What Is Third Party Fraud? How Does It Work & How Do You Prevent It?

Anonybit’s fraud prevention solution helps you safeguard your financial entities from potential threats. This cutting-edge solution seamlessly integrates with your tech stack to offer comprehensive protection against all types of fraud, enabling you to stay steps ahead of potential threats.

What is Third Party Fraud?

Third party fraud, also known as account takeover fraud, is a type of fraud in which an external party, someone who isn’t an authorized user, uses deceitful means to gain value. This can happen in various ways, but the core idea is that the fraudster isn’t the end user of the product or service; they’re exploiting a system or process to benefit themselves at your expense.

Imagine a scammer using stolen personal information to apply for a loan in someone else’s name. The scammer is the third party here, and the legitimate person’s identity is being used fraudulently. 

The Complex Nature of Third-Party Fraud and Its Detection Challenges

Third-party fraud is particularly challenging because it often involves complex schemes that traditional security protocols may not detect. . Fraudsters might use sophisticated methods, like device or IP spoofing, malware, man in the middle attacks and generative AI to steal credentials and hide their tracks, making it crucial for businesses to have robust systems for authentication, fraud prevention  and transaction monitoring.

Understanding and Preventing Third-Party Fraud: Essential Insights for Businesses

Understanding third-party fraud is essential for businesses because it can lead to:

• Significant financial losses
• Damage to reputation
• Operational disruptions

By being aware of how these frauds occur and implementing preventive measures, businesses can protect themselves from these costly and often disruptive schemes.

First Party vs Second Party vs Third Party Fraud

First-Party Fraud

First-party fraud occurs when an individual uses their identity to commit fraud. This type of fraud often involves deceitful practices where the perpetrator intends to benefit from a transaction without paying for it. Examples include:

• Friendly fraud
• Application fraud
• Chargeback fraud

Second-Party Fraud

Second-party fraud involves an individual who willingly allows another person to use their personal information to commit fraud. 

This type of fraud can be more complex and more challenging to detect because it often involves collusion between the parties. Examples include money mulling and exploiting family or friends.

Third-Party Fraud

Third-party fraud occurs when a perpetrator uses stolen or fabricated information to impersonate another individual or entity without their consent. This type of fraud is often associated with identity theft and is the most common form. Examples include:

• Account takeover
• New account fraud
• Phishing scams

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5 Common Third Party Fraud Schemes

There are many types of third party fraud, and fraudsters constantly work to find new and inventive ways to extract financial gain from their victims. Some of the most common types of third party fraud include:

1. Account Takeovers

These involve criminals gaining access to bank accounts, making purchases, or diverting funds. 

2. Credit Card Fraud 

This type of third-party fraud involves making illegal purchases or obtaining cash advances, including anything from stolen physical cards to skimmed and cloned cards.

3. New Account Fraud

This involves fraudsters opening new accounts using stolen personal details. (New account fraud can also involve synthetic identities or combinations of false and genuine information. This is known as identity manipulation.)

4. Loan Stacking 

This involves fraudsters applying for multiple loans under an assumed identity, pocketing the funds, and then failing to make repayments.

5. Benefit and Tax Fraud 

Criminals may apply for government benefits in somebody else’s name. They may also file false tax returns and apply for rebates.

Many nuanced subtypes of such attacks exist for all of the third-party fraud types above. For example, criminals can obtain the personal details needed to perpetuate third-party fraud through phishing and social engineering, physical theft, and using the dark web to purchase compromised account details.

Preventing Data Breaches and Fraud with Anonybit’s Decentralized Biometrics

At Anonybit, our decentralized biometrics system design helps companies prevent data breaches and all types of third-party fraud. With a decentralized biometrics solution, companies can enable passwordless login, wire verification, step-up authentication, and help desk authentication and ensure someone is truly who they claim to be. 

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 third-party 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.

How Does Third Party Fraud Impact Businesses?

The impact of third-party fraud on businesses can be significant and far-reaching. One of the most dangerous methods of third-party fraud is new account fraud, in which bad actors deploy fake identities to open new accounts at banks or businesses for use as staging grounds for fraudulent activity. Identity theft is the most well-known source of these false identities, but some fraudsters develop synthetic identities instead.

New account fraud is a relatively new phenomenon, as banks considered it a low priority in the early 2000s. Still, it has grown into a full-blown scourge, with 85% of financial institutions (FIs) reporting fraud in the account opening process. In 2023, 13.5% of global digital account creation transactions were suspected to be fraudulent, highlighting the high risk associated with new account creation. The volume of suspected digital fraud increased by 14% from 2022 to 2023, with a total consumer loss of over $10 billion in 2023 reported by the Federal Trade Commission.

