First Party Fraud

What Is First Party Fraud?

First party fraud occurs when an individual purposefully provides false details or misrepresents their identity for illicit gain. The fraud is committed by an otherwise genuine, authorized consumer.

According to Experian, first party fraud accounts for 25% or more of all US consumer credit charge-offs. The definition encompasses a wide range of activities, which we will explore below.

How Does First Party Fraud Work?

First party fraud takes various forms, all of which center on an individual falsifying or misrepresenting their information. Broadly speaking, the individual uses the false information to obtain goods, funds, or a service, with a promise that they will pay for them at a future time. The buyer then fails to make the promised payment.

First party fraud in banking, for example, could involve an individual overstating their salary in order to take out a loan before ultimately defaulting on the repayment.

Another commonly cited example of first party fraud is chargeback fraud, of which friendly fraud is a common example. Chargeback fraud involves a customer filing a chargeback on their account despite having (knowingly or unknowingly) received the goods or services they paid for.

Common Types of First Party Fraud

There are plenty of examples of first party fraud. Let’s look at some of the most common ones.

Application Fraud

This is where an individual lies when applying for credit, insurance, or similar. The goal is to secure a higher credit limit or more favorable terms than they otherwise would.

Chargeback Fraud

This is where an individual makes a purchase then initiates a chargeback in order to obtain a refund, despite having received (and kept) the goods or service to which the transaction relates. This type of friendly fraud can take a variety of forms, including accidental friendly fraud, where the shopper mistakenly disputes a genuine transaction.

Refund Fraud

While chargeback fraud sees the individual asking for their money back from the bank, refund fraud sees the individual asking for the same but from the retailer. One example is when a shopper falsely claims that they received an empty box but without the goods they paid for. They request a refund from the retailer, then keep the goods and the refunded money. Some fraudsters take this further, using double dipping to obtain a refund from both the retailer and the bank – while still keeping the goods.

There are many types of return fraud, and all of them can eat into retailers’ profits significantly.

De-Shopping

Also known as wardrobing, this is a subset of refund fraud. An individual buys an item of clothing – usually something pricey – and wears it once or twice. They then return it for a full refund, having intended to do so from the outset.

Goods Lost in Transit Fraud

This is a simple form of first party fraud. The shopper makes a purchase then claims that the goods were lost in transit and never delivered. A variation of this is where the shopper claims the goods were delivered but that they were damaged in transit.

Sleeper Fraud

This is a longer-term form of first party fraud, as the individual commits to building up what appears to be a decent credit history, making the odd purchase on their credit card or store card, and always paying it off on time. Then, once this responsible behavior triggers a card limit increase, the fraudster maxes out the card and vanishes.

Fronting

Fronting involves using someone else’s details as a front in order to obtain a better price or more favorable terms for a service. This is often seen in the automobile insurance industry: A driver classed as higher risk due to their age adds themself as a named driver on a relative’s policy, rather than taking out insurance in their own right. By doing so, they pay a lower premium. They are also committing first party fraud.

Address Fronting

Another bane of car insurance companies’ lives, address fronting is where an individual uses a different address than their home address in order to obtain a better price or better terms.

Note that this is not the same as identity theft, which is a form of third party fraud, rather than first party fraud.

What Is the Difference Between First Party and Third Party Fraud?

It bears repeating that while some people believe that identity theft is a form of first party fraud, this is not the case. It is actually a form of third party fraud and serves as a good example of the difference between first party and third party fraud.

First party fraud is where the fraudster uses their own details but with some of those details falsified or misrepresented. Third party fraud, by contrast, is where the fraudster uses another person’s personally identifiable information (PII) without their knowledge. Some types of fraud, of course, can span more than one categorization. Clean fraud, for example, can be first, second, and third party fraud!

How Does It Affect Your Business?

If you’re involved in ecommerce, insurance, or a range of other sectors, the consequences of first party fraud can be significant in terms of the impact on your business. Some examples of the impact of first party fraud include:

Top Red Flags to Detect First Party Fraud

Businesses seeking to detect and deter first party fraud need to be on the lookout for warning signs of it. Signs such as:

• Previous chargebacks: According to Chargebacks911, 40% of first party fraudsters commit further fraud within 60 days.
• Big spenders: Brand new customers who make huge purchases, particularly from overseas locations, warrant further attention.
• Typical profiles: First party fraudsters are usually male, young (in their 20s), city-based (particularly inner city-based), and lower-income earners.
• Multiples: Customers with multiple accounts, multiple active users, and multiple addresses are a definite red flag. The same is true of customers making multiple purchases of the same item.

How to Protect Against First Party Fraud

Businesses have the power to defend against first party fraud in a number of ways. For example, using fraud prevention tools can enable them to blacklist those who have already committed first party fraud, thus reducing the chance that they will do it again.

Finely tuning fraud-fighting software can also help to home in on the red flags detailed above, including the relevant profile markers. Identifying potentially suspicious customers means that the business can then look into them in further detail and take appropriate action, such as by limiting the functionality of accounts associated with multiple addresses or multiple users.

Businesses should also bear in mind that fraud risks – including the risk of first party fraud – can change over time. As such, they should constantly be alert to new threats and new scams and adjust their response accordingly.

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