Dictionary

First Party Fraud

What Is First Party Fraud?

First-party fraud is a deceptive practice where individuals intentionally misrepresent their identity or provide false information to gain illicit benefits. Unlike traditional fraud, which often involves stealing someone else’s identity, first-party fraud is committed by individuals who appear to be legitimate consumers. This type of fraud costs US financial institutions and merchants over $100 billion annually, underscoring its significant impact on businesses across various sectors.

How Does First Party Fraud Work?

First-party fraud can take many forms, but it fundamentally revolves around individuals using falsified information to obtain goods, services or funds with the intention of not fulfilling their payment obligations. Here are some common methods:

  • Application fraud: This occurs when an individual exaggerates their income or provides misleading information on applications for credit or insurance. The goal is to secure better terms or higher credit limits than they would normally qualify for.
  • Chargeback fraud: involves a customer purchasing goods or services and then filing a chargeback with their bank, claiming they did not authorize the transaction. This can happen even if the customer has received and kept the purchased items.
  • Refund fraud: In this scenario, a shopper might falsely claim that an item was never delivered or was damaged upon arrival to receive a refund while keeping the product. Some perpetrators engage in “double dipping,” obtaining refunds from both the retailer and their bank.
  • De-shopping: Also known as wardrobing, this form of fraud involves purchasing clothing or high-value items, using them briefly, and then returning them for a full refund. The intent is clear: enjoy the product without paying for it.
  • Sleeper fraud: This longer-term strategy involves building a seemingly good credit history by making small purchases and paying them off regularly. Once the individual has established trust and triggered a credit limit increase, they max out the card and disappear.
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Distinguishing Between First-Party and Third-Party Fraud

It’s crucial to differentiate first-party fraud from third-party fraud. While first-party fraud involves individuals using their own (albeit misrepresented) information, third-party fraud occurs when someone uses another person’s personal information without their consent. Understanding this distinction is vital for developing effective prevention strategies.

The Impact of First-Party Fraud on Businesses

First-party fraud, where customers intentionally misuse services or provide false information for personal gain, can have widespread consequences for businesses. These impacts are especially pronounced in industries like ecommerce, finance, and retail, where trust and efficient processes are critical. Below are some of the most significant repercussions:

  • Reduced profits: Retailers face significant losses from chargebacks and refunds, along with associated fees and costs related to processing these claims. This financial burden can escalate quickly.
  • Inventory losses: Goods lost to fraudulent returns can severely affect stock levels and profitability, leading to increased operational costs.
  • Increased friction: To combat fraud, businesses may implement overly stringent onboarding processes that frustrate legitimate customers, driving them to competitors.

Recognizing Red Flags of First-Party Fraud

To effectively detect first-party fraud, businesses should be vigilant for certain warning signs, including:

  • 1. Previous chargebacks: According to Chargebacks911, 40% of first-party fraudsters commit further fraud within 60 days.
  • 2. Large purchases from new customers: New customers making unusually large purchases—especially from high-risk locations—should raise red flags.
  • 3. Multiple accounts or addresses: Customers with multiple accounts, multiple different addresses or those making several purchases of identical items warrant closer scrutiny.

How SEON Helps Detect and Prevent First-Party Fraud

SEON employs advanced technologies and strategies to combat first-party fraud, enabling retailers to secure their operations effectively. One of the key functionalities is digital footprint analysis, utilizing data from users’ emails, phone numbers and IP addresses to create comprehensive profiles. This allows businesses to identify potential fraudsters before they complete transactions, enhancing the Know Your Customer (KYC) process. Additionally, SEON integrates AI and machine learning to analyze complex fraud patterns, continuously refining detection capabilities and reducing false positives for legitimate customers.

SEON’s AML screening solution ensures compliance with anti-money laundering regulations while safeguarding revenue streams. Retailers can also set custom rules tailored to their specific needs, allowing for a more nuanced approach to fraud detection. By combining these functionalities, SEON empowers retailers to proactively address first-party fraud, ultimately protecting their bottom line and fostering customer trust.

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