Fraud Prevention for High-Risk Merchant Accounts

In the realm of payment processing, fraud refers to unauthorized or deceptive transactions, ranging from stolen credit card use and identity theft to chargeback abuse, that disproportionately affect high-risk merchant accounts. These are businesses that operate in sectors like gaming, CBD, nutraceuticals, adult entertainment, and travel, where transactional complexity and regulatory scrutiny make each fraudulent event more costly.

In fact, a recent LexisNexis True Cost of Fraud study found that U.S. merchants incur an average cost of $3.75 for every $1 lost to fraud, accounting for expenses like chargeback handling, customer churn, and fraud remediation. The heightened fraud exposure in high-risk industries underscores the need for proactive, tailored strategies.

This article offers actionable fraud prevention techniques designed specifically for high-risk merchant accounts, from advanced fraud filtering and AI-driven detection to chargeback alerts and clear billing practices.

By adopting a layered approach to fraud management, high-risk merchants can not only reduce the financial impact of fraudulent transactions but also safeguard their ability to operate smoothly and maintain processor trust. With this foundation in mind, let’s explore the key tools, compliance requirements, and strategies that can help high-risk merchants build stronger defenses against fraud.

Why Fraud Is More Common in High-Risk Businesses

Fraud tends to concentrate in high-risk industries such as CBD, gaming, adult entertainment, travel, firearms, and nutraceuticals because these sectors combine complex regulations, frequent disputes, and heavy reliance on digital transactions. Unlike low-risk merchants, businesses in these categories face unique vulnerabilities that make them prime targets for fraudsters and increase scrutiny from payment processors.

One of the leading drivers is chargebacks. Customers in these industries are more likely to dispute transactions, often due to dissatisfaction with the product, unclear billing descriptors, or even “friendly fraud,” where the buyer knowingly makes a false claim to obtain a refund. High chargeback ratios put merchants at risk of higher fees, reserve requirements, or even account termination.

Regulatory complexity is another factor. Industries like those related to CBD or firearms operate under shifting state, federal, and international laws. Fraudsters exploit these gray areas, while merchants face additional compliance burdens that slow down dispute resolution.

Many high-risk businesses operate across global markets, making them susceptible to fraud patterns that vary by region. Cross-border payments are harder to verify, and differences in fraud laws, customer protections, and banking systems create opportunities for exploitation.

Together, these factors explain why fraud risk is disproportionately high in these industries, underscoring the importance of multi-layered fraud prevention strategies tailored to the unique challenges of high-risk merchants.

Types of Fraud High-Risk Merchants Face

High-risk merchants are susceptible to various types of fraud that target both customers and businesses. Understanding these threats is the first step toward building stronger defenses.

Identity Theft & Stolen Cards

Identity theft is one of the most common forms of fraud in high-risk industries. Criminals use stolen personal information or credit card details to make unauthorized purchases. For example, a fraudster might buy CBD products or book travel using someone else’s account, only for the actual cardholder to later dispute the charge. Since these transactions appear legitimate at first, they often bypass standard fraud filters.

Friendly Fraud

Friendly fraud happens when a legitimate customer disputes a valid transaction. This often occurs in industries like online gaming or adult entertainment, where buyers later deny making the purchase or claim they didn’t authorize it. While the term “friendly” suggests harmlessness, the financial impact can be severe, as merchants lose both the product/service and the payment.

Chargeback Fraud

Chargeback fraud occurs when customers intentionally misuse the chargeback process as a means of obtaining refunds. For example, instead of contacting customer service for a refund on a nutraceutical subscription, they file a chargeback with their bank. This not only leads to financial loss but also damages the merchant’s chargeback ratio, increasing the risk of being labeled too risky by payment processors.

Affiliate & Marketing Fraud

High-risk industries often rely on affiliate marketing to drive sales. Still, this approach also opens the door to fraudulent practices, including fake traffic, click farms, and bots that generate false leads. Merchants often end up paying commissions on non-existent sales or low-quality leads, thereby draining resources without generating a corresponding boost in revenue.

Account Takeover Attacks

In an account takeover (ATO) attack, criminals gain unauthorized access to a customer’s account, often through phishing or credential stuffing. Once inside, they make fraudulent purchases, redeem loyalty rewards, or change account details to lock out the legitimate user. High-risk merchants in online gaming and subscription services are especially vulnerable since these accounts often store payment details for quick checkout.

The Cost of Fraud for High-Risk Merchants

Fraud is not just a temporary setback for high-risk businesses; it has long-term consequences that threaten both profitability and sustainability. The impact extends beyond direct monetary loss, creating ripple effects that can cripple operations. Let’s break it down to understand more efficiently.

