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First-party fraud: What it is and how to guard against it

Sep 07, 2018 Philip Burgess

First-party fraud: What it is and how to guard against it

From finding an unusual statistic to buying a one-of-a-kind heirloom or antique, virtually everything is easier to come by in today's instant information era.

But unfortunately, the age of convenience is not without its unfortunate side effects, as fraud has proliferated. In 2016, for instance, 15.4 million Americans were affected by it, based on estimates from Javelin Strategy & Research. The frequency of fraud hasn't subsided despite increased awareness among business owners and consumers, as 50 identity thefts occur every 60 seconds, according to the Identity Theft Resource Center.

There's a particularly pernicious threat that is sapping a tremendous amount of business owners' collective time, money and energy. It's called first-party fraud, and over the past 20 years or so has intensified in scale and scope. But what is first-party fraud? And how can you guard against it? The following is a brief overview of the scheme, how it manifests itself and what you can do to diminish your risk of being victimized.

What is first-party fraud?
First-party fraud is a premeditated scheme whose targets are primarily business owners, rather than customers, as is typically the case for third-party fraud. Otherwise known as "intent not to pay fraud," first-party fraud starts out in ways, not unlike most other transactions, where a customer seeks to buy products or services by way of credit. Typically during the approval stage, everything appears to check out, suggesting applicants are creditworthy because they make payments on time and don't have major outstanding debts. What isn't known to the lender is the applicant has no intention of following through on the amount he or she is borrowing. In other words, they're relying on their trustworthy track record - authentic or synthetic - to fool lenders into believing that they're a safe bet, when in reality they're the antithesis of trustworthy.

This is different from third-party fraud because the perpetrator is using his or her own identity - or one that's been invented out of whole cloth - rather than stealing someone else's. This is why first-party fraud can be extremely difficult to pinpoint before the effects become apparent because credit histories frequently don't raise any red flags.

Sign with a cross through the word "fraud."You can reduce the risk of fraud by taking a more proactive approach to identifying its characteristics.

How common is first-party fraud?
Because first-party fraud is so hard to detect, small-business owners and organizations affected by it often remain unaware at first. In other words, it's only later on that companies realize they were scammed. What they thought was a nonpayment due to bad credit or a misunderstanding on the part of the customer or merchant was actually attributable to first-party fraud. In either case, charge-off rates have proliferated. Indeed, according to the Federal Reserve, it's nearly two times more common today (9.9 percent) than in the previous 18 years, where the charge-off rate averaged 5 percent. The Federal Trade Commission estimates that approximately 85 percent of identity fraud cases involve fabricating one or several pieces of credit-related information. This may include contrived Social Security numbers, names, dates of birth and addresses.

As important as understanding what first-party fraud is, it's of little value without knowing how to reduce your risk. Here are a few recommendations:

Compare and contrast current activity with account history
An excellent predictor of future intentions is past behaviors. A classic indication of first-party fraud is if the scammer is engaged in actions that run counter to his or her track record, SC Media advised. The best way of going about this is through comprehensive behavior profiling, where you can examine their banking activities across more than one channel.

Share information
First-party fraudsters rarely attack only one organization, given the lengths at which they go to avoid detection. Thus, security and intelligence experts recommend the sharing of analytics so other companies are clued into common first-party fraud characteristics, such as defaulting on early payments.

Make more regular use of alternative credit data
From subscriptions to rent, alternative credit gives you a clearer indication of customers' payment behaviors. Although frequently associated with how lenders vet unbanked individuals, alternative credit can a provide a greater sense of confidence that borrowers are legitimate.

With the verification systems available from Microbilt, scammers have met their match. We provide the tools and solutions that can help you stay above the fraudster fray so all your loan decisions are made with both eyes open. 

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