3 ways to prevent first party fraud in fintech

First party fraud is a growing issue for fintech companies. Learn how to fight back and build customer trust with high-tech solutions.

March 28, 2023

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Danielle Antosz

Danielle is a fintech industry writer who covers topics related to payments, identity verification, lending, and more. She's been writing about tech for over a decade and is passionate about the impact of tech on everyday life.

As millions of people choose to live more of their financial life online, bad actors have recognized new ways to take advantage of fraud opportunities. 

Every company operating in fintech needs to prioritize fraud mitigation. It’s good for end-users —and it’s good for business. In fact, underinvesting in anti-fraud technology can cut deeply into a company’s bottom line and undermine its response to a rising threat. 70% of financial institutions lost more than $500,000 to fraud in 2022, and 91% reported a year-over-year rise in fraud. 

Some fraud is particularly difficult to stop because it involves consumers using their own identities. This means measures like identity verification do little to stop it. Despite these challenges, there are several ways fintech companies can limit first party fraud. 


What is first party fraud? 

First party fraud is fraud perpetrated by an account holder in their own name. Rather than stealing someone's identity or using a friend or family member's details, the account holder is who they say they are and uses their own account to commit fraud. 

Say a consumer orders a stove and pays via ACH. The item arrives in good condition, but they claim the stove was damaged or never arrived and ask for a refund via ACH return. This is an example of first party fraud. 

While many believe identity theft is a form of first party fraud, first party fraud actually occurs without identity theft or identity misrepresentation. 

Examples of first party fraud in fintech 

Preventing first party fraud starts with understanding what it looks like. First party fraud can take many forms, including: 

  • Ghost funding: Online merchants may allow users to fund online purchase accounts using ACH, and make those funds available to users before funds have settled. Users can exploit this by making purchases from accounts that don't actually have the funds to complete the purchase.  

  • Chargeback fraud: A person purchases an item on their credit card, then calls their credit card company claiming the purchase wasn't authorized in an effort to have the purchase refunded.

  • ACH fraud: A person fraudulently disputes an ACH payment as unauthorized, even after receiving goods or services. 

  • Lost in transit fraud: A person falsely claims an item ordered online was never delivered or arrived damaged in an effort to get a refund or discount. 

  • Item not as ordered fraud: A person falsely claims an item they received did not match the specifications of the item they ordered in an effort to get a discount or refund and (hopefully) keep the item. 

  • Mortgage application fraud: A person submits false documentation in an effort to gain access to better interest rates or a higher mortgage amount. For example, renting an asset and claiming you own it.

First party fraud, second party fraud, third party fraud: What are the differences?

Fintech fraud falls under three types: first, second, and third party fraud. The differences between the types of fraud comes down to who commits the fraud and whose identity details they use. 

In first party fraud, a person uses their own identity details when committing fraud. For example, submitting false documentation when applying for a mortgage in their own name. 

Second party fraud occurs when someone knowingly provides their identity details to another party to commit fraud. For example, they could accept a deposit from a criminal organization into their account and then move it to a third-party account. This is known as acting as a ‘money mule’ and is common in money-laundering schemes. 

Third-party fraud occurs when a third party uses someone else's identity or information to commit fraud, with malicious intent. This type of fraud includes identity theft or moving funds between accounts without consent or knowledge of the identity owner. 

One reason first party fraud is so challenging to stop is that the person committing the fraud is using their own, legitimate identity documents. While digital ID verification can prevent other types of fraud, it can't stop first party fraud.

Guide to calculating the value of identity verification

Prevent fraud, win users, and protect your bottom line

How first party fraud in banking has changed

When thinking about fraud, well-known large-scale scammers like Bernie Madoff often come to mind. However, the face of fraud has changed dramatically in recent years. The increase in online shopping and the rise of digital payments has made it easier than ever for everyday people to commit fraud by, for example, falsely claiming an item was never delivered and asking for a refund. 

The increase in same-day ACH payments and access to online financial tools has also made it easier for consumers to commit fraud by making purchases before payments settle via ghost funding. While most consumers use financial services in good faith, bad actors have found ways to exploit the system. 

First-party fraud is particularly difficult to stop because it involves a person using their own identity to falsify financial documents or request a refund for an item they legitimately purchased. In fact, nearly 62% of fraud reported by financial institutions is considered first-party fraud. 

While it is difficult to prevent first party fraud, it is possible. Here are several steps fintech companies can take to reduce first party fraud.

How to reduce first party fraud in fintech 

While the growth of technology has made it easier for bad actors to commit first party fraud, technology is also helping fintech companies prevent, track, and monitor for first party fraud.  Here are three ways to stop first party fraud before it happens.

Onboarding due diligence 

Stopping first party fraud starts during the onboarding process. Digital identity verification tools use digital data points like IP addresses, locations, cookies, and email checks to verify a person is who they say they are. Plaid IDV, for example, performs seven different verifications to ensure users are using their own identity. 

This stops fraudsters who are trying to use someone else's identity or accounts to commit fraud. However, it doesn't stop people from using valid identification documents to commit first party fraud. Therefore, it must be used in conjunction with other risk reduction methods, such as Plaid Signal, which scores ACH risk to help stop first party fraud in its tracks. 

→ Want to reduce fraud during new customer onboarding without sacrificing conversion rates? Plaid Identity Verification is the lowest friction identity verification experience available.

ACH risk scoring

Between 2021 and 2022, same-day ACH payments grew by nearly 103%. As ACH usage increases, so does the risk of ACH fraud. There are two main types of first party ACH fraud—fraudulent ACH returns, where a user requests a refund or blocks a legitimate payment, and ghost funding, where a user makes purchases from an account funded by ACH before the payment is officially sent to the seller.   

ACH risk scoring platforms help limit both types of ACH fraud by flagging risky payments before they process. For example, Plaid Signal uses machine learning to create highly accurate, custom risk assessments for ACH payments. By looking at 60+ attributes, it can indicate the likelihood that a payment will be returned and allow the company to stop first party fraud before it happens. 

→ Want to reduce the risk of ACH fraud and returns? Plaid Signal provides an instant risk assessment and allows you to customize payment flows based on the likelihood of an ACH return. 

Digital asset verification 

Mortgage fraud is a growing risk as more lenders use online platforms to perform risk assessments. This makes it easier for borrowers to fudge numbers in an effort to gain more favorable mortgage rates.  

Digital asset verification provides mortgage lenders with fast and secure real-time access to assets via an API integration. This means a lender can easily see bank account information, transactions, and assets in seconds. Because the lender has direct access to asset information, first-party fraud risk is reduced. 

→ Want to verify transaction history, account balance, and assets faster? Plaid's asset verification APIs provide a secure, up-to-date view of a borrower’s assets.

First party fraud risk can be mitigated with the right tools

First party fraud is a growing risk with an even bigger price tag. By 2029, the fraud detection prevention market is expected to reach $129 billion—and that doesn't consider the direct revenue losses caused by fraud. 

However, there are steps fintech companies can take. By leveraging technology to perform risk assessment and scoring, companies can track the risk of first party fraud and prevent fraudsters  from committing fraud. 


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