A first-party fraud epidemic?

First-party fraud is bank-lingo for when a consumer intentionally tries to game the financial system for illicit gain -- like, when a customer provides false details or misrepresents their identity.  More than one in three Americans admit to committing first-party financial fraud themselves, according to recent research. This ongoing trend is hitting online lending companies, community banks, and credit unions the hardest.

With US regulators pushing for a shift in liability towards FIs when fraud attempts convince customers to send money, there is an expectation that first-party and second-party fraud will become more “lucrative”. This may mean that customers become more comfortable with acting as money mules and making false claims for reimbursements from their banks for losses that do not exist.

First-party fraud attempts get more common in times of economic hardship: around 30% of Gen Z report taking on BNPL loans without any intention of paying back. Moreover 1 in 5 Gen Z don't consider first-party fraud as ethically wrong. 

But perhaps the most worrying in the following statistic: More than half of Gen Z report that they would be okay with committing first-party fraud if they were sure there would be no negative consequences. In a climate where regulators are trying to balance who has liability in the case of social engineering fraud attempts, laws that do not mindfully distribute consequences may cause more trouble than they’d fix. 

These findings are similar to those reported by other sources like FICO. Around 19% of customers thought first-party fraud was normal and 23% it was okay in certain circumstances, according to the company. 

With the first-party fraud problem getting worse, card networks like Visa and Mastercard are evolving their policies to combat the problem. This year Mastercard updated its chargeback policies to match Visa’s new Compelling Evidence policy that allows merchants to offer account history as evidence which can establish that a transaction was valid and maybe an indicator of “friendly fraud” in case of a dispute.

Meanwhile this type of fraud is also hitting ecommerce businesses where 60% of merchants report that this type of fraud has risen over the past year. “Given the expense and difficulties, many merchants just accept chargeback fraud as a cost of doing business," said Aaron McPherson, principal at AFM Consulting. 

Given the cost to their businesses, merchants appear to be in favor of the updates offered by Visa and Mastercard, with 49% saying that these updates will help a lot.