Fraud is one of the most critical challenges in ecommerce, particularly for merchants selling high-risk products or operating in regulated sectors. Whether you’re dealing with online firearms transactions that require compliance with federal law, or digital goods and peer-to-peer payments that are easily disputed, the threat of fraud looms large. This threat not only affects security and reputation but also directly influences processing fees. Merchant service providers consider fraud risk when assigning rates and reserve requirements, meaning your bottom line can suffer from poor risk management. In this blog, we’ll break down how fraud affects processing fees in ecommerce, what merchants can do to combat it, and why even platforms like Venmo and online point-of-sale (POS) tools must be used with caution.
Why Fraud Increases Processing Fees
When a merchant is categorized as high-risk, one of the first areas impacted is the fee structure. Payment processors must account for the elevated risk of fraud, chargebacks, and regulatory non-compliance, especially in ecommerce transactions where the buyer and seller never meet. To protect themselves, processors increase rates and may hold rolling reserves to cover potential losses[1]. These fee hikes aren’t arbitrary—they’re based on historical chargeback ratios, the type of product sold, and industry-specific fraud statistics. Merchants selling digital downloads, firearms, or age-restricted items face additional scrutiny due to the ease of misuse and identity fraud. The more frequent the fraudulent activity, the higher the fees rise, making fraud prevention not just a legal obligation but a financial imperative.
Types of Ecommerce Fraud That Affect Fees
Fraud comes in many forms, each contributing differently to how a processor evaluates a merchant’s risk profile and assigns fees. Digital merchants must understand the nuances of these types to respond effectively.
Chargeback Fraud
This occurs when a customer makes a legitimate purchase but then disputes the charge to get a refund while keeping the product. It’s especially common with digital goods where there’s no tangible shipment to track. High chargeback rates not only incur fines but can also cause your fees to spike or your account to be terminated entirely.
Friendly Fraud
A subset of chargeback fraud, friendly fraud involves customers who forget they made a purchase or didn’t recognize the transaction on their bank statement. Despite being accidental in many cases, friendly fraud still counts against your chargeback ratio, driving up costs and increasing your risk designation.
Identity Theft
Fraud involving stolen personal information is rampant in ecommerce. Criminals use hacked credentials to make purchases, often targeting high-ticket or downloadable products. Once the fraud is discovered, the original cardholder initiates a chargeback. Repeated instances raise your risk profile and trigger higher reserve requirements from processors.
Triangulation Fraud
This sophisticated scheme involves three parties: a fraudster, a legitimate customer, and an unsuspecting merchant. The fraudster collects payment from the customer, buys a product using stolen card data, and ships it to the customer—leaving the merchant with the chargeback. Triangulation is hard to detect and often affects merchants in electronics and digital services[2].
The Role of Payment Platforms Like Venmo
Peer-to-peer platforms like Venmo have seen increasing use in ecommerce, but using them for business transactions can backfire. Venmo is designed for personal use, and its terms of service explicitly prohibit commercial use without proper authorization. If a customer reports a transaction as unauthorized, Venmo may decline the payment or suspend the merchant’s account. Searching phrases like “Venmo transaction declined” or “how to decline a Venmo payment” reveals how frequently these issues occur. Moreover, Venmo lacks the detailed invoicing and fraud protection that high-risk ecommerce merchants need. Improper use not only violates terms but increases your risk of disputed transactions—once again driving up your processing fees or leading to account closure.
How Firearm Sales and FFL Requirements Increase Scrutiny
Selling firearms online adds another layer of regulatory complexity. To legally sell firearms, a Federal Firearms License (FFL) is required, and transactions must follow strict federal and state laws. The acronym “FFL” stands for Federal Firearms License, and this status is mandatory for dealers transferring guns across state lines. Online POS systems used in gun sales must verify the recipient’s FFL credentials and often route delivery to a licensed dealer for in-person pickup. Failing to comply with FFL laws can lead to legal penalties and merchant account termination. Even when compliant, the high-risk nature of the industry means payment processors impose higher fees due to the liability associated with fraud, theft, and legal oversight.
Building an Online POS That Minimizes Risk
Choosing the right online POS system can make or break a high-risk ecommerce business. Payment processors prefer merchants that use secure, verifiable checkout systems capable of preventing fraud at the transaction level. Essential features in an online POS for high-risk merchants include multi-factor authentication, tokenized payments, velocity checks, and AVS (Address Verification System) integration[3]. These systems not only protect your customers but also build trust with your processor—helping to stabilize or even lower your fees over time. A weak or non-compliant POS setup invites fraudulent activity, making it harder to negotiate better rates and potentially resulting in costly penalties or reserves.
How to Lower Your Processing Fees Despite High Risk
Despite being labeled as high-risk, merchants can still take proactive steps to reduce their processing fees. Implementing advanced fraud prevention tools, maintaining a low chargeback ratio, and staying compliant with industry regulations are foundational strategies. Merchants should also regularly audit their payment flows and use reputable gateway providers that specialize in high-risk verticals. Transparent refund policies and clear product descriptions can reduce disputes. Maintaining strong documentation and timely customer service helps win chargeback disputes, which can improve your standing with processors[4]. Over time, consistently low risk signals can qualify a merchant for reduced fees or better terms.
The Impact of Fraud on Merchant Statements
Processors often communicate fee hikes or new reserve requirements via the merchant services statement. These documents reveal whether you’re being penalized due to excessive chargebacks, flagged transactions, or non-compliance. Many merchants don’t read their statements closely, missing critical indicators of financial erosion. Key red flags include sudden reserve increases, risk adjustment surcharges, and alerts related to excessive refunds. Regularly reviewing these statements helps businesses understand how fraud is directly impacting their cost structure and allows for corrective action before it becomes a bigger problem. Merchant statement analysis is an overlooked but powerful tool in reducing processing costs.
When to Consider Switching Providers
There comes a point when high fees and fraud-related penalties outweigh the value provided by your current processor. If your business has made improvements in fraud prevention and still faces punitive fee structures, it may be time to switch providers. Not all processors treat risk equally—some specialize in high-risk industries and can offer more competitive rates, especially when paired with robust fraud controls. A new provider may also offer additional benefits like faster payouts, customizable fraud filters, and better customer service. However, switching should always be accompanied by a thorough risk evaluation and performance history review.
Final Thoughts
Fraud isn’t just a security issue—it’s a financial one. For ecommerce merchants, especially in high-risk categories like firearms, digital goods, or regulated services, the cost of fraud is reflected in every transaction fee[5]. By understanding the relationship between fraud and processing fees, business owners can implement smarter payment systems, avoid risky behaviors like unauthorized Venmo transactions, and maintain compliance with federal licensing requirements like the FFL. Payment Nerds helps merchants in high-risk spaces find tailored solutions to minimize fraud, lower processing costs, and build long-term sustainability in ecommerce.
Sources
- Visa. “Chargeback Management Guidelines for Visa Merchants.” Accessed June 2025.
- Federal Trade Commission. “Protecting Small Businesses from Fraud.” Accessed June 2025.
- McKinsey & Company. “Global Payments 2023: Transformation in Motion.” Accessed June 2025.
- Harvard Business Review. “Why Companies Should Treat Fraud as a Strategic Issue.” Accessed June 2025.
- PCI Security Standards Council. “Best Practices for Securing Ecommerce.” Accessed June 2025.
