What is First Party Fraud & How Can You Prevent it Within Your Organization?

First-party fraud can cause significant damage to organizations. This blog provides insights on how to detect and prevent first-party fraud to protect your business and its stakeholders from financial losses.

If you’re looking to understand and prevent first-party fraud in your organization, Anonybit’s solution for first-party fraud prevention can be a game-changer.

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. It may involve using a synthetic identity. The use of false or synthetic identifying information distinguishes it 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.

Prevalence of First-Party Fraud in Financial Applications

First-party fraud is a significant issue in credit, loan, and insurance applications. Individuals often attempt to secure better rates by misrepresenting their employment status or income, making it common in these sectors.

Types of First-Party Fraud: Opportunistic vs. Organized

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, in particular, 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.

How Does First Party Fraud Occur?

First Party Fraud encompasses a wide range of fraudulent activities:

• Individuals may make a purchase or transaction and either regret it afterwards or claim it wasn’t them and report it as fraud
• Organized groups of criminals may make purchases and ship them to each other or make payments to one another and then claim it was never sent or never received. 

First-party fraud compared to other fraud categories

According to the United States Federal Reserve, first-party fraud is one of four categories. It is important to understand the difference in knowing how to address this type of fraud.

1. First-party Fraud

Fraud is committed by an account holder whose main victim is an organization. Instances of FPF:

• Include fraud committed via an account opened under a synthetic identity 
• Abuse of dispute policies to obtain a refund on false or misleading claims
• Abuse of promotion policies to acquire discounts or excess refunds.

2. Second-party Fraud

The unauthorized use of an account holder’s funds by a loved one or trusted acquaintance. A loved one who obtained access to a credit card on trust might, for example, abuse the access to make more purchases—or different types of purchases—than were agreed upon when they were given access.

3. Third-party Fraud

Transactions made by an unknown third party who has illegally gained access to an account or payment instrument. Account takeovers or transactions on an account opened with a stolen identity are classic examples.

4. Fraud in the Inducement (Scams)

Some firms call this a victim-assisted scam. This means that a scammer tricks the account holder into making a transaction that causes them to lose money or be harmed in some way. Examples include romance scams and scams using fear to manipulate vulnerable people, such as:

• A person who is disabled 
• Elderly
• In urgent need due to personal circumstances

Protecting Businesses from Data Breaches and Fraud with Decentralized Biometrics

At Anonybit, our decentralized biometrics system design helps companies prevent data breaches and all types of  fraud. With a decentralized biometrics solution, companies can bind a person to their physical identity, disallowing someone to claim that a transaction they initiated was not them. We also enable passwordless login, wire verification, step-up authentication, and help desk authentication. We are on a mission to transform the way companies implement identity management solutions.

To achieve this goal, we offer security solutions such as:

• Secure storage of biometrics and PII data
• Support for the entire user lifecycle
• 1:1 biometric authentication and 1:N biometric matching to prevent duplicates, synthetics and blocklisted identities 

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.

Related Reading

• Identity Providers
• Liveness Detection
• Biometrics Identity Verification System
• New Account Fraud
• Online Banking Authentication
• Fraud Detection In Banking

Why First Party Fraud Can Be Easily Missed

First-party fraud, also known as bust-out fraud, is a complex issue that often disguises itself as a credit risk problem. Delinquent accounts are sent to collections, creating a progression of treatment. 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.

The Importance of Vigilance in Identifying First-Party Fraud

First-party fraud can be mistakenly written off as uncollectible and is sometimes sold unknowingly to external collections agencies. This underscores the need for a deeper understanding and vigilance in fraud prevention. 

Challenges Faced by New Financial Service Providers in Fraud Prevention

Newer financial services providers, telcos new to payment processing, and retail finance organizations all face a common challenge in fraud prevention. They often lack the historical data that banks can analyze to help define what actual first-party fraud and bust-out fraud look like.

• Online bank  
• A telco financing costly devices

All these organizations all face similar challenges. This shared responsibility underscores the need for unity in tackling fraud prevention.

5 Common Types Of First Party Fraud Schemes

First-party fraud is mostly concentrated in banking and the financial sector. However, it can also affect other industries. Here are some examples of common manifestations of First-Party fraud.

1. New Account Fraud

New account fraud – This is a form of first-party fraud that involves opening new accounts using misleading or falsified identification. The manipulation can be basic, such as:

• Altering real name spellings
• Changing addresses to conceal multiple fraudulent accounts
• It can also be more complex, as in synthetic identity fraud, which creates a fictitious identity by randomly combining real or fake information. 

It’s important to note that while new account fraud can involve outright identity theft, using a stolen identity would be considered third-party fraud, not first-party.

