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First Party Fraud: When the Customer Is NOT Always Right

Guest Blog By Adam Elliott

Recent data breaches are front-and-center in the public consciousness, with retailers and banks scrambling to provide answers and customers worried about the safety and security of their accounts and identities.

However, while high profile breaches serve to raise consumer awareness, as well as retailer responsiveness, some consumers are using both reactions to perpetrate more fraud. With such widespread publicity, it is likely that thousands of fraudsters with no connection to the original data breach may take notice and exploit retailer’s willingness to remediate the situation.

This type of fraud – known as “first party fraud” – happens when someone uses a verified identity to enter a transaction or account application with malicious intent. In a new loan application situation, the fraudster will apply for a loan with no intent of payment. In a charge-off scenario, the perpetrator will purchase merchandise, and then dispute the charge later so the full amount will be refunded – even though they did, in fact, make the transaction.

With businesses scrambling to repair customer relationships following such large and heavily publicized data breaches, first party fraudsters know that retailers will be handling an increased number of disputed charges and issuing thousands of refunds for fraudulent transactions. These customers believe they can exploit the situation and dispute purchases they have actually made, while falsely attributing the charges to the data breach.

First party fraud has always been a significant contributor to retailer losses, but the current situation is even more disastrous than past spikes in similar fraud. For many reasons, this seems to be “open season” for first party fraudsters, with national merchants in full crisis mode immediately following the holidays. Reputation management and customer preservation is making retailers more apt to charge back transactions simply because they cannot fully determine whether they were legitimate or fraudulent.

We are already seeing a significant rise in first party fraud that is adding to the already calamitous breach situation, and with merchants so fixated on controls to mitigate and remedy the damage caused from the actual breach, they will likely be hit hard with this type of fraud.

Given any of the aforementioned circumstances – the holiday season, a highly public breach, and a consumer base furiously scouring their bank statements for irregularities – a certain degree of fraud may be inevitable. However, taken together, this situation is almost unprecedented and has no simple solution.

What retailers and financial institutions must determine is the balance between heightened sensitivity to customer needs, and the potential for abuse among dishonest consumers.

Adam Elliott is President of ID Insight

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