First-Party Fraud

April 19, 2022 | 12 min read

4 Signs You’ve Been a Victim of First-Party Fraud & How to Respond

When you think about fraud, you probably imagine a shady figure in a dark hoodie, tucked into the corner of some dusty basement. You might picture a Mr. Robot type of character, staring at a laptop with a nefarious smirk.

Sure, those characters are out there. But, what if we told you the fastest-growing type of fraud isn’t committed by a third-party criminal. Instead, what if we told you the party responsible for more than 60% of all chargebacks might be cardholders themselves?

In this article, we’ll take a deep dive into the topic of first-party fraud. We’ll explain how it happens, what to look out for, and what you can do about it.

What is First-Party Fraud?

First-Party Fraud

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First-party fraud occurs when an individual receives goods or services after promising to make a future payment for those items. However, the buyer has no intention to do so. Examples include applying for a loan which the borrower won’t pay back, or filing a false chargeback claim.

Put simply: a first-party fraud attack refers to any fraudulent activity perpetrated by a consumer, rather than by a third-party fraudster. For example, if a cardholder takes out a loan they have no intention to pay back, or if the user buys an expensive item on their own credit card, but has no intention to actually pay for it.

One of the most common ways in which consumers commit first-party fraud is chargeback abuse. In these cases, the act of ‘fraud’ lies in the false claim itself, rather than the transaction. This practice, also known as ‘friendly fraud,’ cost merchants an estimated $48 billion in 2021.

The unique thing about first-party fraud is that it’s not always intentional. It can be committed willfully, or it can be a mistake or misunderstanding by the perpetrator, as we’ll see later.

How First-Party Fraud Happens

First-party fraud doesn't technically need to be committed by a single individual. These schemes can be conducted by individuals or by groups of people, and can be done on behalf of the buyer, or a third party.

In a nutshell, the two main categories of first-party fraud are:

First-Party Fraud

Opportunistic

fraud perpetrated by an individual or small group of individuals.

First-Party Fraud

Organized

fraud performed by a large-scale criminal organization or group.

Some types of first-party fraud can make use of both categories simultaneously.

Fraudsters tend to look for people who are vulnerable or out of their element. For example, if a college student decides to study abroad for a time, that person might be targeted by smaller criminal groups on behalf of a larger fraud ring. They may talk the user into willfully sharing their credentials and identity for used over a long period to make fraudulent purchases.

Another group of people who are often targeted by cybercriminals, or who are enticed into joining forces with them, are people who are struggling financially. After the chaos and upheaval of the 2020 pandemic, many thousands of people across the globe experienced a job loss or lengthy span of unemployment that may have encouraged them to seek less savory money streams.

Whatever the case, once fraudsters gain access to someone's banking and personal information, the goal is often to use that data to scam others. Let’s go over how first-party fraudsters might use the data they mine from you or someone you know.

The 7 Most Common First-Party Fraud Scams

First-party fraud isn't just one thing; it's an entire ‘family tree’ of different but related fraud schemes. The complicity of the “legitimate” (i.e. authorized) user is the uniting thread.

First-party fraud can manifest via several scenarios, all of which can be extremely easy to miss. But, awareness of the various scams out there is a decisive first step toward fraud prevention.

Here are some examples of common first-party scams:

Fronting

Setting up service in someone else’s name to save money. For instance, a young driver obtains cheaper car insurance by applying under a parent’s name in order to pay a lower monthly premium.

Address Fronting

Completing an application using a fake address. The fake address might be used because it is associated with lower risk; for example, taking out car insurance using a rural address, rather than a city one.

De-Shopping

Buying items with the intent to use them, then later returning them for a full refund. This is commonly done with clothing, and is referred to as "wardrobing.”

Goods Lost in Transit Fraud (GLIT)

Ordering goods online, then falsely claiming that they were either never delivered, or were damaged on arrival. Sometimes, fraudsters engage in GLIT fraud by returning empty boxes to get a refund.

Muling

This happens when a consumer uses their information—or allows their information to be used—for the benefit of a third-party fraudster. According to Aite Group, mule activity increased by 41% in 2020 compared to attack rates before the pandemic.

Sleeper Fraud

Defrauding a merchant or agency over time by using false credentials that reflect normal consumer behaviors. This is meant to build trust, letting the fraudster eventually cash in on a line of credit or significant cash advance in one lump sum.

Friendly Fraud

The cardholder completes a purchase, then files a chargeback without a valid reason to do so. This can be done intentionally or by accident; In either case, the cardholder walks away with goods they didn’t pay for.

First-Party Fraud & Chargebacks

To keep things simple, let’s focus on how first-party fraud relates to the chargeback process for now.

Sometimes, cardholders mistake legitimate purchases for fraudulent transactions. This can happen because the buyer is unable to recognize the merchant’s name on their billing statemen. In 2018 alone, 31 million cardholders filed chargebacks making this claim. In other cases, the buyer might have forgotten they made the purchase. Or, they might have believed they were entitled to a refund they didn’t receive, or which they received later than expected.

This type of ‘accidental’ fraud occurs due to mistakes, miscommunication, or misunderstanding between the two parties. In contrast, some first-party fraud is very clearly intentional.

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In cases of deliberate first-party fraud, the cardholder is fully aware of their actions and how they might benefit them. In this way, they are intentionally defrauding the merchant to “get something for free.”