Financial Costs

When fraudulent transactions occur, merchants are not only forced to refund the transaction but also pay steep chargeback fees. According to the Federal Reserve, merchants may face fees ranging from $20 to $100 per incident, depending on their acquirer. Beyond fees, acquiring banks often increase rolling reserves, where a percentage of monthly revenue is withheld to cover potential chargebacks. This reduces immediate cash flow and makes it harder to reinvest in growth.

Non-Financial Costs

The hidden costs of fraud can be even more damaging. High chargeback ratios or repeated fraud incidents often lead to account freezes, higher transaction fees, or outright termination by payment processors. This reputational hit makes it difficult to secure new banking partners, leaving merchants reliant on costly, less flexible solutions. Additionally, repeated fraud undermines customer trust. A PwC survey revealed that brand reputation is one of the most frequently cited non-financial consequences of fraud, with lasting effects on customer loyalty. For high-risk merchants, these combined costs highlight why fraud prevention must be treated as a core business priority rather than a secondary operational concern.

Fraud Prevention Strategies for High-Risk Merchants

High-risk businesses can’t rely on the same fraud controls that standard merchants use. Because industries like CBD, gaming, adult, and travel face higher chargeback ratios and stricter compliance oversight, proactive fraud prevention is essential. The following strategies provide merchants with practical ways to reduce exposure while keeping operations smooth and customer-friendly.

Strong Customer Verification

Implementing multiple layers of identity checks helps confirm that the buyer is who they claim to be. Address Verification Service (AVS), Card Verification Value (CVV) matching, and 3D Secure authentication add friction for fraudsters while maintaining a seamless experience for legitimate customers. Advanced solutions such as biometric authentication or one-time passcodes (OTPs) are becoming increasingly important for high-ticket or cross-border transactions.

Fraud Detection Tools & Filters

Different AI-driven fraud detection tools can analyze transaction data in real time to flag suspicious activity before authorization. Features like velocity checks (detecting unusually rapid purchases), IP geolocation, device fingerprinting, and blacklisting known fraudsters help reduce the approval of fraudulent transactions. Modern fraud filters can also adapt over time, improving accuracy as more data is processed.

Transparent Billing Descriptors

Many chargebacks occur because customers don’t recognize charges on their statements. By using clear, transparent billing descriptors that include the business name, customer service number, or product reference, merchants can dramatically reduce confusion-driven disputes.

Strong Refund & Return Policies

A clearly written and easily accessible refund policy reduces the likelihood of disputes escalating into chargebacks. Offering fast refunds, flexible return windows, and responsive customer support builds trust, ensuring customers contact the business before going to their bank.

Recurring Billing Controls

For subscription-based services, merchants should use dunning tools (automated retries of failed payments) and send payment reminders before charges. Offering easy cancellation options also minimizes frustration that often leads to chargeback claims.

Multiple Payment Options

Expanding beyond card payments reduces reliance on high-risk channels. Accepting ACH/eCheck transactions lowers chargeback exposure since disputes are less common, while cryptocurrency payments can offer faster settlements and lower fraud rates for international customers.

Compliance as a Fraud Prevention Tool

For high-risk merchants, compliance is not only about avoiding fines; it also acts as one of the strongest fraud prevention mechanisms. Frameworks such as PCI DSS, Know Your Customer (KYC), and Anti-Money Laundering (AML) create guardrails that protect sensitive data, verify customer identities, and track suspicious activity. By following these standards, merchants significantly reduce vulnerabilities that fraudsters often exploit.

PCI DSS (Payment Card Industry Data Security Standard)

The PCI Security Standards Council defines PCI DSS requirements to ensure businesses securely process, store, and transmit cardholder data. These rules mandate encryption, secure networks, and strong access controls, all of which help reduce both card-present and card-not-present fraud. High-risk merchants that comply with PCI DSS build a stronger infrastructure against cyberattacks and data theft.

KYC (Know Your Customer)

According to FINRA, KYC regulations require businesses to verify the identity of customers through methods like government ID checks, address validation, and ongoing monitoring. For high-risk industries, implementing KYC makes it harder for fraudsters to open accounts under fake identities or use stolen credentials.

AML (Anti-Money Laundering)

The Financial Action Task Force (FATF) establishes international AML standards to combat illicit financial flows. For merchants dealing in sectors such as gaming, travel, or crypto, AML compliance helps detect unusual transaction patterns, including large or layered payments, that often indicate fraudulent or criminal activity.

How Compliance Reduces Fraud

Together, PCI DSS protects data integrity, KYC ensures identity verification, and AML provides transaction monitoring. By aligning with these frameworks, high-risk merchants strengthen defenses across multiple points of vulnerability, making it far more difficult for fraudsters to exploit weak systems.

