August 29, 2024
3 Effective Methods Of First-Party Fraud Detection & Prevention
Thousands of companies lose millions of dollars to first-party fraud every year. This fraud occurs when a person makes a purchase or a transaction and then claims it was not them. This type of fraud is very perplexing to businesses as not only does it look legitimate but potentially accusing a legitimate customer of a fraud or not giving them their money back can alienate them.
Detecting this kind of fraud comes down to stronger authentication and identity management methods, that ensure a person is who they claim to be in the first place. As most leading biometric algorithms are greater than 99% effective, someone who passes a biometric authentication would be very hard pressed to make a valid claim that it wasn’t them. Anonybit’s first-party fraud prevention solution uses privacy-enhancing technology to enable the safe and secure use of biometrics, thwarting first-party fraud efficiently and effectively, avoiding the pitfalls of traditional fraud prevention solutions that use signals like device and location to determine a person’s identity.
What Is First-Party Fraud?
First-party fraud is when an individual or an organization purposely misrepresents their identity or provides incorrect information to gain an unfair or unlawful advantage.
First party fraud is very different from third-party fraud, in which fraudsters use a stolen identity to carry out illegal activity, or second-party fraud, where the fraudster uses someone else’s identity with that person’s knowledge.
Detecting and Preventing Opportunistic First-Party Fraud
First-party fraud is a significant issue in all kinds of credit and loan transactions, but also in many P2P payment apps and in commerce where a person may claim that a transaction was not done by them.
With first-party fraud, individuals often attempt to secure better rates by misrepresenting their employment status or income, making it common in these sectors.
First-party fraud may be either opportunistic—carried out by an individual—or organized, perpetrated on a larger scale by a fraud ring. Organized fraud can lead to major losses because criminal rings can defraud organizations out of large sums of money and because they employ professional tactics to fly under the radar and evade detection.
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How Does First-Party Fraud Happen?
One way that first-party fraud happens is when a policyholder deceives an insurer for financial gain. The individual files a legitimate insurance claim but exaggerates the damages or creates a fake accident to collect more compensation. Another way is when a person makes a payment to another fraudulent account, claims it wasn’t them and then gets a refund on the initial payment. In yet another flavor of first-party fraud, organized groups of criminals may apply for loans or lines of credit with no intention of repaying them.
Exploitation of Weak Verification Processes
Fraudsters often target institutions with inadequate verification processes. If an institution’s procedures for identity verification and/or authentication are weak,
it becomes easier for fraudsters to exploit these vulnerabilities.
Why First-Party Fraud Can Be Easily Missed?
Traditional third-party fraud entails some form of impersonation or stolen identity, whether through stolen card credentials or someone taking over your identity. Many victims of third-party fraud become aware of the crime when unknown transactions appear on statements or a debt collection agency attempts to collect money the victim does not owe.
Unlike third-party fraud, the transactions are carried out with accurate information and seemingly legitimate intentions. This complexity makes it significantly more challenging for a fraud team to detect.
Preventing Data Breaches and Account Takeover Fraud with Anonybit
At Anonybit, we help companies prevent data breaches and all types of fraud with our decentralized biometrics features and first-party fraud prevention software. With a decentralized biometrics solution, companies can enable passwordless login, wire verification, step-up authentication, and help desk authentication to ensure that someone is who they claim to be. Biometrics also help to establish an irrefutable audit trail which can be used to negate a false fraud claim.
To achieve this goal, we offer security solutions that cover the user lifecycle such as:
- 1:N deduplication, synthetic and blocklist checks upon account origination
- Passwordless login
- Step up authentication
- Account recovery
- Secure storage of biometrics and other PII data
Anonybit eliminates the tradeoffs between privacy and security. Prevent data breaches, enable strong authentication to eliminate account takeovers, and enhance the user experience across the enterprise using Anonybit.
Book a free demo today to learn more about our integrated identity management platform.
What are The Methods of First-Party Fraud Detection & Prevention?
1. Identity Verification: The First Step in Detecting First-Party Fraud
One of the most effective ways to combat first-party fraud is through stringent identity verification and authentication. Biometrics offers a powerful solution for ensuring that accounts are created with legitimate credentials.
