring Program or Mastercard’s Excessive Chargeback Program, both of which carry heavy fines and potential account termination (Visa, Mastercard). This makes chargeback prevention and dispute management essential for long-term stability.

Regulatory Restrictions

Industries such as CBD, gambling, adult entertainment, and firearms face much tighter compliance obligations due to legal uncertainties and reputational risks. For example, CBD merchants must navigate constantly shifting FDA and state-level rules, while gambling operators must comply with both domestic and international licensing frameworks. Noncompliance not only increases the risk of fraud exposure but also carries the potential for heavy penalties and account freezes.

Cross-Border Payments

High-risk merchants often rely on global customer bases, which exposes them to foreign exchange (FX) fraud, synthetic identities, and stolen credit card use. Juniper Research projects that global merchant losses from online payment fraud will surpass $362 billion between 2023 and 2028, with losses in 2028 alone expected to reach $91 billion. Fraudsters exploit weaker ID verification standards in certain regions, making robust fraud prevention tools a necessity.

Recurring Billing Risks

Subscription-based models, common in nutraceuticals, digital services, and adult content, are more susceptible to risks of friendly fraud and customer disputes. Customers may forget they signed up, cancel late, or dispute charges directly with their banks. This can quickly inflate refund and chargeback rates, especially if merchants lack clear billing descriptors or flexible cancellation policies. Managing recurring billing transparently is critical for reducing disputes.

Compliance Requirements for High-Risk Merchants

High-risk merchants must navigate a complex web of technical, financial crime, and consumer protection rules. Below are the major regulatory frameworks you need to be aware of, accompanied by concise explanations and direct links to authoritative guidance.

PCI DSS Compliance

The PCI DSS (Payment Card Industry Data Security Standard) outlines the technical and operational controls necessary to safeguard cardholder data throughout its storage, processing, and transmission. Merchants must scope their cardholder-data environment, perform regular vulnerability scans and penetration tests, and complete the required Self-Assessment Questionnaire (SAQ) or undergo a qualified external assessment.

KYC (Know Your Customer) / Customer Due Diligence (CDD)

KYC/Customer Due Diligence rules require payment providers and many merchants to verify customer identities, collect beneficial-ownership information, and maintain ongoing monitoring for suspicious activity. The U.S. CDD Rule and FinCEN guidance outline the data to collect and the process for risk-profiling customers. Complying with KYC reduces identity-based fraud and helps processors feel comfortable handling your volume.

AML (Anti-Money Laundering) & Suspicious Activity Reporting

AML obligations require businesses (and their banking partners) to detect, investigate, and report transactions that may indicate money laundering or terrorist financing. High-risk merchants should have transaction-monitoring and escalation procedures and understand when to file Suspicious Activity Reports.

FTC & Consumer Protection Rules (Negative-Option / Recurring Billing)

Consumer protection rules are especially relevant for subscription and continuity billing. The FTC’s “Click-to-Cancel” (Negative Option) rule and related guidance mandate clear disclosure, easy cancellation, and transparent billing descriptors—noncompliance increases chargebacks and regulatory risk.

Tools & Strategies to Reduce Fraud in High-Risk Payments

High-risk merchants cannot rely on a single tool or rule set to manage fraud. Instead, they must deploy layered strategies that use data, automation, and proactive monitoring to identify threats early and minimise losses. Below are practical solutions that strengthen fraud defences and improve payment approval rates.

AVS, CVV & 3D Secure

Address Verification Service (AVS) checks whether the billing address provided matches the card issuer’s records. Combined with CVV (the 3- or 4-digit security code), these tools block many stolen card attempts. 3D Secure 2.0 (e.g., Verified by Visa, Mastercard Identity Check) adds an extra authentication step, protecting both merchants and cardholders from unauthorised use.

