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The Rise of Third Party Fraud

First party fraud continues to be a challenge facing institutions and is, arguably, a necessary evil of doing business for institutions today. However, this also can prove problematic when also trying to balance regulatory and consumer pressure to treat customers fairly. Here the advantage tips in favour of the fraudster: how do institutions manage and treat a customer that they suspect of showing symptoms of first party fraud - fairly. Just look at some of the consumer web forums describing tales of woe where customers or credit applicants have negative registrations against their credit history – purportedly for account misuse or supplying false or misleading information. However, let’s not lose sight of the fact that dishonestly making a false representation is now recognised as a criminal offence under the Fraud Act 2006.

Hence, how the institution identifies and manages a suspected first party fraud customer requires very careful tact and diplomacy - assuming of course the institution was able to recognise the symptoms of first party fraud verse genuine bad debt. There will also be a “tipping point” when the fraudster becomes suspicious that the bank knows what is going on, leading them to perpetrate their crime earlier than anticipated.

There are a number of subtle differentiations between first party fraud and bad debt, and how this impacts upon institutions today. First party fraud refers to cases where a consumer opens a credit or debit account and uses it to make payments and purchases that they don’t plan to pay for. It is a pre-meditated fraud where applications for funds are submitted based upon legitimate information which is supported by verified identification. Once accepted in the system the fraudster uses various payment methods such as credit, debit cards and cheques to make purchases with no intention of actually paying, leaving the merchant, financial institution or payment scheme at a financial loss.

What is becoming clearer in these recessionary times is just how fine the line is between bad debt and first party fraud. The main challenge banks face in preventing first party fraud is to prove beyond reasonable doubt that it is pre-meditated and not simply a genuine inability to pay a bill.

The best way to combat first party fraud is to monitor customers and attempt to detect it before it has even taken place. This may sound ambitious but there are identifiable fraudster characteristics which tend to be consistent across the globe. For example there is a greater propensity for a certain age bracket to commit first party fraud. Once these characteristics are identified, banks should scrutinize and observe trends to distinguish between routine and inconsistent activity. A combined strategy of predictive analytics and full end-to-end payment and transaction monitoring best positions financial institutions to deter and shut down first-party fraud. If a customer is identified as suspicious, the activity can then be checked before the fraud is perpetrated thus reducing the risk to the institution. The key to assessing this successfully and reducing the frequency of false positives is by having a real time holistic view of the customer across all of their accounts.

First party fraud is more likely to grow rather than subside going forward. The recent recession has played a role in cash strapped individuals reverting to fraudulent activity to attain goods, which has been reflected in the increase in the level of fraudulent activity since the recession has escalated. While banks have previously gone to great lengths to protect their customers from third party fraud, they must now also take action to protect themselves from the risk of financial loss as a result of first party fraud.

Andy Morris

Risk Business Solutions Consultant