First-Party Fraud

Yes, even if the customer hasn’t shown any signs of fraudulent behavior, they can develop a bad reputation or fraudulent intent at any stage of their lifecycle on a digital platform. For example, a form of first-party fraud is chargeback fraud, which often happens when a legitimate customer disputes a transaction or claims they didn’t make a purchase, even though they did.

For example, first-party fraud can also happen when:

• Users with positive credit histories face changes in life and want to benefit financially.
• Customers manipulate their identities to hide past errors.

Any company involved in financial transactions often conducts an internal fraud risk assessment. It helps prioritize risks linked to that particular business, prioritizing edge cases and more severe risk factors that need extra attention. In practice, businesses need to review their internal fraud prevention controls and systems to spot vulnerabilities that fraudsters could exploit. For regulated businesses, this process is called AML, or anti-money laundering risk assessment. 

Through a fraud risk assessment, businesses can:

• Identifying fraudulent cases or potential links, such as money laundering risks.
• Assessing exposure to these risks.
• Implementing measures to manage and improve these fraud risks.
• Continuously improving these measures to strengthen the company’s risk management system.

Refund fraud is a form of first-party fraud and happens when individuals or groups exploit an online store’s return policy to falsely claim a refund. Their goal is to deceive the business into issuing compensation for expenses they never incurred, allowing criminals to keep both the money and the products. Some fraudsters even use the “double dipping” technique, which means receiving compensation from both the retailer and their bank.

First-party fraud occurs when a person or company uses their own identity (for example, they dispute a legitimate transaction to get a chargeback or they use their own account to apply for credit). In the meantime, third-party fraud uses another source or an external actor that provides fake data or uses a stolen identity to commit crimes online. That’s why third-party fraud often happens without the victim’s knowledge.

It’s vital for every business to have a proper fraud prevention strategy that consists of multiple measures and that is quick enough to spot criminal behavior with accuracy in mind. A step-by-step program helps determine custom steps that your business can take to prevent, detect, and respond to fraud as soon as possible. 

Some steps that will help you shape your fraud prevention strategy:

• First off, you need to choose (or appoint a fraud prevention/safety manager) a person who will be the main stakeholder in implementing and monitoring each part of the plan.
• Set clear, documented goals for minimizing fraud losses, such as the chargeback rate, and improve your fraud detection processes. 
• Consult with specialists and implement automated fraud prevention solutions that help assess risks and build effective processes that cater to large transaction volumes and increase security.