There is more to fraud than just identity theft

August 30, 2009 by Guest Contributor

By: Ken Pruett

I find it interesting that the media still focuses all of their attention on identity theft when it comes to credit-related fraud.  Don’t get me wrong.  This is still a serious problem and is certainly not going away any time soon.  But, there are other types of financial fraud that are costing all of us money, indirectly, in the long run.  I thought it would be worth mentioning some of these today.

Although third party fraud, (which involves someone victimizing a consumer), gets most of the attention, first party fraud (perpetrated by the actual consumer) can be even more costly.  “Never pay” and “bust out” are two fraud scenarios that seem to be on the rise and warrant attention when developing a fraud prevention program.

Never Pay
A growing fraud problem that occurs during the acquisition stage of the customer life cycle is “never pay”.  This is also classified as first payment default fraud.  Another term we often hear to describe this type of perpetrator is “straight roller”.

This type of fraudster is best described as someone who signs up for a product or service — and never makes a payment.

This fraud problem occurs when a consumer makes an application for a loan or credit card. The consumer provides true identification information but changes one or two elements (such as the address or social security number).  He does this so that he can claim later that he did not apply for the credit.  When he’s granted credit, he often makes purchases close to the limit provided on the account.  (Why get the 32 inch flat screen TV when the 60 inch is on the next store shelf — when you know you are not going to pay for it anyway?)

These fraudsters never make any payments at all on these accounts. The accounts usually end up in collections.

Because standard credit risk scores look at long term credit, they often are not effective in predicting this type of fraud.  The best approach is to use a fraud model specifically targeted for this issue.

Bust Out Fraud
Of all the fraud scenarios, bust out fraud is one of the most talked about topics when we meet with credit card companies.  This type of fraud occurs during the account management phase of the customer lifecycle.  It is characterized by a person obtaining credit, typically a loan or credit card, and maintaining a good credit history with the account holder for a reasonable period of time.  Just prior to the bust out point, the fraudster will pay off the majority of the balance, often by using a bad check.  She will then run the card up close to the limit again — and then disappear.

Losses for this type of fraud are higher than average credit card losses.  Losses between 150 to 200 percent of the credit limit are typical.  We’ve seen this pattern at numerous credit card institutions across many of their accounts.

This is a very difficult type of fraud to prevent. At the time of application, the customer typically looks good from a credit and fraud standpoint.  Many companies have some account management tools in place to help prevent this type of fraud, but their systems only have a view into the one account tied to the customer.  A best practice for preventing this type of fraud is to use tools that look at all the accounts tied to the consumer — along with other metrics such as recent inquiries.  When taking all of these factors into consideration, one can better predict this growing fraud type.

Related Posts

AML transaction monitoring stands as a crucial barrier against financial crimes, which ensures the integrity of financial systems worldwide.

April 18, 2024 by Julie Lee

Anti-money laundering and fraud prevention have historically been separated, but here's why that might not be a good idea.

March 27, 2024 by Julie Lee

Know Your Customer (KYC) procedures are a requirement for banks and other financial institutions to collect and verify the...

March 21, 2024 by Stefani Wendel