Fighting Back Against Merchant Identity Fraud with Sophisticated Identity Verification

As more and more of our lives become digital, the stakes for effective fraud prevention have never been higher.

By 2029, global eCommerce  fraud losses are projected to reach $107 billion.¹ And one contributing factor to that number? Merchant identity fraud.

What Is Merchant Identity Fraud?

Merchant identity fraud happens when criminals exploit or impersonate a merchant’s identity to process unauthorized transactions, steal funds, or deceive customers. Common schemes include:

• Fake merchant websites: 

  Fraudsters create counterfeit online storefronts or social media profiles that closely mimic legitimate businesses. These fake sites are designed to trick consumers into making purchases or sharing sensitive payment information.
• Victims may receive counterfeit or no products at all, and their payment details can be used for further fraudulent activities. In many cases, these sites offer goods at unusually low prices or advertise hard-to-find items to lure unsuspecting customers.This tactic is not only common but has led to a significant rise in online fraud, with 43%² of online users reporting being recently victimized by these schemes.
• Account takeover:

  Fraudsters may gain unauthorized access to merchant accounts through stolen credentials, phishing, or malware. Once inside, they can change account details, intercept payments, or drain balances.Account takeover fraud increased by 13%³ year-over-year in 2024, with global losses projected to reach $17 billion in 2025⁴. Attackers often use techniques like credential stuffing, social engineering, and SIM swap scams to bypass security controls and gain control over merchant accounts.
• Transaction laundering: 

  Transaction laundering occurs when criminals use legitimate-looking businesses to process payments for illegal goods or services. This can involve setting up a front company or hijacking an existing merchant account to funnel illicit transactions through seemingly lawful sales.⁵For example, a website may appear to sell digital goods but is actually processing payments for counterfeit or illegal products in the background. These schemes allow criminals to evade detection by payment processors and regulators, posing serious risks to financial institutions and consumers alike.
• Identity swap fraud: 

  In identity swap fraud, criminals use stolen or synthetic identities to open new merchant accounts or take over existing ones. Synthetic identity fraud is now one of the fastest-growing types of financial crime—global losses are projected to reach $23 billion⁶ by 2030, and it accounts for about 30% of all identity fraud cases as of 2025.

There are two main types of synthetic identities involved:

• Manipulated synthetic identities:

  These start with a real person’s information, such as a legitimate Social Security number or name, but criminals tweak details—like the date of birth or address—to create a slightly altered version of the real identity. This method is often used to hide poor credit history or evade detection.
• Fabricated synthetic identities:
 
  Here, fraudsters create a completely new, fake persona by combining real data (like a stolen Social Security number) with invented details (such as a false name or address). These identities do not correspond to any real person, making them harder to detect and often allowing them to build up a credit history before being used for fraud.

Both types can be used to open accounts, apply for credit, or conduct fraudulent transactions—and both present serious challenges for fintechs and merchants worldwide.

The Role of Identity in Merchant Fraud

Identity is the critical enabler behind most merchant fraud, but the methods fraudsters use to manipulate identity are constantly evolving. Here are just a few of the fraud tactics used, as well as the challenges they pose.

• Synthetic identities: 

  Beyond just opening accounts, synthetic identities are designed to persist within financial systems for months or years, slowly building credibility before being used for high-value fraud. In the first quarter of 2025, over 365,000⁷ identity theft cases were reported, with synthetic identities responsible for more than 80%⁸ of fraud detected in newly opened accounts.
• Deepfake and AI-driven manipulation: 

  Fraudsters are now using AI-generated documents, videos, and real-time facial forgeries to evade onboarding and KYC checks. Deepfake fraud attempts have surged, with financial losses from deepfake-enabled fraud exceeding $200 million⁹ in the first quarter of 2025.These attacks often bypass traditional verification, requiring advanced liveness detection and AI-based document analysis to detect.
• Digital document manipulation: 

  Using digital tools to forge or alter documents has increased by 244%¹⁰ since 2024. Fraudsters can now easily obtain templates and use fraud-as-a-service platforms to create convincing fake identities at scale, making detection even more challenging for businesses.
• Regulatory and operational risk: 

  The persistence and sophistication of identity-based fraud expose organizations to significant regulatory, financial, and reputational risks. As fraud techniques evolve, many businesses struggle to keep their identity verification and fraud detection systems up to date, leaving them vulnerable to emerging threats.

While merchant identity fraud schemes exploit identity in various ways, the rapid evolution of synthetic identities, deepfakes, and digital forgery tools has made robust, multi-layered identity verification essential.
Organizations must combine AI-powered document verification, biometric authentication, and ongoing monitoring to stay ahead of these threats and protect both their operations and their clients.

How Can We Stop Merchant Identity Fraud?

Effectively stopping merchant identity fraud requires a proactive, multi-layered defense strategy that addresses both technological vulnerabilities and human factors. By combining advanced verification tools, real-time monitoring, and strong internal controls, businesses can significantly reduce the risk of falling victim to these evolving threats.

A solid strategy should include:


1. Advanced identity verification

Implementing multi-layered identity verification is the most effective way to prevent merchant identity fraud:

• Document verification: Identify forged, doctored, or synthetic documents with AI-powered checks.
• Biometric authentication: Confirm the genuine presence of applicants with facial recognition and liveness detection.
• KYC and AML screening: Detect high-risk individuals by screen against global watchlists, sanctions, and politically exposed persons (PEPs) lists.

2. Real-time transaction monitoring

Continuous monitoring of transactions helps detect suspicious activity, such as unusual payment patterns or high-risk locations. Real-time alerts and automated fraud detection tools can mean the difference in fast intervention to reduce losses.

3. Multi-factor authentication (MFA)

Adding extra layers of security — such as requiring a one-time password or biometric verification — makes it harder for fraudsters to access merchant accounts or process unauthorized transactions.

4. Employee training and awareness

Training staff to recognize signs of fraud, handle sensitive data securely, and respond to incidents is essential for building a strong defense against merchant fraud.

5. Regular system updates and access controls

Keeping payment systems updated and restricting access to critical data minimizes vulnerabilities that fraudsters can exploit.

Making a Business Case for Identity Verification

Identity verification is not just a compliance requirement — it is a strategic necessity for merchants to:

• Reduce fraud losses: Detecting fake or manipulated identities during onboarding prevents fraud before it starts.
• Enhance customer trust: Secure onboarding and transaction processes build confidence with clients and partners.
• Streamline compliance: Integrated solutions help meet KYC, AML, and data privacy requirements efficiently.

Moving Forward

Merchant identity fraud is evolving rapidly, driven by advances in synthetic identities, AI, and digital forgery. Stopping it requires a proactive, multi-layered approach centered on robust identity verification, real-time monitoring, and employee vigilance. By investing in advanced identity solutions, merchants can protect their operations, comply with regulations, and foster trust in a digital-first marketplace.

Shufti empowers businesses to stay ahead of fraud by offering advanced identity verification solutions, including AI-powered document checks, biometric authentication, and continuous risk assessment. These tools not only help detect and prevent identity-driven fraud but also streamline compliance and build lasting trust with clients.

Learn more about how Shufti serves e-Commerce and Marketplace customers.