This article was updated on May 16, 2023
A few weeks ago, I shared the first in a series of articles about understanding the different types of fraud and how to solve for them. In that article, I likened the third-party fraud problem to baking. Continuing that theme, I’m going to explore first-party fraud by comparing it to biting into a cookie you think is chocolate chip, only to find that it’s filled with raisins. The raisins in the cookie were hiding in plain sight, indistinguishable from chocolate chips without a closer look, much like first-party fraudsters.
What is first-party fraud?
First-party fraud refers to instances when an individual makes a promise of future repayments in exchange for goods or services without the intent to repay. The first-party fraudster might accomplish this by applying for a loan or credit card they won’t pay back or misrepresenting their financial situation to get a more favorable rate.
First-party fraud sometimes presents via “mules” or consumers who are persuaded to use their own information to obtain credit or merchandise on behalf of a larger fraud ring. This type of fraud has become especially prevalent in 2020 due to the increases in online activity for both work and purchasing.
Mule activity has increased by 41% in 2020 in comparison to attack rates prior to the pandemic. – Julie Conroy, Research Director, Aite Group
First-party fraud is often miscategorized as credit loss and written off as bad debt, which causes problems when businesses later try to determine how much they’ve lost to fraud versus credit risk, and then make future lending decisions.
How does first-party fraud impact me?
Firstly, there are often substantial losses associated with first-party fraud. According to Payments Journal, 60% of financial institutions report first-party fraud as the prominent source of fraud losses.
The ranks of those who commission the attacks, as well as the mules who provide logistical support, will continue to increase at the same pace, if not more quickly, as economic conditions remain suppressed. The result will be an increase in the volume of attacks in general but with a particular emphasis on the kinds of fraud that typically accompany prolonged recessions, most notably first-party fraud.1 – Trace Fooshee, Senior Analyst, Aite Group
An imperfect first-party fraud solution can also strain relationships with good customers and hinder growth. When lenders have to interpret actions and behavior to assess customers, there’s a lot of room for error and losses. Those same losses hinder growth when, as mentioned before, businesses anticipate credit losses that aren’t actually credit losses.
This type of fraud isn’t a single-time event, and it doesn’t occur at just one point in the customer lifecycle. It occurs when good customers develop fraudulent intent, when new applicants who have positive history with other lenders have recently changed circumstances, or when seemingly good applicants have manipulated their identities to mask previous defaults.
Finally, first-party fraud impacts how your organization categorizes and manages risk – and that’s something that touches every department.
Solving the first-party fraud problem
First-party fraud detection requires a change in how we think about the fraud problem. It starts with the ability to separate first- and third-party fraud to treat them differently. Because first-party fraud doesn’t have a victim, you can’t work with the person whose information was stolen to confirm the fraud. Instead, you’ll have to work implement a consistent monitoring system and make a determination internally when fraud is suspected.
As we’ve already discussed, the fraud problem is complex. However with a partner like Experian, you can leverage the fraud risk management strategies required to perform a closer examination and the ability to differentiate between the types of fraud so you can determine the best course of action moving forward.
In the coming weeks, I’ll continue my exploration of this topic with a dive into synthetic identity fraud and account takeover fraud prevention, and how robust fraud management solutions can help you minimize customer friction to improve and deepen your relationships while preventing fraud. Contact us if you’d like to learn more about how Experian is using our identity expertise, data, and analytics to improve identity resolution and detect and prevent all types of fraud.
1Key Trends Driving Fraud Transformation in 2021 and Beyond, December 2020