Stopping Fraud Before it Starts: How Payments Platforms Are Using AI to Fight AI
A recent survey from the Association for Financial Professionals revealed payment fraud is up while fraud recovery rates have plummeted. And this may be only the beginning of a new era of fraud challenges. Already, 2025 has become the year of agentic artificial intelligence, in which AI-powered systems can execute a series of tasks without specific instructions. The result? Increasingly advanced, autonomous tools that bad actors can use to conduct payment fraud against consumers, businesses, and financial websites.
As fraudsters continue to find new ways to infiltrate payment systems and e-commerce platforms, businesses must move beyond traditional defense frameworks and adopt proactive, real-time security approaches.
AI-Driven Risk in Payments
Bad actors exploit AI to bypass traditional security measures and regulatory blind spots, posing new challenges, especially for payment processors, banks, and e-commerce platforms, which are responsible for vetting merchants and ensuring compliance. As fraud continues to become more sophisticated, financial institutions face added pressure to detect and prevent threats proactively, serving a vital role in protecting the integrity of the digital payments ecosystem.
What does AI-driven fraud look like? Three of the most common tactics are:
- Synthetic Identity Fraud: Fraudsters blend real and falsified personal data to generate seemingly realistic identities for use in merchant account applications. AI enables faster, more convincing creation of these identities at scale.
- Transaction Laundering: Using AI-powered website builders, criminals can create polished, highly custom e-commerce storefronts to conceal illicit activity, making it harder for onboarding teams to identify suspicious behavior.
- Deepfake Merchant Profiles: Fraudsters use AI-generated visuals and voice deepfakes to mimic real business owners, undermining know-your-business (KYB) and know-your-customer (KYC) processes and increasing the risk of regulatory violations.
Defense Mechanism No. 1: Enhance Merchant Onboarding With AI
For financial institutions and other fintech businesses, merchant onboarding is crucial as payment processors and payment service providers must verify that new merchants operate legitimately within their regulatory jurisdictions. Many risk management tools still depend on manual and/or legacy processes, which lack the tools to catch increasingly sophisticated fraud tactics, exposing the entire online ecosystem to financial and reputational risk.
With AI-powered tools, retailers can quickly analyze business credentials, identify inconsistencies in product listings, and flag high-risk merchant category-based patterns that investigators observed in past fraudulent activity. Notably, detection and verification processes such as automated merchant category code (MCC) detection, KYB, and KYC have been greatly strengthened by AI.
Defense Mechanism No. 2: Ongoing Monitoring Stops Risk Before it Spreads
Risks don’t end after onboarding. Continuous merchant monitoring is crucial to maintain long-term fraud prevention and regulatory compliance. AI-driven solutions enhance this process by persistently scanning merchant websites for changes, such as modifications in product offerings, legal content, or site ownership that human analysts might miss. This scanning can identify irregularities and compliance gaps in real time, allowing for prompt risk mitigation.
A Stronger and Safer Merchant Ecosystem
As e-commerce fraud grows more sophisticated, digital retailers and payment companies need to rethink their approach. By embracing AI as part of a layered, intelligent risk management program, organizations can better protect their platforms, meet compliance demands, and preserve customer safety and trust.
This isn’t just about avoiding fines or catching bad actors; it’s about building a secure, scalable future for digital commerce. Companies that make the investment in smarter tools now will be in a better position to scale safely.
Tom Cook is chief product and technology officer at LegitScript, a top merchant monitoring solution for its unmatched accuracy, AI-powered insights, and expert human review.
Tom Cook is chief product and technology officer at LegitScript, where he leads the product and engineering teams to build innovative solutions that help LegitScript clients comply with regulations and combat fraud. Prior to joining LegitScript, Tom was an Operating Executive at Elliott Investment Management, where he helped companies of all sizes improve their product development processes and achieve product-market fit. He has also held senior leadership positions at Datto, Viewpoint Construction Software, and Ixia. Tom is a passionate advocate for customer centric product development and has a proven track record of building high-performing teams and delivering successful products. He holds a BSEE and a BA from the University of Notre Dame and an MSEE from the University of Michigan. Connect with Tom on LinkedIn.