The Role of Payment Processors in Fraud Prevention

Not all payment processors are created equal, especially when it comes to high-risk merchants. Mainstream providers such as Stripe and PayPal offer fraud detection tools, but their solutions are largely designed for standard, low- to medium-risk businesses. While these platforms provide essentials like basic fraud filters, dispute resolution, and automated transaction reviews, they often lack the flexibility and tailored support needed in high-risk industries such as CBD, travel, gaming, or nutraceuticals. This is where specialized providers like 2Accept play a critical role. Unlike general processors, 2Accept is designed from the ground up to handle the unique challenges faced by high-risk merchants. Its features go beyond the basics, offering:

• Chargeback Alerts & Prevention Tools: Real-time notifications help merchants address disputes before they escalate into costly chargebacks.
• Advanced Fraud Filters: Customizable, AI-powered fraud screening tools that adapt to specific industries and risk profiles, reducing false positives while catching sophisticated attacks.
• White-Glove Support: Dedicated account managers who understand compliance requirements and offer hands-on guidance, a service level often absent in mainstream processors.

By combining these elements, specialized providers deliver a more comprehensive and proactive fraud-prevention approach. For high-risk businesses, this difference can mean not only lower chargeback ratios but also the ability to maintain long-term processing stability.

Case Studies: Fraud Prevention in High-Risk Accounts

Effective fraud prevention is grounded in real-world success. Here are anonymized case studies from U.S.-based organizations demonstrating how tailored solutions significantly reduced fraud exposure:

1. Fintech Firm Strengthens KYC to Block Fraud Rings

A fintech company offering prepaid reloadable cards was struggling with account-opening fraud and money-laundering schemes. Partnering with a fraud analytics provider, they enhanced their KYC and Customer Identification Program (CIP) using data-driven scoring and document verification. This helped them catch 90% of fraudulent sign-ups before account activation and uncover a $10 million fraud ring.

2. U.S. Bank Deploys Predictive ACH Scoring for Real-Time Fraud Detection

One major U.S. bank implemented Fiserv’s Payment Fraud Manager, a predictive scoring system for ACH transactions. The model successfully flagged over 90% of ACH fraud while only reviewing 2% of total transactions, allowing the bank to stop fraud before payments were finalized.

3. Online Gaming Platform Cuts Chargebacks with 3D Secure & AI Filters

A U.S.-based online gaming platform faced increasing chargebacks due to friendly fraud and stolen card usage. By introducing 3D Secure authentication and AI-based fraud filters, they significantly reduced fraudulent transactions, leading to lower losses and improved account stability.

Frequently Asked Questions

What’s the most common fraud in high-risk industries?

The most frequent types of fraud in high-risk sectors are identity theft and friendly fraud. Identity theft involves criminals using stolen personal or card data to make unauthorized purchases, while friendly fraud occurs when legitimate customers dispute valid transactions, often resulting in costly chargebacks.

How can high-risk merchants reduce fraud quickly?

High-risk merchants can act fast by implementing fraud detection filters, chargeback alerts, and clear billing descriptors. These measures reduce confusion, flag suspicious activity early, and help prevent disputes from escalating.

Do fraud prevention tools increase approval rates?

Yes. By lowering fraud risk, merchants become more attractive to acquiring banks and processors. Strong fraud prevention measures often lead to higher approval rates and more stable merchant account relationships.

Are ACH/eCheck safer than credit cards for fraud?

Generally, ACH and eCheck transactions come with fewer chargebacks and disputes compared to credit card payments. They are a popular option in high-risk industries to reduce fraud exposure and payment friction.

Can high-risk businesses be PCI compliant?

Yes. PCI DSS compliance is achievable for high-risk businesses and is a crucial step in safeguarding sensitive customer data. Being compliant not only reduces fraud risk but also improves trust with payment processors and customers alike.

Start Reducing Chargebacks & Growing Safely

Fraud prevention is not just a defensive strategy; it’s a business necessity for high-risk merchants. From chargeback fraud to account takeovers, the challenges these industries face are amplified by strict regulations, higher dispute rates, and global exposure. Without proactive safeguards, merchants risk not only financial losses but also long-term damage to reputation, compliance standing, and processor relationships. To stay ahead, high-risk businesses should adopt layered fraud prevention tools, implement strong compliance practices, and work with specialized providers who understand their unique challenges. Partnering with experts can ensure ongoing protection, better approval rates, and scalable growth. Explore our Fraud & Chargeback Services for hands-on protection strategies, or learn how a specialized High-Risk Merchant Account can strengthen your business against fraud.