Biometric systems, such as those provided by Anonybit, use unique biometric markers like facial recognition to verify an individual’s identity during account setup. Capturing a user’s selfie at account origination affords a business the opportunity to check for duplicates, synthetics and blocked identities. In this case, even if a person applies for an account using a fictitious identity, their selfie could be used to establish fraud.
2. Document Verification: Another Line of Defense Against First-Party Fraud
Document verification is another critical strategy for preventing first-party fraud. Organizations should establish a thorough document verification process to validate the authenticity of documents submitted during the application process. By using sophisticated document verification tools and techniques, businesses can ensure that the documents provided are legitimate and match the information provided by the applicant. This process helps identify forged or altered documents and provides an additional layer of security against fraudulent claims.
3. Biometric Authentication
Biometric authentication can be a powerful tool in combating first-party fraud, where individuals falsely claim to be victims of fraud to gain financial or other benefits. Unlike traditional methods of authentication, such as passwords or PINs, which can be easily shared or compromised, biometric data—like fingerprints, facial recognition, or voice patterns—are unique to each individual and difficult to fake or replicate. By using biometric authentication, institutions can more accurately verify the identity of users, ensuring that the person claiming a transaction or account belongs to them. This makes it much harder for individuals to deny their involvement in fraudulent activities, thereby reducing the occurrence of first-party fraud and strengthening overall security.
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How Does First-Party Fraud Impact Your Businesses
Unlike third-party fraud, where an identity thief uses a victim’s personal information to open accounts or make purchases, first-party fraud involves individuals committing fraud against a business themselves. This makes it more challenging for institutions to identify fraudulent activity.
Financial Loss Linked to First-Party Fraud
The financial impact of first-party fraud can be staggering. According to a 2022 Visa study, a third of firms worldwide reported being affected by it, making it a top concern for small—to midsize businesses.
In 2022, first-party fraud was the second most common form of fraud in North America, just behind card testing. The cost of first-party fraud is considerable.
The Financial Impact of First-Party Fraud on Merchants and Businesses
A PYMNTS study highlighted that merchants alone face annual losses of about $89 billion due to this type of fraud. This figure underscores the gravity of the situation and points to the increasing prevalence of first-party fraud.
As it becomes more common, businesses could see even higher financial losses if they don’t bolster their fraud prevention and authentication measures.
Challenges in Recovering Debts and Financial Implications of First-Party Fraud
When first-party fraud occurs, businesses often have to write off the debt as uncollectible. This happens because it can be challenging to recover the funds from the borrower without clear evidence of who conducted the transaction in the first place.
The inability to properly authenticate people at the time of a transaction can leave companies grappling with significant financial losses, impacting their health.
Honest Customers Suffer From First-Party Fraud
In their efforts to combat first-party fraud, organizations may inadvertently create barriers for their honest customers. Robust authentication systems are essential for safeguarding against fraud, and if implemented properly, they will have the double benefit of now inconveniencing genuine customers.
Overly stringent verification processes or frequent checks can make it harder for legitimate customers to access services or complete transactions smoothly. Striking the right balance between effective fraud prevention and maintaining a positive customer experience is crucial. Luckily, all it takes for strong authentication is a quick selfie check.
Related Reading
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Book a Free Demo to Learn More About Our First-Party Fraud Prevention Software
At Anonybit, we help companies prevent data breaches and account takeover fraud with our decentralized biometrics technology. With our decentralized biometrics framework, companies can enable passwordless login, wire verification, step-up authentication, help desk authentication, and more.
Comprehensive Security Solutions for Companies
We aim to protect companies from data breaches, account takeovers and synthetic identity on the rise, privacy regulations, and digital transformation. To achieve this goal, we offer security solutions that cover the user lifecycle such as:
- 1:N deduplication, synthetic and blocklist checks upon account origination
- Passwordless login
- Step up authentication
- Account recovery
Secure storage of biometrics and other PII data
Balancing Privacy and Security with Anonybit’s Integrated Identity Management Platform
Anonybit eliminates the tradeoffs between privacy and security. Prevent data breaches, reduce account takeover fraud, and enhance the user experience across the enterprise using Anonybit. Book a free demo today to learn more about our integrated identity management platform.