The Growing Threat of Account Takeover (ATO) Fraud

The percentage of U.S. adults who have experienced account takeover has increased to 29% in 2024, up from 22% in 2021. This equates to approximately 77 million adults affected by ATO.

The source of these attacks can vary greatly. Sixty percent of ATO victims report using the same passwords across multiple accounts, which puts them at high risk of identity theft if their passwords are compromised. 

Methods Used by Bad Actors to Access Personal Information

Bad actors have various means of accessing potential victims’ personal information. Some obtain it themselves through phishing emails or malware. Others purchase logins in bulk from dark web marketplaces.

The Increasing Risks of First-Party Fraud and the Importance of Protecting PII

First-party fraudsters are bold enough to use their own identities. As the digital transformation accelerates, the availability of personally identifiable information (PII) on the dark web is becoming increasingly concerning. With the rise of data breaches and phishing scams, consumer data is exposed to criminals. 

This heightened exposure fuels identity theft and significantly raises the risk of third-party fraud. To combat these growing threats, businesses must adopt stringent security measures to protect sensitive information and prevent unauthorized access.

One effective way to bolster security is by implementing biometric authentication. Unlike traditional methods such as passwords and pin codes,which can be easily stolen or guessed, biometrics rely on unique physical characteristics. Modalities like: 

• Fingerprints, 
• Facial recognition,
• And iris scans

These modalities are incredibly difficult for fraudsters to replicate. Incorporating biometrics as an  added layer of security ensures that only authorized individuals can access sensitive systems or data, reducing the likelihood of identity theft and third-party fraud.

The Importance of User Education in Preventing Third-Party Fraud

User education plays a significant role in fraud prevention. A substantial portion of third-party fraud incidents start with human error, phishing and the use of stolen credentials. The more biometrics and other passwordless authentication are used, the harder it is for fraudsters to succeed.

Combining Process and Technology to Combat Third-Party Fraud

For businesses, tackling third-party fraud requires a combination of process and technology. While tech solutions are essential, staff training and overall cyber are equally important. Fraudsters are adapting quickly and companies should be proactive in adopting and integrating automated and robust identity management tools. 

Strengthening Fraud Prevention Strategies with Biometric Authentication

One of the most effective ways to strengthen your fraud prevention strategy is by incorporating biometrics. Biometrics, such as fingerprint recognition, facial recognition and voice authentication provide a higher level of security by verifying identities based on unique physical characteristics. Unlike passwords or security questions, biometric data is complicated to forge or steal, making it a powerful tool in the fight against fraud.

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• Real Time Transaction Monitoring
• Digital Injection
• Fraud Detection Software For Banks

Third Party Fraud Trends

In 2024, third-party fraud related to current accounts, savings, credit cards, and loan accounts continues to be a significant concern. Here are some updated statistics and insights:

• Fraud Increase: Online fraud has surged by 20% in just one year, with 6% of all verification attempts tracked in 2023 being fraudulent. This indicates a growing trend in fraudulent activities, including third-party fraud.
• Digital Fraud Growth: The volume of suspected digital fraud increased by 14% from 2022 to 2023. This growth highlights the increasing risk of fraud in digital transactions, which includes third-party fraud across various financial products.
• Consumer Impact: Nearly half of users (47.8%) encountered some form of online fraud in the 12 months from January 2023. This statistic underscores the widespread nature of fraud attempts impacting various account types.

This indicates that fraudsters are targeting a wider range of financial products, making it crucial for institutions to enhance their fraud detection measures.

Evolving Methods of Data Acquisition

Fraudsters are constantly adapting their tactics to obtain personal data. Recent trends include:

• Fake Job Advertisements: Scammers create fraudulent job listings to collect personal information from job seekers.
• Impersonation Scams: Messages that appear to be from family members or friends are used to solicit money or sensitive information.
• Investment Scams: Fraudulent schemes promising high investment returns, often related to cryptocurrency, are rising.
• Bogus Government Assistance Programs: Scams that claim to offer government grants or assistance, enticing victims to provide personal information.

Exploitation of Cryptocurrency Popularity

As cryptocurrency investments gain popularity, fraudsters are leveraging this trend to create scams that promise quick profits. These schemes often involve fake exchanges or investment platforms that disappear with investors’ funds.

Fraud as a Service (FaaS)

The rise of underground Fraud as a Service scheme allows criminals to scale their operations. These services enable fraudsters to hire botnets or purchase off-the-shelf malware, making it easier for them to execute large-scale attacks.

Synthetic Identity Fraud

This type of fraud involves creating fictitious identities using real and fake information. Fraudsters use these synthetic identities to open accounts and commit various types of fraud, making detection more challenging.

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