What is First-Party Fraud?

Estimated reading time: 5 minutes

When you think of fraud, you likely think of someone stealing another person’s information in order to get a loan or credit to buy certain products. This specific kind of fraud is called third-party fraud, and it has a clear victim — the person whose identity is stolen. Most fraud prevention techniques and tools are focused on preventing and detecting third-party fraud, such as an identity verification service, because it is the most obvious and well-known type of fraud. Though third-party fraud may be the most well-known type of fraud, it is definitely not the only type. 

Another type of fraud that can occur is first-party fraud. Though first-party fraud is harder to pinpoint because it occurs without any stolen identity, it can still have huge consequences for its victims. In fact, 60% of financial institutions report first-party fraud as the main source of loss due to fraud. In this article we’re going to learn about what first-party fraud is, who can commit it, and how you can prevent it.

What is first-party fraud?

First-party fraud is when a customer gets a payment, loan, or credit without any intention of paying the loan or credit back, or manipulates their information to get a more favorable payment. Unlike when someone takes out a loan with the intention of paying it back but is unable to repay it due to certain circumstances, first-party fraud occurs when someone knowingly manipulates the system to get money they are not eligible for or have no plans to pay back, even if they have the financial means to do so. First-party fraudsters do not pretend to be anyone else so they can pass basic fraud prevention tests like identity verification — making it harder to catch first-party fraud.

Who can commit first-party fraud?

Any individual or group of people can commit first-party fraud by lying about their intentions or information. First-party fraudsters do not steal anyone else’s information, however they may misrepresent their information to get a better loan or payment. For example, an individual may manipulate information in an insurance claim to get a payment they aren’t eligible for, or hide information to get a better policy premium than they otherwise would. An individual may also lie about circumstances regarding their income or employment in order to get a better mortgage or credit card loan. Sometimes, first-party fraudsters are people with good credit and clean track records that, for whatever reason, have fraudulent intent. 

What are the consequences of first-party fraud?

Unlike third-party fraud, which directly impacts the consumer whose identity is stolen, the victim of first-party fraud is less clear. Lenders, such as owners of financial services businesses, are the main victims of third-party fraud. There is usually not one specific individual who suffers when first-party fraud is committed. Instead, the organization who has supplied that individual with a payment suffers as a whole. Common victims of fraud are financial services organizations, healthcare, government, and insurance.

Though the consequences of first-party fraud aren’t as obvious as the consequences of stealing an identity, it can be significantly damaging nonetheless to the organizations who are victims of first-party fraud. Though losses from first-party fraud are more difficult to track because they can be written off as basic credit loss, it is still estimated that first-party fraud results in annual losses of tens of billions of dollars.

Other than just leading to financial consequences like loss, first-party fraud can also lead to legal consequences — if a business doesn’t have an effective customer due diligence program and first-party fraud occurs frequently, the business may face regulatory sanctions for not complying. First-party fraud can also lead to reputational damages. If a business provides many payments or loans that aren’t paid back and customers notice, high-quality customers may be less likely to use their products or financial services in the future because they are afraid the business will raise interest rates or go bankrupt in the future. 

What can you do to prevent first-party fraud?

First-party fraud prevention is more complicated than third-party fraud prevention because traditional identity management tools are oriented on ensuring people are who they say they are, not on whether all their information is completely accurate or their intentions are good. That being said, businesses can still use different tools and tactics to prevent first-party fraud.

The Federal Trade Commission reported that 80-85% of identity fraud occurs when someone combines real and fake information to take out a loan, such as addresses, Social Security Numbers, and phone numbers. This means that fraud often occurs because people lie about specific pieces of information. To prevent this, you can use a public and private records database that pulls billions of records from thousands of sources in order to cross-check the information provided to you and verify its accuracy. For example, you can cross-check the name of a person with their address history or utility bill records.

If someone is applying for a loan that doesn’t have a clear credit history, you can use unbanked data sources to gather a more complete picture of their history. Unbanked data sources provide you with information pulled from sources other than traditional credit header bureaus, allowing you to build a profile on someone even if they don’t have credit. 

Unfortunately, because first-party fraud is about bad intentions, not false identity, first-party fraud can occur at any point in the customer lifecycle. Sometimes people may provide accurate information and have a clean credit history, and still commit first-party fraud if their intentions change, whether it’s due to a change of circumstances or something else. To prevent first-party fraud at every point, lenders should use ongoing monitoring to continuously monitor the circumstances of the people they’re providing credit to and receive notifications for when something of concern arises, like if an individual becomes sought after for debt recovery collection by another lender. When businesses maintain a continuous eye on their consumers and use big-data analytics tools to analyze data across a variety of different channels, they will be better able to catch first-party fraud before it directly impacts their business.

If you’d like to see how a public and private records database can help you prevent first-party fraud, get started with Tracers today.