First-party fraud: Why is it so hard to tackle?

First-party fraud—when a cardholder purposely or accidentally disputes legitimate transactions—has been a growing problem in recent years. And unfortunately, it shows no signs of slowing down. In fact, first-party fraud costs retailers $50 billion a year, according to Mercator Advisory Group.  

One reason it’s an ongoing, costly issue: Retailers and issuers currently don’t have all the data and intelligence they need to distinguish true fraud from first-party fraud and most disputes are still coded as fraud even though many of those may be legitimate purchases.   

This means it’s more critical than ever for retailers and issuers to do all they can to identify first-party fraud, understand the reasons it happens and prevent the downstream affects—primarily, the resulting disputes and chargebacks. 

Here are the two main reasons first-party fraud is such a persistent challenge: 

A big cause of first-party fraud is transaction confusion—when the cardholder mistakes a legitimate charge for a fraudulent one and disputes it. This is also known as “friendly fraud.”  
  
Transaction confusion has grown in recent years as people transact digitally more often and on a growing array of connected devices. Moreover, digital bank channels have become the primary place consumers review their transactions and the Retailer name and other information provided is often not recognisable to the customer.  

One eye-opening stat: 77% of consumers often find unrecognisable transactions in their online statements, according to Aite-Novarica.  

“Household fraud”—when someone other than the cardholder living in a home authorises a transaction unbeknownst to the cardholder—is also growing as a form of friendly fraud due to the increase in shared accounts, such as TV and other subscription services that store card information so that anyone with access to those accounts can make purchases. 

Not all first-party fraud is caused by confusion. A fast-growing share of it is happening as consumers rely on the dispute and chargeback process as a way to get their money back for a range of reasons, whether when dealing service-related issues or when they simply aren’t happy with their purchase.  

Traditionally, the expectation was that consumers would contact the Retailer directly when they experienced problems such as orders being delivered late or because they wanted to return an item. But now they are going directly to the issuer to “solve” the problem while bypassing the Retailer, even sometimes when the Retailer has generous return and exchange policies tailored to making the customer happy. 
  
While this is technically a misuse of the dispute process, it’s reality—and retailers and issuers must work together and use collaborative technology to motivate consumers to work with the retailer when they experience service issues. 

Today collaborative tech is available that uses rich Retailer data to help address prevent and reduce fraud—even without the ability to distinguish if it is true fraud or first-party.  

Ethoca Consumer Clarity™ is collaborative technology that brings together data and details provided by the Retailer and issuer cardholder data—providing rich detail and visibility into transactions and disputes. It helps reduce the transaction confusion that often leads to first-party fraud by putting recognisable details—such as the Retailer’s name and logo and a description of what was purchased—into the digital banking channels that consumers use to check their transaction history.   

Ethoca Alerts provides retailers with issuer data that greatly reduces the time it takes for retailers to be alerted of confirmed or suspected fraud or any customer transaction dispute. Retailers receive notifications in near-real-time when a customer disputes a charge, so they can take steps to address it—often eliminating the need for the chargeback process. In the case of true fraud, it allows the Retailer to stop the delivery or delivery of goods, reducing the financial damage.  

Future collaborative solutions will need to make it much easier for issuers and retailers to quickly identify and report which transactions are true fraud and which are first-party fraud. 

Such technology will help further reduce the risk of lost sales and revenue due to first party fraud. It will be able to use details such as the cardholder’s purchase and account history and device ID to help identify legitimate transactions that are reported as fraud. This will be especially important for digital goods retailers that tend to see some of the highest levels of first-party fraud. 

Ethoca Consumer Clarity™ is collaborative technology that brings together data and details provided by the Retailer and issuer cardholder data—providing rich detail and visibility into transactions and disputes. It helps reduce the transaction confusion that often leads to first-party fraud by putting recognisable details—such as the Retailer’s name and logo and a description of what was purchased—into the digital banking channels that consumers use to check their transaction history.   

Ethoca Alerts provides retailers with issuer data that greatly reduces the time it takes for retailers to be alerted of confirmed or suspected fraud or any customer transaction dispute. Retailers receive notifications in near-real-time when a customer disputes a charge, so they can take steps to address it—often eliminating the need for the chargeback process. In the case of true fraud, it allows the Retailer to stop the delivery or delivery of goods, reducing the financial damage.  

Future collaborative solutions will need to make it much easier for issuers and retailers to quickly identify and report which transactions are true fraud and which are first-party fraud. 

Such technology will help further reduce the risk of lost sales and revenue due to first party fraud. It will be able to use details such as the cardholder’s purchase and account history and device ID to help identify legitimate transactions that are reported as fraud. This will be especially important for digital goods retailers that tend to see some of the highest levels of first-party fraud.