What is First-Party Fraud?

November 9, 2023/ Jarrod Wright /

First-party fraud represents a significant financial risk that occurs after a transaction, and it’s crucial for all merchants to understand this threat to effectively counteract it.

First-party fraud occurs when customers or buyers deceive a business or service provider, rather than the traditional fraud scenario where a third party (someone other than the buyer or seller) is committing the fraudulent act. This can happen deliberately, where the customer intentionally sets out to deceive, or accidentally, where their actions might be fraudulent but aren’t malicious.

Common Examples of First-Party Fraud

First-party fraud, similar to third-party or criminal fraud, encompasses a broad range of deceptive schemes, all connected through the involvement of a supposedly legitimate user. Recognizing the different types of these scams is step one for preventing them.

Here are a few tactics to be on the lookout for:

Application Fraud

This happens when cardholders distort their personal information for better terms on loans or credit lines, such as using a rural address instead of an urban address for cheaper car insurance.

Refund Fraud

When customers deliberately manipulate the refund process, which includes “wardrobing” or claiming non-received goods while keeping them, this is a case of return fraud.

Cyber Shoplifting

This is a deliberate act where a purchase is made with the intention of filing a false chargeback later, essentially stealing from the merchant.

Friendly Fraud

Friendly fraud chargebacks happen when chargebacks are filed without valid reasons, often due to misunderstanding or accident, resulting in unpaid goods for the customer.

Wardrobing/De-Shopping

When items are purchased with the intention of using them temporarily and then returning them for a full refund, this is wardrobing.

Goods Lost in Transit Fraud (GLIT)

False claims about online orders being undelivered or damaged sometimes involve returning empty boxes to secure a refund before they can be reversed.

Unintentional, Opportunistic, & Organized First-Party Fraud

First-party fraud encompasses several tactics and situations, which can be broadly categorized into unintentional, opportunistic, and organized types.

Unintentional First-Party Fraud

This tends to happen most when cardholders don’t fully grasp the difference between a refund request and a chargeback. They may be unhappy, confused about the return policy, or simply not recognize the merchant’s billing details. These situations aren’t typically malicious; the buyer might just be unaware of the repercussions of their actions.

Opportunistic First-Party Fraud

Even legitimate cardholders can sometimes yield to temptation and exploit a situation for their benefit. This could occur if they dislike the product, a family member made an unauthorized purchase, or if they think obtaining a refund is too cumbersome. While not always intentionally harmful, this behavior still harms the merchant.

Organized First-Party Fraud

Some fraudsters plan to commit first-party fraud from the get-go, such as in instances of cyber shoplifting. Unlike the other types, this is more deliberate and premeditated.

Common Signs of First-Party Fraud

Detecting third-party fraud involves recognizing certain red flags, and while spotting first-party fraud can be more challenging, there are signs to look for.

Here are five common indicators of potential chargeback abuse:

Red Flag #1 | Recurring Offense

As demonstrated above, some cardholders might file a chargeback for convenience, and many first-party fraudsters may repeat the act within 60 days. If unchecked, they could be motivated to continue.

Red Flag #2 | Multiple Orders of the Same Item

While many consumers may buy multiple versions of a favorite item, excessive repeat purchases might hint at fraud. Such behavior could signify “wardrobing” or even intentional cyber shoplifting with plans to resell.

Red Flag #3 | Use of Multiple Aliases

If a cardholder uses several accounts, ships to different addresses, or has multiple users on one account, it’s wise to monitor these activities. Any returns requested to different addresses might suggest address fraud.

Red Flag #4 | Large, Unexpected Purchases

While merchants welcome big sales, a sudden, large purchase, especially from a new customer or a foreign location, should raise suspicion. Such transactions often correlate with fraud and chargebacks.

Red Flag #5 | Fitting the Fraudster Profile

Typically, first-party fraudsters are younger, tech-savvy males from urban areas with limited financial means. While these traits alone aren’t definitive, they could be telling in combination with other signs.

How to Prevent First-Party Fraud

First-party fraud tends to manifest after a transaction, appearing legitimate until the cardholder engages in fraudulent activities like fronting a bill, returning used goods, or initiating a friendly fraud chargeback. How can one effectively counteract these schemes? Here are some key steps to tackle first-party fraud:

#1 | Clarify the Issue

Understand the distinctions between first-party and third-party fraud. Recognize the signs and comprehend which tactics are being utilized against your business. Rely on your data analysis and internal decision-making processes, possibly seeking assistance from external data analysis experts. A well-established system makes identifying fraud types more straightforward.

#2 | Spot Suspicious Transactions

With a solid first-party fraud detection strategy, you’ll be better positioned to address such incidents. Categorize the fraud type correctly to formulate an appropriate response. In cases where fraud is evident, gather proof, limit the user’s access, and contact the bank swiftly. In situations like friendly fraud, you’ll have the necessary information to construct a strong representment case.

#3 | Implement Solutions

While completely preventing first-party fraud might not be feasible, the data acquired from handling suspicious transactions can be invaluable. Analyzing past disputes and chargebacks can block suspicious activities and bolster your cases for revenue recovery over time.

#4 | Continuously Refine Your Approach

Evaluating and adapting your first-party fraud strategies over time ensures you discard ineffective methods and enhance successful ones, optimizing your chances of recovering losses from such fraud.

#5 | Seek Professional Assistance

Prevention is key in combating both third-party threats and first-party fraud schemes. If your resources are stretched thin, don’t hesitate to seek external help to manage and mitigate these risks effectively.

Last Update: November 9, 2023