The consequences for intentional first-party fraud can be severe. The buyer’s funds could be tied up for weeks or months. Plus, the cardholder may be penalized if caught; up to and including loss of banking privileges, which would hurt the cardholder’s credit score. However, there is a decided ‘gray area’ that is difficult to define concerning first-party fraud. As a result, banks and merchants are hard-pressed to identify these attacks.

Learn more about friendly fraud

Top 4 First-Party Fraud Red Flags

Experts have identified specific red flags to spot potential third-party fraud. By themselves, none of these warning signs necessarily point to a problem; large purchases, for example, aren’t indicative of a full-scale fraud issue. But, at the same time, you must recognize the signs that warrant further investigation.

The same is true for first-party fraud. Below, we’ve picked out four of the most common signs of chargeback abuse as a way to illustrate how this can work.

Red Flag #1 | The Cardholder Has Done This Before

According to our research, 81% of cardholders freely admit to filing a chargeback out of convenience. Furthermore, 40% of consumers who commit first-party fraud will do it again in 60 days. If a cardholder gets away with first-party fraud and sees no consequences, they might be incentivized to try it again.

Pro Tip:

Mirror this effort on social media from time to time, as many customers will purchase directly from their favorite channels, rather than your website.

Red Flag #2 | The Cardholder Has Done This Before

Consumers will often order multiples of the same item if they really like it. Clothing is an excellent example of this; everyone has a favorite shirt they’d like to have in several colors. However, there comes a point when merchants should be wary of repeat purchases made for one particular item. This could be a case of wardrobing. It could even be a sign of mule activity or deliberate cyber shoplifting, as the buyer might request chargebacks on those purchases, then warehouse the goods to resell later.

Pro Tip:

Avoid return fraud and other scams by keeping meticulous records for every transaction. If something looks suspicious, there could be a reason.

Red Flag #3 | The Cardholder Uses Other Aliases

Suppose the cardholder has made purchases from multiple accounts, ships to various addresses, or sets multiple active users on one account. It might be wise to investigate each purchase and keep an eye on them thereafter. If the customer requests returns and wants them shipped to a different address, this could indicate address fraud. Whatever the case, it’s best to practice caution.

Pro Tip:

If your customer creates multiple accounts, disable payments until the cardholder selects a primary account and address. Always keep a record of purchases and activity, too.

Red Flag #4 | The Cardholder is Spending Large

No merchant wants to reject a large sale. However, let’s say the cardholder has never made a purchase from you before, but then drops $10,000 on your site in the middle of the night, from a foreign location. This should be a clear fraud red flag. Smart merchants know these are precisely the types of transactions that often lead to fraud and chargebacks.

Pro Tip:

Earmark EVERY major purchase as potential fraud, even if you are familiar with the cardholder. Timestamps and transaction details will come in handy if you are hit with a chargeback for the amount spent.

4 Basic Steps to Stop First-Party Fraud

Now that we’ve discussed what first-party fraud is, why it happens, and what to look out for, let’s talk about how to defeat it.

We should clarify this point up front: you may be able to stop some first-party fraud. Your options are limited when it comes to ongoing first-party fraud prevention, though. First-party fraud schemes are generally post-transactional. The exchange seems legitimate, right up until the second the cardholder accepts a fronted bill, returns wardrobed goods, or files a friendly fraud chargeback.

So, how can you really fight back? Here are a few steps to help you get started:

#1 | Define the Problem

You have to know the difference between first-party fraud vs. third-party fraud. Look at the signs, and know precisely which schemes are being deployed to hurt your business.

You can’t work with the cardholder to confirm what’s happening, as the cardholder is also the perpetrator. Instead, you must examine your data closely and trust your internal decisioning processes. You need to build out this capacity, or work with a third party who can conduct data analysis on your behalf. Once you have this system in place, identifying which type of fraud you’re dealing with gets much easier.

#2 | Identify Bad Transactions

Once you have a strategy in place for first-party fraud detection, you are better equipped to handle it. Considering all the red flags we listed above, categorizing the incident accordingly will help you prepare your official response. If you can prove the incident was fraud, you should compile any evidence, restrict the user’s account, and contact the bank as quickly as possible. In the case of friendly fraud, for instance, you might have all the ammunition you need to prepare a winning representment.

#3 | Deploy Solutions

As we established, your ability to “prevent” first-party fraud is limited. However, the data you generate from identifying bad transactions and responses could be an incredible asset to help here.

Looking at chargebacks again, we see that analyzing historical data regarding past disputes and representments could help you block suspicious transactions. It will also help you prepare stronger cases and recover more revenue in the long term.

#4 | Adjust Over Time

Another benefit of implementing effective first-party fraud solutions is that, over time, you can evaluate and see what is—and is not—working for you.

The strategy you implement might seem rational at first. But, as time goes on, you could discover that you’re not getting the results you expect. If you make adjustments accordingly, you can see better results for recovering first-party fraud losses.

Need Help?

As they say, “prevention is the best medicine.” That’s true for third-party threats, as well as first-party fraud schemes. What if you are too busy, understaffed, or overloaded to manage that on your own, though?

With more than a decade in chargeback management and recovery, the experts at Chargebacks911 have the advanced tools and industry knowledge to help you prepare a winning fraud prevention strategy. Contact us today for your free demo.

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