This article was updated on October 31, 2023
In a series of articles, we talk about understanding the different types of fraud and how to solve for them. This article will explore first-party fraud and how it’s similar 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 as more consumers are active online.
Money mules constitute up to 0.3% of accounts at U.S. financial institutions, or an estimated $3 billion in fraudulent transfers.
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. 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.
Additionally, our robust fraud management solutions can be used for synthetic identity fraud and account takeover fraud prevention, which 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.