Fighting First Party Fraud – Best Practices for Businesses and Financial Institutions
While the popular image of digital fraudsters is a shadowy cabal hacking corporate systems or tricking individuals into handing over funds, data, or login credentials, a substantial portion of fraudulent activity involves consumers. Whether opportunistic — like a consumer who maxes out their credit card and then asks for a refund — or criminal, these schemes can be very damaging.
Create a Fraud Policy
The most basic definition of fraud is a malicious misrepresentation of who you are. Fraudsters often use their real names, with minor variations in contact information. Fraudulent activities can often go undetected by traditional fraud detection methods, which increases the chances of the fraudsters escaping scrutiny and remaining unnoticed.
First party fraud can be opportunistic – perpetrated by a single individual on a one-off basis – or highly organized and carried out at scale by an entire criminal gang. Regardless, this type of fraud can have profound consequences for companies.
Aside from the financial loss of unpaid loans and chargebacks, businesses can face other operational costs as they spend time and resources investigating these cases and attempting to recover the losses they experience. Lastly, these cases can also cause reputational damage as consumers lose trust in the business and its ability to protect their information. This is why creating a policy defining what constitutes fraud is essential.
Create a Fraud Prevention Program
First-party fraud is opportunistic and can be carried out by a single or small group of fraudsters. It can also occur in various industries, from credit card companies to telecoms. And unfortunately, many of these businesses are left with uncollectible debts and hefty chargeback costs.
Various indicators can help identify individuals who engage in first-party fraud. Paying attention to these signs and taking prompt action to prevent further harm is essential. For example, a suspiciously large purchase from a high-risk customer or an overtime employee might indicate fraud. And, if an employee is new to your company, this could also be a sign of fraud risk.
As technology changes, identity thieves change tactics, and the economy shifts, you should review your fraud prevention program regularly. This can help ensure that your fraud detection tools and chargeback recovery programs are still practical. You can also work with your service providers to ensure they address new fraud risks.
Establish a Fraud Detection System
Fraud detection is a big challenge for financial institutions. This is especially true when a fraudster has established a synthetic identity hidden in a portfolio of accounts.
Developing a system that can recognize this type of fraud is essential by examining data for known patterns. This includes identifying tell-tale signs, like aliases, multiple email addresses, or phone numbers used for numerous applications for credit cards or loans.
Other red flags include losing a card often and regularly claiming unauthorized charges. These types of activities, in isolation, don’t mean fraud, but when combined, should raise suspicions.
Another way to identify first-party fraud is by using link analysis to examine data. Using public data sources like credit reports or industry consortiums can effectively prevent fraud by helping to identify fraudulent patterns and improving sign-up procedures. This can also help reduce bad debt losses and improve collections.
Implement a Fraud Prevention System
For businesses and financial institutions, implementing a system that can recognize suspicious patterns is the best way to protect against first-party fraud. Unlike traditional third-party scam, which requires impersonation or stolen identity, first-party fraud is much harder to detect because fraudulent transactions are often legitimate-looking.
For example, opportunistic first-party fraud can be committed by customers who don’t like their purchase or someone who took over an account and wants to save a chargeback. It can also be achieved by people engaged in GLIT fraud, who return empty boxes for a refund and then vanish.
While identifying these incidents isn’t always easy, merchants must take action quickly. This includes compiling evidence of fraud, restricting the customer’s account, and preparing an official representation. Using an anti-fraud solution that monitors transactions and flags them for review is also a good idea. This can help prevent fraud when a customer deliberately tries to circumvent your security measures by using a fake identity or modifying documents.