Wednesday, 10 June 2009

First-party fraud largely goes unreported

Losses from first-party credit card fraud are bigger than those from third-party fraud, and although it represents 10% to 20% of bad debt, first-party fraud often goes unreported.

First-party fraud is a new threat to the banking industry and is more difficult to detect than third-party fraud as banks often write it off as bad debt, when in fact fraudsters have given inaccurate financial and personal details in order to obtain a credit card or loan without ever intending to pay it off.

At a recent webinar held by analyst firm Lafferty Group, Martin Warwick, principal consultant, solutions management, at decision-management software vendor, FICO, said first-party fraud is different from third-party fraud in that the account for a loan or credit card is set up using a "synthetic" or false identity. The application also contains false or "misrepresented" financial information. Banks continue to write it off as bad debt, he says, because of challenges around proving intent.

Warwick says first-party card fraud can be detected during the application process and the "transactional life" of the account. Things to look out for are:

  • First payment defaults on cards
  • Cases where the customer is massively over their credit limit
  • Customer ends up as a no trace
  • Or if less than 5% of the loan is repaid.
Stand-alone scorecards and customer profiling applications can be used at the time of applying for a card or loan to detect whether an individual is likely to commit first-party fraud. However, Warwick says a holistic approach needs to be taken as first-party fraud can start with current accounts and quickly spread to other banking accounts and channels such as loans, mortgages and insurance. Both qualitative and quantitative measures need to be used to distinguish first-party fraud from bad debt.


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