What is first-party fraud?
First-party fraud is a type of financial fraud that occurs when a person uses their own legitimate identity to commit fraud. It should not be confused with third-party fraud, which occurs when a fraudster uses the stolen identity of another person to make fraudulent transactions.
First-party fraud can be tricky to pin down. Some behaviors may resemble first-party fraud but lack the clear intent to deceive. An individual who disputes a legitimate transaction with a credit card company, for example, may not be actively trying to deceive that company into reimbursing their money. But regardless of intent, the company is deceived and may experience a financial loss.
Of course, the term “fraud” generally implies the intent to deceive and defraud. Less-ambiguous examples of first-party fraud include applying for a credit card with the intention to max it out and never pay it off or applying for a personal loan with no intention of repaying it.
Individual cases of first-party fraud may not lead to significant financial losses for banks and other financial institutions. But the total can cost businesses up to $100 billion in fraud losses per year according to a 2023 report by identity verification platform Socure — and that’s in the US alone.
Common types of first-party fraud
So-called “friendly fraud” is one of the more common types of first-party fraud — though the name can be a misnomer, as fraud typically involves deliberate deception for personal gain. First-party fraud is more prevalent than you may think, and some forms of it even go unrecognized by those committing them.
Here are some of the most common examples:
Chargeback fraud
Chargeback fraud occurs when a customer makes a legitimate purchase, receives the thing they purchased, then nonetheless disputes the charge as illegitimate or unauthorized. Customers may commit this form of "friendly fraud” to save time on returns or because they're having trouble dealing with the merchant. But it still results in financial harm to the business, and it’s still technically a type of fraud.
"Lost" or "damaged" goods refund fraud
Related to chargeback fraud, this type of fraud occurs when a customer claims that an item was damaged in transit or that they never received it. (With so many Amazon orders and other packages being stolen from porches these days, it can be difficult for merchants and financial institutions to prove otherwise.) If the refund is approved, the customer makes out with a refund or replacement while keeping the original (and perfectly fine) item.
Willful default fraud
Willful default occurs when someone intentionally chooses not to pay their credit card bills or Buy Now, Pay Later (BNPL) purchases. Why would someone do this? Well, if you're short-sighted or simply don't care about the long-term repercussions of not paying off debt, you can enjoy access to funds you may not otherwise have.
This type of fraud can occur as early as the application process. If somebody uses their real identity to apply for credit or a loan with no intention of paying it back, the bank or credit card company may approve the application — without realizing the risk of doing so until it's too late.
Other types of first-party fraud
Additional examples of first-party fraud may include:
Insurance fraud: When committed under one’s own name, exaggerating or falsifying insurance claims to receive a hefty payout also counts as a type of first-party fraud.
Insider misuse: In some grey-area cases, an individual might exploit access to a friend or family member’s account to make unauthorized transactions. While this is typically classified as third-party fraud, the boundaries can be a bit indistinct — especially if identity data is willingly shared.
Is identity theft first-party fraud?
No — identity theft is typically classified as third-party fraud, which is separate and distinct from first-party fraud. The key difference lies in whose identity is being used:
Identity theft involves the fraudulent use of someone else's identity.
First-party fraud involves the fraudulent use of one’s own legitimate identity.
Understanding this distinction is crucial for financial institutions and fraud prevention teams, which must contend with the different risks associated with both types of fraud. Given the methods involved and the unique scope of each problem, identity theft and first-party fraud require different prevention strategies and forms of protection.
What is first-party fraud in banking?
First-party fraud in banking refers to when individuals exploit their own identity or account to deceive banks and other financial institutions (like neobanks or neobrokers). Because first-party fraud is a general concept with various subtypes, this can manifest in vastly different ways. Examples may include:
Disputing transactions that were actually authorized
Engaging in chargeback fraud
Applying for loans or credit cards with no intention of repayment
This type of fraud can be challenging for institutions to detect, since the identity and credentials being used are legitimate and not stolen. Traditional fraud detection systems that flag unusual account behavior or identity mismatches may not be in the best position to catch first-party fraud.
First-party fraud is a big deal in the banking sector. Not only can it lead to major financial losses, but it can undermine trust in your institution or in the banking system overall. You can combat this type of fraud by investing in robust identity verification processes and closely monitoring customer behavior.
How Fourthline helps banks tackle first-party fraud
Fourthline helps banks, fintechs, and non-financial businesses solve some of the biggest identity challenges they face. Our solutions to help tackle first-party fraud include:
Advanced KYC (Know Your Customer) onboarding
Yes, KYC onboarding is primarily designed to tackle third-party fraud by verifying that individuals are who they claim to be. But robust KYC processes can also play a key role in detecting misrepresentation — even when the individual in question is using their real identity.
Fourthline's advanced KYC processes can help reduce first-party fraud, especially if an individual attempts to falsify their own documents for the sake of applying for a certain type of financial product. We perform over 210 checks on every document, resulting in up to 99.98% fraud detection accuracy.
Investigations and Customer Due Diligence (CDD) reporting
Fourthline tackles first-party fraud and other types of financial crime through a combination of AI-powered technology and human expertise, including:
Proprietary machine learning algorithms that identify suspicious patterns in the behavior of legitimate — but potentially malicious — customers.
Financial crime experts who investigate potential risks and deliver conclusive findings.
Comprehensive reporting systems that minimize ambiguity and provide clear, actionable insights for risk and compliance teams.
Unlike many KYC providers that focus primarily on onboarding and third-party fraud detection, Fourthline's automated approach also includes behavioral analytics, early risk detection, Enhanced Due Diligence (EDD), and dynamic monitoring of ongoing customer activity.
We also help banks and other businesses meet regulatory obligations under the Fifth Anti-Money Laundering Directive (5AMLD), providing the documentation and audit trails needed to comply with national implementations across the EU.
First-party fraud FAQs
How common is first-party fraud?
First-party fraud is very common. A consumer survey by the ID verification platform Socure found that 35% of respondents had committed some type of first-party fraud, often without understanding the ramifications or severity of their behavior.
What are the consequences of first-party fraud?
The financial consequences of first-party fraud can be vast — up to $100 billion annually in the US alone when factoring in all the businesses affected. Individuals who commit first-party fraud may also face consequences, including but not limited to damaged credit scores, legal repercussions, and reduced access to financial services.
How can businesses prevent first-party fraud?
Businesses can — and should — implement a range of strategies to prevent first-party fraud. These may include robust identity verification processes, monitoring customer behavior for suspicious activities, and educating customers and employees about the consequences and implications of fraud. Advanced technologies, such as machine learning algorithms, can also enhance fraud detection and prevention efforts.
