First-party fraud is when a consumer deliberately uses their own identity to commit fraudulent activities. In other words, the individual is committing the fraud, rather than an outside party using stolen information from a victim.
Let’s face it - we’ve all experienced buyer’s remorse. You know, that feeling you get when you realize you probably shouldn’t have made that impulsive purchase. While most of us just move on with our lives, some bad actors will call up their credit card companies to dispute the charges even though they were legitimate. This is just one example of first-party fraud, a category of fraud that costs merchants, card issuers, banks, and companies big time.
First-party fraud has some pretty unique characteristics that make it especially difficult to flag, which is why it’s one of the fastest-growing fraud vectors today. In this article, we’ll review the definition of first-party fraud, analyze the impact of first-party fraud across industries, and give you real-world tools you can employ to protect against first-party fraud.
Yes, two of the largest categories of first-party fraud are sleeper fraud and bust-out fraud.
First-party fraud is a broad category of fraud. Here are some common examples:
In general, first-party fraud can be characterized as either opportunistic which means it is perpetrated on a small scale by a single person or an informal group, or it can be highly organized and carried out at scale by a larger group of people (e.g., a criminal gang or fraud ring). Both sleeper and bust-out fraud can be perpetrated in an opportunistic or organized fashion.
Someone may commit first-party fraud on a whim and never commit it again, while someone else may commit it over and over again and again with the help of a gang. Either way, first-party fraud has profoundly negative impacts on companies.
What are the negative impacts of first-party fraud?
Some of the potential costs associated with first-party fraud include:
Overall, the costs associated with first-party fraud can be significant and can have long-term impacts on an organization's financial health and reputation. As a result, businesses and financial institutions must implement effective fraud prevention and detection measures to prevent, detect, and mitigate the risks associated with this type of fraud.
According to Mercator Advisory Group, first-party fraud costs merchants roughly $50 billion annually.
First-party fraud is notoriously difficult to classify. Without a sufficient identity-proofing system, you will have multiple types of fraud on your books that commingle. Commingling fraud vectors lead to inaccurate reports and inefficient fraud-prevention plans. After all, if you can’t even accurately identify first-party fraud, how can you expect to prevent it?
By leveraging Prove Identity™ during the onboarding process, you can confirm the identity of your customer from day one. During every subsequent log-in or high-risk transaction, you can choose to verify the user with the help of a powerful source of truth. If a customer successfully passes Prove Identity’s three-step PRO check during onboarding but later claims that they never created an account, for example, you can positively classify this as first-party fraud.
Establishing a user’s identity with confidence is also key if an account “goes bad" and enters collections. If you have confirmed the identity of the account and the account goes into collection, you can reach out to the user with more confidence that they created the account and are not victims of identity theft as they might claim.
Using Prove Identity™, you can confidently verify a consumer’s identity without adding unnecessary friction to the consumer experience. Prove Identity™ can better identify first-party fraud during the collecting, dispute, and fraud classification processes.
First-party fraud is a growing problem that costs businesses and financial institutions billions of dollars every year. Given that it is a type of fraud where the perpetrator uses their own identity to carry out fraudulent activities, it creates difficulty in detection, and most importantly, prevention. Sleeper fraud and bust-out fraud are two of the largest categories of first-party fraud. First-party fraud, whether committed by a lone individual or by organized criminal gangs, the costs associated with it include financial losses, operational costs, compliance costs, and reputation damage. To avoid these losses, businesses, and financial institutions must implement effective fraud prevention and detection controls, such as secure, next-generation identity verification solutions, to mitigate the risks associated with first-party fraud.
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