Online fraud takes many different forms. Perhaps one of the most insidious of these is first-party fraud, in which a seemingly legitimate cardholder is the party behind the scam.

First-party fraud is a massive problem in eCommerce, and it’s only going to get worse the longer banks and financial institutions continue to downplay its effects. Take chargebacks, for instance; research suggests that first-party chargeback abuse was the most prevalent fraud attack method in 2021, rising from fifth place in 2019.

What do banks and financial institutions, specifically, need to know about first-party fraud? And, what advice could they provide to their clients about fraud prevention and recovery?

What is First-Party Fraud?

First-party fraud is a type of fraud that is committed by the actual account holder or someone who has been given authorized access to the account. This is in contrast to third-party fraud, which is committed by an outside party who has obtained unauthorized access to the account.

First-party fraud can take many forms. For example, an account holder deliberately misuse their own account for personal gain, and file a chargeback without a valid reason.

First-party fraud could also be as simple as someone setting up a service in another person’s name. For instance, getting cheaper car insurance by applying under a parent’s name to get a cheaper rate.

Examples of Common First-Party Fraud Scams

As we alluded to above, first-party fraud can take several forms. The most common first-party scams include:

• Fronting: This is the result of a fraudster setting up a service in someone else’s name to save money. An example of this would be an individual using another’s identity to sign up for a service in order to get a cheaper rate.
• Address Fronting: This is the act of completing an application using a fake address in order to attain less costly rates according to regional pricing.
• De-Shopping: This is also known as wardrobing, which is when a cardholder purchases a wearable or usable item with the intent to return it for full price.
• Goods Lost in Transit Fraud (GLIT): This extremely common form of first-party fraud occurs when a cardholder orders an item online and then claims that they never received the item.
• Refund Fraud: The cardholder completes a purchase with the intent of demanding a refund after the fact.
• Sleeper Fraud: Sleeper fraud happens over a period of time, during which a fraudster will continuously use 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.
• Insurance Fraud: An account holder makes false claims to try and get an insurance payout to which they’re not entitled.

First-Party Fraud Red Flags

First-party fraud can be extremely difficult to identify. In most cases, they don’t raise any red flags because the “fraud” happens after the transaction.

Thankfully, there are some warning signs that can help financial institutions and their clients avoid becoming victims.

None of these signs should be considered incontrovertible evidence of fraud on their own. When taken together, however, red flags can help paint a more detailed picture of each account holder’s intentions. Examples include:

#1 | The Cardholder Has Done This Before

The odds are strong that problematic customers will leave a record of their activity. People that successfully commit friendly fraud tend to do it again. According to Visa, nearly one in five consumers who have filed a chargeback dispute have committed first-party fraud by submitting false claims in order to get their money back on legitimate purchases. In fact, according to the NRF, the losses from friendly fraud total over $25 billion a year.

Merchants should be advised to keep meticulous transaction records for every customer and transaction. They should also set order review parameters to ensure irregularities aren’t being overlooked.

#2 | The Cardholder Ordered Multiples of the Same Item

Customers often buy more than one of the same item if they like it. Clothing, for instance, is a good example of this. However, scale is important to recognize and be alert for.

Merchants should be advised to ask whether the buyer has requested refunds for one or more similar items in the last few months. Or have they ordered hundreds of one particular item, which can then be tracked to a resale wholesaler online?

Whatever the case may be, merchants can more easily spot cases of fraud when precedents have been set and transactions are thoroughly reviewed.

#3 | The Cardholder Uses Other Aliases

Another area financial institutions might influence their clients to consider is periodically reviewing the address and shipping details associated with every transaction. Through machine learning tools built into many CRMs, merchants can quickly identify anomalies in their customer orders for further investigation.

For instance, if a cardholder has used several aliases on a particular site and/or shipped to several different locations over a given period of time, this person could be a first-party fraudster.

#4 | The Cardholder is Spending Large

Large tickets are a good thing for merchants. But, in the interest of preventing fraud, it’s important to advise merchants to proceed with caution. If a cardholder is spending quite a lot of money at once and historical data does not match up, further investigation or authentication may be warranted.

Banks & Merchants Profit From Stopping Fraud

Ultimately, merchants are responsible for their fraud prevention efforts, but it certainly behooves financial institutions to get involved and maintain an open dialogue with their clients concerning fraud.

Banks also benefit from helping merchants remain profitable. Therefore, it stands to reason that banks should also be helping merchants develop comprehensive strategies to stop first-party fraud at its source, and shift focus back to what counts: increasing revenue.