First-Party Fraud - the Hidden Part of the Iceberg

Banks have been dealing successfully with third-party fraud for decades — today’s report on the low rates of card fraud in the UK bears this out — but there is another side to fraud: first-party fraud. First-party fraud represents the hidden part of the iceberg, and it can sink your collections department. The first-party fraudster is intending to commit fraud — not pay you — at the time they take out the loan, open an account or apply for a credit card.

This is not ID theft: The person is who they claim to be, but they are committing fraud because they have no intention of repaying the debt. So unlike third-party fraud, which is reported at an industry level, first-party fraud may not be identified as such and is often hidden in bad debt. FICO research confirms that this represents around 10% to 30% of bad debt at many lenders – so, as with the iceberg, the fraud you don’t see is bigger than the fraud you do!

What can you do to control first-party fraud when originating accounts?

• Implement a originations decision platform that enables you to add an unlimited number of rules, and rapidly implement new models. This system should also enable you to manage the complete fraud detection process.
• Put first-party fraud models in place, as the characteristics of fraud will differ from those of risk.
• Ensure that your case management system includes an analyst workstation with workflow for referred applications.
• Take advantage of experienced fraud consultants’ expertise to review your policies and procedures, identify the most effective rules and apply industry best practices.

Remember, the fraudster is a businessperson, and he seeks Return on Investment. Yes, ROI. The investment made to perform the fraud must have the fastest and easiest ROI. If your financial institution is the weak link of the chain, fraudsters will find you quite attractive for the expected ROI. Better fraud controls send them away.

So are you inviting the fraudsters in, or sending them away?

Comments

[Brian Kinch]

First Party: A Victimless Fraud?
The key differential between first and third party fraud is that there is not a consumer victim: the fraudster has set out to deliberately access funds, run up debts and disappear without payment. First party fraudsters will either use their own identity, or a completely fictitious identity using socially engineered or fabricated credentials. Often these fraudsters can be spotted at the point that they apply for an account or credit facility owing to profiles common to a fraudster but unusual when examining genuine customer behavior. Additionally, however, some first party fraudsters will lay dormant within bank records for months or even years, often building themselves a creditworthy profile in order to access further financial instruments or extensions to credit through cross-sell and up-sell opportunities, before suddenly “busting out” by rapidly utilising all the funds and disappearing. This is the more valuable, and insidious, side to first party fraud and some banks have witnessed first party dormancy lasting up to four years! Nonetheless, with sophisticated transactional monitoring systems, it is possible to spot the “bust out” before the first party fraudster has accessed the majority of the funds. Successful, early intervention has even, in some instances, led to the first party fraudster repaying their indebtedness in full because otherwise their credentials have been tarnished without ever having realised the expected funds