As rising interest rates persist and credit conditions tighten, vendors and lenders are facing an uptick in first-party fraud.
First-party fraud represents a problem for lenders and vendors because it is fraud being committed by the borrower, so there’s a real person attempting to defraud them. The presumptive borrower is the person they say they are but manipulates their information in a way that makes them worthy of the loan.
Consumers and small businesses feeling the pressure of higher rates are more likely to engage in fraudulent activities, Vivek Ahuja, head of enterprise sales and alliances at anti-fraud fintech SentiLink, said during a July 27 webinar presented by Scienaptic AI, an AI-driven credit-decisioning platform.
Economic pressure “leads to increasing levels of first-party fraud or certain types of synthetic products,” Ahuja said. “My prediction [for the near future] would be continuing to see some elevated levels of first-party fraud tied to credit abuse and manipulation.”
The equipment finance industry has seen an uptick in the number of fraudsters applying for loans with falsified information, Ronan Burke, co-founder and Chief Executive of document and automation fintech Inscribe, told Equipment Finance News.
“In business lending, we’re seeing a lot of first-party fraud; the person applying is who they say they are; however, they are modifying certain information around their ability to repay revenue and the business,” he said.
In fact, 30% of fraudulent personal loan applications showed signs of first-party fraud in 2022, whereas 50% of fraudulent business loan applications had signs of first-party fraud in 2022, according to data published by Inscribe in January.
Fighting first-party fraud
Fighting the rise in first-party fraud is a challenge that pervades the entire finance industry, and requires robust communication between lenders and vendors.
Motorcycle financier American Cycle Finance, for example, has put in place two baseline tests to combat this type of fraud, Richard Snyder, director of credit, said during the July 27 webinar.
The lender’s first baseline test checks for potentially fraudulent activities and credit scores that warrant an automatic decline, followed by the second baseline test, which tests for possible fraudulent activities and credit scores that require more information from the dealer and an underwriting review, Snyder said.
“We require our dealers to get us more information if that second baseline isn’t satisfied, and that’s usually when we find out it’s 100% fraud, when the customer never gets back to the dealer,” he said.
Multiple baseline tests allow lenders to utilize manual fraud detection resources efficiently to detect actual fraudulent activity rather than problematic applications, Snyder said. For lenders, it’s important to get “the underwriters to understand not everything’s fraud … Training is key and then getting used to asking for the information,” he said.
Repeat fraudsters can also be tracked and found through communication with service providers, Shahar Ronen, product manager at financial data platform Plaid, told EFN.
“One thing that you will want to see is that this person is logging in from a device that was used to open 20 different accounts over the last couple of days or has been known to defraud many other vendors either in this space or in some other space,” he said. “These are really strong signals that vendors could provide you.”
Other first-party fraud methods, such as document fraud, can be discovered within the financial services vendor ecosystem, Inscribe’s Burke said.
“When you actually talk to financial services companies, they often have hundreds if not thousands, of team members working on this stuff,” he said.
With fraud escalating, communication with vendors facilitates the development of strategy and best practice, Plaid’s Ronen said.
“As a fraud fighter, you should also get more sophisticated if you need to make decisions in real time,” he said. “You need to look at other sorts of data, get more data about devices, location and things like that. Any fraud vendor would probably have a good understanding of what to do and what are good practices and how to make these real-time decisions.”
Synthetic fraud as first-party fraud
Synthetic fraud allows first-party fraudsters to “Frankenstein” their identity to overcome bad credit and other red flags, Ronen said.
“Some fraudster creates an identity that was never seen before, as they piecemeal things here and there, and the goal is to hide their identity rather than steal somebody else’s identity,” he said.
Different from first-party fraud, second-party fraud involves an individual passing on their personal information to another party to commit fraud. And, third-party fraud involves an individual who steals another’s identity, according to consumer credit reporting giant Experian.
Financial institutions are seeing a surge in first-party fraud, according to a January study by identity risk solution provider Alloy, which also noted:
- 62% of financial institution respondents indicated they had experienced first-party fraud;
- 39% of organizations said they experienced second-party fraud; and
- 38% of organizations said they experienced third-party fraud.
Synthetic fraud was a top concern for financial institutions heading into this year, according to the Alloy report, in which nearly 24% of respondents named synthetic fraud as a top concern.