7 steps for merchants to detect and prevent first-party fraud
Credit: Pixabay
First-party or friendly fraud occurs when consumers purposefully misuse return procedures, report transactions incorrectly, or make exaggerated claims about goods and services. It is a growing concern for merchants, as these claims can result in revenue loss or increased chargeback rates. Merchants may take proactive measures to lessen their susceptibility to first-party fraud as online commerce expands.
This is a guidance on how to effectively identify and stop this kind of fraud.
1. Enhance customer verification
Customer verification is the first stage in confirming that the individual making a transaction is authentic. Merchants may make it more difficult for fraudsters to take advantage of weaknesses by demanding a second verification step. This can include identity verification or two-factor authentication for high-value purchases.
Additionally, retailers may identify possible fraud early by monitoring irregularities like strange email addresses or billing and shipping addresses that don’t match. Complying with mandatory requirements like Know Your Customer (KYC) can also be helpful with verification.
KYC’s primary purpose is to verify the identity of customers and ensure that they really are who they claim they are. Therefore, it is important to use KYC with additional technologies to go beyond just identity verification. For instance, the use of artificial intelligence and data analytics can help find anomalies in data. This can be extremely useful in preventing first-party fraud or money laundering.
2. Develop stronger return policies
Customers abusing lax return procedures are the root cause of many first-party fraud instances. Merchants may lessen the possibility of fraudulent returns by establishing clear policies on acceptable return grounds, restocking costs, and deadlines.
To deter fraudsters, for example, stricter return guidelines for high-risk items and sanctions for misuse are implemented. Because consumers cannot claim ignorance of the rules, retailers may be protected in a disagreement by making regulations easily accessible.
3. Monitor transaction patterns
As stated by Ethoca, first-party fraud usually hides in plain sight and is difficult to identify or prevent. This is because it is carried out by your own customers, either intentionally or due to some confusion around bank statements.
According to CNBC, businesses are losing around $100 billion annually due to first-party or friendly fraud. Moreover, 35% of Americans admit to committing some form of first-party fraud. Monitoring transaction patterns can prevent at least some of these intentionally committed, friendly frauds.
Monitoring transaction data can help identify trends associated with first-party fraud. A large volume of returns, repeated claims of non-receipt, or persistent disputes from a single client are indicators to look for.
Tools that signal suspect conduct, such as fraud detection software, can help identify these trends. By taking a proactive stance, retailers can deal with possibly fraudulent conduct before it gets out of hand.
4. Encourage secure payment methods
Providing safe payment methods, such as digital wallets or credit cards with fraud protection, increases security and deters first-party fraud. Fraud prevention is frequently included in payment processors, which facilitates dispute resolution and transaction verification.
Providing consumers with information about secure payment options can help improve transaction security by making it harder for scammers to use the system.
5. Use chargeback alerts and protection services
Chargebacks are a typical sign of first-party fraud since dishonest consumers may contest valid charges in an effort to recoup their money. When disputes occur, merchants may react swiftly by using chargeback alert systems.
Thanks to real-time alerts, merchants receive notifications of confirmed friendly fraud and disputes faster. Before the expensive and drawn-out chargeback procedure even starts, they may halt fraudulent orders and issue refunds. This frequently gives them an opportunity to address the problem before a chargeback is submitted and reduce losses.
6. Implement a customer blacklist
A customer blacklist can be a useful tool for reducing first-party fraud risk for repeat offenders. Merchants can lower the risk of recurring fraud by monitoring consumers who have a history of abusing return policies or submitting unjustified disputes.
This tactic increases overall efficiency by assisting companies in concentrating their efforts on loyal clients. Furthermore, certain fraud protection technologies enable merchants to distribute blacklists throughout networks, assisting other businesses in avoiding well-known scammers.
7. Train staff to recognize fraudulent behaviors
Knowledgeable employees are essential in identifying fraudulent activity. Merchants may identify suspicious behavior early by teaching their sales and customer service personnel to see the warning signs of possible fraud.
When trained on common first-party fraud strategies, employees are better prepared to manage situations like friendly fraud or manipulating return procedures. The crew is also kept ready to handle such threats through regular training sessions on the latest fraud trends and best practices.
Frequently asked questions
What distinguishes third-party fraud from first-party fraud?
Customers who purposefully violate policies or make fraudulent claims against their valid purchases, often in an attempt to get refunds, commit first-party fraud. Third-party fraud occurs when an outside fraudster, usually an identity thief or hacker, utilizes another person’s information to make unlawful transactions.
Are some product categories more susceptible to fraud by third parties?
First-party fraud is frequently attracted to high-priced things (such as jewelry, electronics, or designer goods) or those with a high resale value. Targets may also include consumables, perishables, and things that are regularly bought in large quantities. However, what items your customers are targeting will depend on your product range and prices.
How can customer care representatives deal with suspected first-party fraud in an efficient manner?
Customer service representatives should have diplomatic handling training when dealing with suspected fraud. Without accusing the consumer of fraud outright, they might ask for more proof from them, such as delivery confirmations or receipts. Agents can also consult comprehensive records to resolve policy misconceptions and diffuse possible disputes while safeguarding the company.
To combat first-party fraud, a proactive, multi-layered strategy that incorporates technology, robust regulations, and employee training is needed. By implementing these tactics, retailers can create a robust system that lowers losses and boosts consumer confidence. Protecting company interests will require ongoing efforts to modify and improve detection and prevention techniques as fraud strategies change.
