Published in Spectrum August 2010
Sunday, August 01, 2010
First party fraud is a growing threat for banks. Recent figures from CIFAS reported nearly 16,000 instances of fraudulent misuse of bank accounts in the first five months of 2010. This was one per cent higher than in 2009 and 2009 was 42 per cent higher than 2008 with just 11,000 cases. While this type of fraud may not have been top of the banks’ priority list previously, it is now set to move up the ranks as the potential for financial loss increases.
There are a number of subtle differentiations between first party fraud and bad debt, and how this impacts upon institutions today. First party fraud refers to cases where a consumer opens a credit or debit account and uses it to make payments and purchases that they don’t plan to pay for. It is a pre-meditated fraud where applications for funds are submitted based upon legitimate information which is supported by verified identification. Once accepted in the system the fraudster uses various payment methods such as credit, debit cards and cheques to make purchases with no intention of actually paying, leaving the merchant, financial institution or payment scheme at a financial loss.
Andy Morris, Risk Business Solutions Consultant at ACI Worldwide discusses the growing financial losses associated with first party fraud, the unique challenge it creates for banks attempting to detect it and how best to tackle the problem as it becomes increasingly prevalent.
Detecting and managing first party fraud
First party fraud poses two main challenges for institutions. Firstly, detecting the fraud itself and secondly, dealing carefully with suspected cases. Both pose a significant challenge, creating a risk that the advantage can tip in favour of the fraudster: how can institutions manage and treat a customer fairly that they suspect of first party fraud?
Many consumer web forums highlight the level of customers or credit applicants that have failed registrations against their credit history – purportedly for account misuse or supplying false or misleading information. This highlights the critical need for accuracy in first party fraud cases- a false positive is highly damaging to the customer and could result in reputation and brand damage for the financial institution in question. On the other side of the coin, dishonestly making a false representation is a serious issue and recognised as a criminal offence under the Fraud Act 2006.
How an institution identifies and manages a suspected first party fraud customer requires very careful tact and diplomacy - assuming the institution was able to recognise the symptoms of first party fraud verse genuine bad debt. There will also be a “tipping point” when the fraudster becomes suspicious that the bank knows what is going on, leading them to perpetrate their crime earlier than anticipated.
What is becoming clearer in these recessionary times is just how fine the line is between bad debt and first party fraud. The main challenge banks face in preventing first party fraud is to prove beyond reasonable doubt that it is pre-meditated and not simply a genuine inability to pay a bill.
How to tackle this type of fraud
The best way to combat first party fraud is to monitor customers and attempt to detect it before it has even taken place. This may sound ambitious but there are identifiable fraudster characteristics which tend to be consistent across the globe. For example, there is a greater propensity for a certain age bracket to commit first party fraud. Once these characteristics are identified, banks should scrutinize and observe trends to distinguish between routine and inconsistent activity. A combined strategy of predictive analytics and full end-to-end payment and transaction monitoring best positions financial institutions to deter and shut down first-party fraud. If a customer is identified as suspicious, the activity can then be checked before the fraud is perpetrated thus reducing the risk to the institution. The key to assessing this successfully and reducing the frequency of false positives is by having a real time holistic view of the customer across all of their accounts.
The cost of fraud
Overall fraud levels have decreased by three per cent , however this reduction should not lead individuals to assume that the risk of fraud is any less than it was. Fraud is still very much prevalent. It costs the UK up to £30billion a year and the financial sector in particular has suffered significantly at the hands of sophisticated fraudsters. While the overall figure may fluctuate year on year and different types of fraud come to the fore at certain times, this simply shows that the exceptionally sophisticated fraudster will adapt to different circumstances and perpetrate the fraud most suited to the economic climate of the time.
First party fraud is more likely to grow rather than subside going forward. The recent recession has played a role in cash strapped individuals reverting to fraudulent activity to attain goods, which has been reflected in the increase in the level of first party fraud activity since the recession has escalated. While banks have previously gone to great lengths to protect their customers from third party fraud, they must now also take action to protect themselves and their customers from the risk of financial loss as a result of first party fraud.