First party fraud is the most frequently occurring type of fraud, and one that’s easily missed by merchants and banks alike. First party fraudsters cost businesses approximately $4 to $17 billion each year, according to the Federal Reserve. However, the true out-of-pocket cost attributable to first party fraud is three times the recorded cost of ‘friendly’ fraud chargebacks.
Many fraudsters are repeat offenders. This is both a frustrating challenge and an opportunity. Because first party fraudsters often return to the same business repeatedly, data analytics tools can help spot trends and crack down on their attempts. This guide will help illustrate how to recognize and prevent first party fraudsters from targeting your business.
What is a first party fraudster?
First party fraudsters are people who misrepresent their identity or provide false information for financial or material gain. Sometimes known as “friendly fraud”, these schemes typically involve an actual consumer obtaining goods or services from a merchant, only to then claim they did not make the purchase, receive the goods, and/or would like a refund from a false claim. Ultimately, the goal is to keep the goods or services without paying for them.
[LISTEN: Podcast: First-Party Fraud Lowers Profits by 25%]
First party fraudsters are often good at their crimes, which can sometimes make it hard for customer service to point out a fraudulent claim. Moreover, sometimes a first party fraud starts as a true claim, and the customer’s choices lead to an incident of friendly fraud. For instance, a customer could request a legitimate refund for a product they intended to return, only to end up keeping the item—and the refund.
In most scenarios, however, fraudulent customers are more intentional with their crime.
Examples of a first party fraudster
First party fraudsters use a few common methods to carry out their crimes. They may claim they didn’t receive items that they did, or they might state that the item received didn’t match the online description. Or, the first party fraudster may claim they don’t remember making the purchase. Each of these instances can be very hard to detect, since mistakes do happen and businesses must be very committed to customer service.
In our 2020 benchmarking report, we identified these prevalent approaches to first party fraud:
- The customer reports that the item wasn’t received, although evidence of a complete download or delivery exists.
- The customer claims that the item purchased doesn’t match the online description and no longer wants it. This is especially effective for digital goods that cannot be returned and/or digital keys that cannot be revoked.
- The customer claims they canceled the order but it was still sent to them.
- The customer initiates a chargeback for a known non-refundable item or service, such as for travel insurance after the travel has taken place.
- The customer initiates a chargeback claiming to their issuer that they returned the item but a refund was not processed.
- The customer states they don’t remember making the purchase, that their credit card must have been abused, and they have had high chargeback or refund rates historically. Probability is increased when the purchase involves high-value, easily-resold product categories, such as gift cards.
Ultimately, first party fraudsters take advantage of generous customer service and dispute resolution to end up with both the goods and the funds. Unfortunately, merchants bear the cost of fulfilling the order, acquiring the “customer”, resolving the disputed charge, and potentially issuing the refund—not to mention the loss of inventory.
First party fraud red flags: how to spot first party fraudsters
It’s tricky to detect first-party fraud, but it’s possible, with the right approach and software. Whitney Anderson, CEO and Co-founder of Fraud.net, says that first-party fraud often starts as an opportunistic decision. “[One] of the amazing things in (first-party fraud) is that we’ve found that once an individual kind of turns that corner, once they get away with (first party fraud), once on average, they’ll go at least nine times, if not more,” said Anderson.
There are a few behaviors and indicators that can serve as first party fraud red flags, including:
- Opening accounts with synthetic identification. The information associated with a synthetic ID is either completely or partially fabricated.
- Boosting credit limits — artificially and through manipulation of behavior scores.
- Making false claims of fraud.
- Unusually large order sizes.
- Orders that ship to an address other than the billing address.
- The same customer purchasing multiple small transactions in a row.
Of course, some first party fraudsters are part of well-organized operations. In these instances, companies can use analytics software that will systematically scan different data sources to find links between people, identities, places, and events that can indicate connected fraud and money laundering campaigns.
“The most significant way to prevent [first party fraud] is to be able to tap into a consortium data set where digital merchants have pooled together transactional history from fraudsters,” said Anderson.
How to crack down on first party fraudsters
While first party fraud isn’t always obvious, there are steps that businesses can still take to prevent fraudulent chargebacks from eating away at profit margins.
1. Participate in a data consortium
Merchants blacklist first party fraudsters only 15% of the time compared to over 85% in third party fraud scenarios. This enables first party fraudsters to continue their schemes. On average, our data shows that first party fraudsters committed their crimes three times more than their third-party counterparts, and are likely still continuing their fraudulent behavior undeterred.
However, it is possible to detect a large percentage of first party fraud through consortium data, machine learned modeling, and advanced analytics. Fraud.net operates the largest global anti-fraud consortium and platform-as-a-service for enterprises across industries. Through collaboration, big data, and advanced AI, we can help members identify and stop fraud attempts long before they have to experience a loss.
2. Implement a robust fraud monitoring program
A fraud monitoring program can help your business spot first party fraudsters before they’ve targeted your business multiple times. Fraud.net offers a suite of AI tools and models that make it possible to detect fraud with high precision in real-time. Plus, Fraud.net offers chargeback protection for merchants.
3. Optimize your shipping procedures
Finally, consider ways to reduce the opportunity for first party fraud through tracking and shipping procedures. For instance, ask for a signature on delivery to create a paper trail that proves product orders and delivery. Clear and precise refund policies can also reduce customer fraud claims on falsified product descriptions. Make sure your refund policy states specific guidelines for the time period during which the customer has to return a product.
These procedures will help your legitimate customers get the best possible experience with your brand, while also mitigating the risk of fraud.