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 merchants $50 billion a year, according to Mercator Advisory Group.  

One reason it’s an ongoing, costly issue: Merchants 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 merchants and issuers to do all they can to identify first-party fraud, understand the reasons it happens and prevent the downstream impacts—primarily, the resulting disputes and chargebacks. 

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

1. Transaction confusion is only getting worse.

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 merchant 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.

2. The dispute process is being misused.

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 merchant 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 merchant, even sometimes when the merchant 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 merchants and issuers must work together and use collaborative technology to motivate consumers to work with the merchant when they experience service issues.

Tech that can tackle first-party fraud—today and tomorrow

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

Here are two solutions available to help reduce and prevent fraud today:

Ethoca Consumer Clarity™ is collaborative technology that brings together data and details provided by the merchant 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 merchant’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 merchants with issuer data that greatly reduces the time it takes for merchants to be alerted of confirmed or suspected fraud or any customer transaction dispute. Merchants 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 merchant to stop the shipment or delivery of goods, reducing the financial damage. 

Future collaborative solutions will need to make it much easier for issuers and merchants 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 merchants that tend to see some of the highest levels of first-party fraud.

Collaboration matters

First-party fraud will continue to be a costly problem for merchants unless they invest in the collaborative tools today and in the future that can help them minimise all types of disputes and chargebacks. Working together and leveraging rich data are merchants’ and issuers’ best defense.