2. Sleeper Fraud

Accounts are opened with fraudulent intent, but the fraud does not begin immediately. The account holder allays suspicion by establishing a positive track record with their financial institution. They suddenly change patterns and begin fraudulent transactions. This typology is sometimes referred to as bust-out fraud.

3. Bust-Out Fraud (aka Hit-and-Run)

A type of financial fraud in which an individual or group of individuals establish credit accounts with various lenders or financial institutions and then use these accounts to purchase goods and services. 

Instead of paying off the balances owed, the fraudsters max out the credit lines and disappear without making any further payments. This type of fraud is called bust-out because the fraudsters intentionally bust out the credit limits of the accounts they have opened, leaving the lenders with significant losses.

4. Loan Fraud

Individuals apply for loans with falsified financial information, such as their income or credit score, to increase their chances of approval, and they have no intention of paying back the loan after using the proceeds.

5. Retail Fraud or Chargeback

Fraudulent chargebacks, sometimes known as friendly fraud, occur because a customer falsely claims a legitimate dispute reason. This might include:

• Claiming a legitimate charge was unauthorized
• Received goods never arrived
• A billing error occurred when it did not 

Although this can be done with fraudulent intent, it’s also common for customers to engage in this behavior due to a misunderstanding of dispute categories. They may even believe that giving an inaccurate dispute reason is no more than a technicality, not understanding that this could constitute fraud.

How Does First Party Fraud Affect Businesses? What Are The Risks?

First-party fraud can often appear as credit risk issues rather than actual fraud. With third-party fraud, for instance, the individual whose personal information has been stolen for fraudulent activity may notice discrepancies on their credit report, unauthorized use of their credit card, and other instances that may flag fraud.

In first-party fraud, the person is doing the fraudulent activity, so it is up to the financial institution to catch it first. It can be extremely difficult to discern the difference between intentional fraud and a person who is financially irresponsible and finds themselves unable to pay back their debts.

Financial Loss

First-party fraud can lead to significant financial losses for organizations. According to a 2022 Visa study, first-party fraud affected a third of firms worldwide, ranking as the number one concern for small to midsize businesses. It was the second-ranked form of fraud in North America in 2022, behind only card testing in frequency. When such fraud occurs, the organization often has to write off the debt as uncollectable, primarily due to credit issues with the individual. 

The Growing Threat and Financial Impact of First-Party Fraud

The costs associated with this fraud type are high, with one study by PYMNTS citing $89 billion lost per year to merchants alone. If, as some financial crime analysts suggest, it becomes more prominent, its costs will only increase. This underscores the urgent need for effective fraud prevention measures.

Related Reading

• Fraud Detection Software For Banks
• Real Time Transaction Monitoring
• ACH Fraud Prevention
• Digital Injection
• First Party Fraud Detection
• AI Fraud Detection Banking
• Payment Fraud Trends
• Biometrics In Banking
• Fraud Detection Analytics

How Your Organization Can Get Ahead Of First Party Fraud

Biometric authentication helps reduce first-party fraud by ensuring that accounts are created with legitimate credentials. Here’s how:

A biometric verification and authentication solution, such as: 

• The one provided by Anonybit
• Establishes validity of the person’s identity upon account opening, ensuring the person is not already in the system under another name or blocked identity
• Uses biometrics to bind a person to a transaction

This makes it much harder for applicants to claim that a transaction was not conducted by them.

Recognize the differences between unintentional bad debt and intentional fraud

With the right analytics, patterns of intentionality can become very evident, such as:

• Linked accounts used to pay fake bills for each other
• Duplicate identities
• SYnthetic identities 

This knowledge empowers your organization to detect and prevent first-party fraud effectively.
By utilizing systems like the Anonybit decentralized biometric identity platform Genie,, and learning to spot patterns of fraudulent activities, your organization can better prepare to stay ahead of first-party fraud, potentially saving you millions of dollars.

Related Reading

• OTP Fraud
• Fraud And Authentication Management
• First Party Fraud vs Third Party Fraud
• Multi Factor Authentication Banking
• Identity Verification For Banking
• Fraud And Identity Management
• Fraud Systems For Banks
• Fraud Management System In Banking

Book A Free Demo To Learn More About Our Integrated Identity Management Platform

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, synthetic identity on the rise, privacy regulations, and digital transformation. To achieve this goal, we offer security solutions such as:

• Secure storage of biometrics and PII data
• Support for the entire user lifecycle
• 1:1 authentication and 1:N matching for lookups and deduplication

Balancing Privacy and Security with Anonybit’s Integrated 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.