Velocity & Volume Checks

Fraudsters often test multiple cards or place abnormally large orders within minutes. Velocity checks (monitoring transaction frequency) and volume checks (flagging unusually high purchase amounts) help merchants spot suspicious spikes.

AI & Machine Learning Tools

Machine learning models analyze thousands of data points, device fingerprints, IP geolocation, and transaction history, to identify fraudulent behaviour patterns that humans might miss. According to Juniper Research, AI-driven fraud tools are crucial in combating the projected $362 billion in global losses between 2023 and 2028.

Chargeback Alerts & Mitigation Tools

Chargeback alert services (e.g., Ethoca, Verifi) notify merchants when a dispute is initiated, enabling them to refund the customer before the conflict escalates into a chargeback. This prevents fees, protects merchant accounts, and maintains lower chargeback ratios, especially vital for subscription or continuity billing businesses.

Multi-Layered Fraud Monitoring

The most effective strategy is combining tools into a multi-layered defense. For example, pairing AVS and CVV checks with AI fraud scoring, velocity monitoring, and real-time alerts creates stronger protection than any single tool.

Building a Secure High-Risk Payment System

For merchants in high-risk industries, security isn’t just a compliance box to check; it’s a survival strategy. Fraudsters actively target businesses with higher transaction volumes, recurring billing models, or products and services considered sensitive by regulators. A single breach or a wave of chargebacks can erode customer trust and even lead to a merchant losing their processing privileges. That’s why building a secure payment system is about more than fraud prevention; it’s about sustaining growth, protecting revenue, and demonstrating reliability to both customers and financial partners. Below are some systems you should have to build a strong and secure high-risk payment system.

End-to-End Encryption

End-to-end encryption (E2EE) ensures that sensitive cardholder data is scrambled from the moment it is entered until it is safely delivered to the payment processor. This means that even if hackers intercept the transaction, the information is useless without the decryption key. E2EE is especially important in high-risk industries where large transaction volumes attract cybercriminals. For merchants, this makes encryption both a compliance requirement and a cost-saving investment.

Tokenisation of Payment Data

Tokenisation replaces sensitive payment details, like credit card numbers, with randomly generated tokens that have no exploitable value. Even if criminals access a merchant’s database, these tokens cannot be reverse-engineered into real card data. Tokenization replaces sensitive payment details, like credit card numbers, with randomized tokens that carry no exploitable value. Even if cybercriminals access a merchant’s data store, these tokens cannot be reverse-engineered into real card data. This technology is especially valuable for companies using recurring billing or subscription models, as it lets them process repeat transactions without storing actual card information, thereby shrinking their PCI DSS compliance scope. According to industry sources, tokenization significantly reduces the cost of PCI DSS compliance as it replaces sensitive data with non-sensitive substitutes that are safe even if intercepted.

Strong Authentication

Passwords alone are no longer enough to protect accounts from fraud. Multi-factor authentication (MFA), including two-factor authentication (2FA), one-time passwords (OTPs), and biometric verification, adds extra security layers that make unauthorised access much harder. For example, even if a fraudster steals login credentials, they cannot proceed without the second factor, such as a fingerprint scan or SMS code. The National Institute of Standards and Technology (NIST) emphasises MFA as one of the most effective methods for preventing account takeovers, which are among the fastest-growing fraud tactics in high-risk e-commerce.

Secure Gateways for High-Risk Merchants

Not all payment gateways are created equal, especially for high-risk merchants. A secure gateway does more than process payments; it integrates fraud filters, risk-scoring models, and chargeback management tools. High-risk merchants should partner with providers that understand their industries, such as 2Accept, which both offer tailored gateway solutions with built-in fraud protection. Choosing the right gateway minimizes downtime, reduces fraud exposure, and ensures compliance with both global and local regulations.

