Regarding fraud, most people think of credit card scams and criminal gangs. However, first-party fraud can be just as damaging.
It can involve a shopper falsely denying a purchase to obtain a refund, fronting to get cheaper car insurance, or racking up debt that’s not theirs by applying for loans.
What is First Party Fraud?
While traditional third-party fraud schemes rely on identity theft, first party fraud involves the account holder using their information to commit fraudulent transactions. This includes returning a product they have not used to claim it was never delivered or damaged on arrival or engaging in GLIT fraud (guys lying about their income to buy expensive goods and returning them to get full refunds).
These kinds of fraud can be costly for businesses. They can result in financial losses impacting the bottom line and even severe bankruptcy. They can also damage a company’s reputation with customers.
Fortunately, there are ways to prevent first-party fraud. For example, using biometric data like fingerprints and facial recognition can help verify that the person opening an account or making a transaction is who they say they are. Another method is device fingerprinting, which analyzes the unique characteristics of a customer’s device to identify if they are using multiple devices to perpetrate fraud.
Types of First-Party Fraud
When most people think of fraud, they picture criminal gangs stealing identity details and using them to commit financial crimes. But first-party fraud is far more common, causing significant losses for businesses and financial institutions.
In many cases, these losses are the result of disputes and chargebacks. And while some of these disputes are valid, the vast majority are not. This is primarily due to transaction confusion, as consumers review their transactions through digital bank channels and often find unrecognizable merchant names and other information. To prevent it, chargeback protection services can even fight disputes on your behalf to recoup revenue lost to them. This will help keep your profits intact while maintaining customer loyalty and a positive business image. However, the cost of these tools varies among providers, so research your options carefully before choosing one.
In addition, a growing share of first-party fraud stems from abuse of the dispute process–sometimes known as friendly fraud or chargeback misuse. This is a form of opportunistic fraud committed by individuals looking to get their money back for various reasons. It’s also a significant issue for telcos, payment processors, handset financiers, and debt collection agencies that are often drained of profits and costs by this type of fraud.
Risks of First-Party Fraud
First-party fraud is costly for businesses in a variety of ways. Financial losses include unpaid loans, credit cards, and operational costs from the time and effort required to detect and investigate cases of first-party fraud. It can also damage a business’s reputation by causing strained customer relationships – as the airlines experienced when they placed overly stringent onboarding processes in place to prevent chargeback fraud, resulting in delays in refunding customers who had canceled flights.
Opportunistic fraudsters can also engage in fraud, ordering goods online and falsely claiming that they were never delivered or damaged on arrival. This can result in merchants losing valuable inventory that they can’t return, an additional cost to their bottom line. Unlike third-party fraud, which often involves stolen identities, first-party fraud is opportunistic and challenging to detect without the right tools. The good news is that there are warning signs that can help detect opportunistic first-party fraud: large purchases, changes in behavior, and geographic patterns.
Detecting First-Party Fraud
First-party fraud can occur in many ways. One way is friendly fraud or chargeback fraud, in which a customer files a fraudulent claim after receiving goods or services they didn’t pay for. Another example is fronting, in which an individual lies on their application for credit cards or loans to secure a higher credit limit or better terms. This can be opportunistic and carried out by individuals or organized at scale by criminal gangs and fraud rings.
The good news is there are many techniques that institutions can use to detect first-party fraud attacks. These include leveraging behavioral analytics to look for signs of fraud in customers, including device fingerprinting to see if a customer is using multiple devices. Some solutions can also use biometric data to verify that a user is who they say they are. These technologies can effectively detect fraud attacks without needing historic labels or rules and are quick to set up.
