Understanding first-party fraud and abuse, and what merchants can do to protect themselves
Laura Carruthers is the Director of Fraud Prevention at Boku . With more than 10 years of experience, she’s an expert on fraud and risk management and their effects on industry-leading merchants across different countries, verticals and customer bases.?
It can start as a ‘one-off’ refund request, a momentary lapse in honesty, in order to save money on goods or services already consumed. If successful the first time, the temptation to repeat this activity can be strong. Though this may not match most people’s idea of a ‘fraudster’, it is not a fully legitimate or honest interaction – and most businesses consider this to be fraud. ?
Read on to find out what constitutes first-party fraud and what doesn't, what the impact of this type of fraud is, and how you can protect yourself from it as a merchant.?
Definitions
We can consider Offer Abuse and Friendly Fraud to be similar in that the perpetrator is usually acting under their own identity and credentials.?The recipient benefitting from or purchasing the resulting?product or service?may or may not realize the transaction was not legitimate.?
While the lines between spontaneous abuse and intentional first-party fraud may be blurry, the damage to businesses in terms of lost revenue is clear. More merchants are reporting refund or policy abuse and first-party misuse than any other type of fraud globally, with MRC’s report finding that around 33% of merchants experience first-party misuse.?
With the increasing adoption of strong Multi-Factor Authentication (MFA), biometric-based authentication methods are on the rise, making online payments more secure. Use of biometrics makes it more difficult for fraudsters to pretend they are someone else, for the purpose of using that person’s funds.??
But these days the consumers’ Internet is overflowing with offers, promotions, no-questions refund policies and consumer protection schemes – and the potential for abuse is ripe for the taking. This can be attractive for both the experienced fraudster and the ