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BLOG: The hidden face of first-party fraud

Brian Kinch | March 8, 2012
New approaches to mounting threats in the credit lifecycle.

FICO and our partner Equifax convened to talk about new approaches needed to the mounting threats presented by, particularly, first-party fraud across the credit lifecycle and third party fraud at applications stage. The site was appropriate: the St James's Hotel and Club in London, which used to be the home of Ian Fleming.

Just as in Fleming's Bond novels and the movies based on them, criminals are getting craftier, their technology more advanced. As stated in our news release, this fraud is better hidden than ever before.

Banks have been dealing successfully with third-party fraud for decades, but first-party fraud is on the rise. First-party fraud represents the hidden part of the iceberg, and it can sink your collections department. The first-party fraudster is intending to commit fraud - not pay you - at the time they take out the loan, open an account or apply for a credit card. 

First-party fraud is not ID theft: The person is who they claim to be, but they are committing fraud because they have no intention of repaying the debt. So unlike third-party fraud, which is reported at an industry level, first-party fraud may not be identified as such and is often hidden in bad debt. FICO research confirms that this represents around 10 percent to 30 percent of bad debt at many lenders - so, as with the iceberg, the fraud you don't see is bigger than the fraud you do!

Good guys lead too

Fortunately for the fate of the civilised world - or at least banks and their customers - the good guys have more advanced technology too, and better methods of detecting well-hidden criminals. The key to thwarting criminal intent is to identify it early and to take summary action. Sometimes the fraudster has just opened an account, but often they are playing a long game and have sat, good as gold, on the credit books for weeks, months, even years before seeking to "bust out" (disappear with as much money as possible) with the proceeds from all their acquired accounts.

Many banks are beginning to realise that their bad debt book is littered with individuals who set out to acquire credit facilities with the specific intent of not paying them back. This first-party fraud is distinguished from traditional third-party fraud by the fact that there is no consumer victim - the fraudster is either precisely who they claim to be, or uses a fictitious identity. In either event, such accounts need very different treatment to established credit and collection techniques if the bank is to avoid losses.

Aged, abandoned accounts - where they are attributable to a true identity that performed first-party fraud - may contain important information about customers who may "resurrect" themselves a few years later. These customers want to distance themselves from past records linking them to the debt that remains eligible for collection, either because they want to try to walk away with more unpaid debt, or because they want to make a fresh start. The thing is, in either event, the eligible debt has not been serviced - banks can use this as leverage over a "resurrected" customer. The "good" customers are often only too willing to repay significant sums owed from the past just to keep their current creditworthiness clean.


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