The Role of Specialized Providers in Compliance & Security

Mainstream processors such as Stripe, PayPal, and Square are excellent for standard e-commerce businesses, but they often fall short when it comes to the demands of high-risk industries. These platforms typically have strict risk thresholds and rely on automated account monitoring, which can result in sudden freezes, withheld funds, or outright account closures. For a high-risk merchant, these disruptions can be devastating. This is where specialized providers like 2Accept play a critical role. Unlike mainstream processors, 2Accept is built with high-risk verticals in mind, offering advanced fraud filters, flexible compliance tools, and tailored transaction monitoring. These solutions help reduce false declines while catching sophisticated fraud schemes that generic platforms might miss. In addition, 2Accept provides expert guidance on PCI DSS, KYC/AML, and industry-specific regulations, ensuring merchants remain compliant without wasting time navigating complex requirements alone. Beyond technology, its white-glove support model gives businesses access to specialists who understand the unique challenges of CBD, nutraceuticals, travel, adult, gaming, and other high-risk sectors. For businesses looking to grow without constant fear of account disruptions, specialized providers offer both protection and peace of mind.

Frequently Asked Questions

Why are high-risk businesses more prone to fraud?

High-risk businesses attract more fraud attempts because of higher transaction volumes, international customers, and frequent disputes. These sectors also face stricter regulations, which increase scrutiny from banks and processors. Additionally, industries with recurring billing models are more likely to experience customer disputes, often resulting in chargebacks.

What compliance rules must high-risk merchants follow?

High-risk merchants must comply with several regulatory frameworks:

• PCI DSS: Ensures cardholder data is protected (PCI SSC).
• KYC (Know Your Customer): Requires identity verification to prevent fraud.
• AML (Anti-Money Laundering): Obligates merchants to monitor for suspicious financial activity (FinCEN).
• FTC & consumer protection rules: Especially apply to subscription-based services (FTC Subscription Rule).

How can I reduce fraud in my high-risk business?

Fraud prevention requires a multi-layered approach. High-risk merchants can use fraud filters like AVS, CVV, and 3D Secure, along with velocity checks to spot abnormal transactions. Implementing chargeback alerts helps intercept disputes before they escalate.

What happens if I don’t meet PCI compliance?

Failure to comply with PCI DSS can result in serious penalties. Merchants may face fines ranging from thousands to hundreds of thousands of dollars, higher transaction fees, or even termination of their merchant account. In some cases, processors may require increased reserves or collateral to cover potential risks.

Are ACH or crypto safer for high-risk merchants?

Yes, ACH payments are often safer for high-risk merchants because they bypass credit card networks, which means fewer chargebacks and lower processing fees (NACHA). Similarly, cryptocurrency payments carry no traditional chargeback risk, giving merchants greater protection from fraud and disputes.

What are the 4 components of fraud?

In high-risk payments, the four components are pressure, opportunity, rationalization, and capability. Pressure drives the motive, opportunity comes from weak controls, rationalization justifies the act, and capability reflects the fraudster’s skills or access.

What are the 5 principles of fraud?

The five principles are integrity, accountability, transparency, control, and detection. In payments, this means fostering ethical practices, ensuring responsibility, maintaining transparent reporting, enforcing strict controls, and utilising monitoring tools to detect fraud early.

Always Stay Ahead in High-Risk Payments

High-risk industries face greater challenges than traditional businesses, from higher fraud exposure and chargeback risks to stricter compliance requirements. Without proper safeguards, merchants not only risk financial loss but also potential account termination and legal issues. Building trust with processors and customers depends on maintaining strong fraud prevention systems, compliance with global regulations, and secure payment practices. For merchants operating in high-risk sectors, proactive protection is the best strategy. Implementing multi-layered fraud detection tools, staying compliant with frameworks like PCI DSS and AML, and choosing the right payment gateway are all critical steps. Partnering with a provider that understands high-risk industries ensures not only smoother processing but also long-term sustainability. At 2Accept.net, we specialize in high-risk payment solutions designed to keep your business secure and running smoothly. Explore our services today and see how we can help your operations thrive.