What is first-party fraud?

Understanding first-party fraud

First-party fraud occurs when an individual or organization intentionally provides false information or misrepresents their identity to gain an unfair advantage. This deception often involves the use of synthetic identities, which is what distinguishes it from third-party fraud. In third-party fraud, stolen identities are used without the victims awareness, whereas in second-party fraud, the person knows their identity is being used.

While first-party fraud is common in credit, loan, and insurance applications, it can also manifest as organized schemes orchestrated by fraud rings. This poses significant risks, leading to substantial financial losses for businesses due to fraud rings’ ability to defraud organizations of large sums using sophisticated tactics.

An example of first-party fraud would be an individual who knowingly applies for a loan with no intention of repaying it, intending to claim later that they never requested the loan and keep the funds. Similarly, a user might purchase an expensive item using their own credit card, with no intention of fulfilling payment, and subsequently dispute the transaction as unauthorized to obtain a chargeback.

Examples of first-party fraud

First-party fraud schemes encompass various deceptive practices that impact financial institutions, credit companies, and retailers, among others. Many public and private organizations can fall victim to these fraudulent activities.

Here are some examples of first-party fraud:

• Bust-out fraud or sleeper fraud: Initially applying for credit, individuals gradually build their credit profile over months or years, accumulating increasing amounts of credit before disappearing entirely.
• Chargeback fraud: Customers make purchases using a credit card and then falsely claim to their credit card company that the payment was fraudulent, attempting to regain the funds.
• De-shopping: Consumers purchase items, use them, and then return them for a refund.
• Fronting: Individuals use someone else’s identity to access services or open accounts, seeking an unfair financial advantage, such as obtaining lower insurance rates.
• Goods lost in transit fraud (GLIT): After online purchases, consumers falsely assert that the goods were not delivered to obtain fraudulent refunds.

How does first-party fraud affect businesses?

For businesses involved in e-commerce, insurance, and other sectors, the ramifications of first-party fraud can be substantial. One significant consequence is the reduction in profits. Retailers, for instance, may suffer losses due to chargebacks, which entail not only the reimbursement of funds but also associated fees. Moreover, businesses must allocate resources to address these claims, incurring additional overhead costs.

Another challenge posed by first-party fraud is the depletion of stock levels. Businesses that fall victim to fraudulent activities may experience losses in inventory, translating into significant financial setbacks. This loss of goods can disrupt operations and compromise the ability to fulfill customer orders efficiently.

Also, first-party fraud can result in increased friction between businesses and their clientele. In response to fraudulent incidents, companies may implement rigorous onboarding procedures to mitigate future risks. However, such measures can create barriers for genuine customers, leading to dissatisfaction and potential defection to competitors offering smoother processes.

Red flags of first-party fraud

Businesses aiming to identify and prevent first-party fraud must remain vigilant for potential warning signs, including:

• Previous chargebacks: Data reveals that 40% of individuals involved in first-party fraud engage in further fraudulent activities within a 60-day period.
• Big spenders: Newly acquired customers who initiate substantial purchases, especially those originating from international locations, should be subject to increased scrutiny.
• Multiples: Customers exhibiting behaviors such as maintaining multiple accounts, having multiple active users, possessing multiple addresses, or making repetitive purchases of identical items should raise red flags for potential fraudulent activity.

As organizations navigate the complexities of detecting and combating first-party fraud, vigilance and proactive measures are essential to safeguard against potential fraudulent activities.

Summary

• First-party fraud involves individuals or entities intentionally providing false information for financial gain.
• First-party fraud schemes include bust-out fraud, chargeback fraud, de-shopping, fronting, and goods lost in transit fraud (GLIT).
• Businesses experience reduced profits, diminished stock levels, and increased friction with customers due to stringent security measures.
• Warning signs include previous chargebacks, high-spending new customers, and patterns of multiple accounts or purchases.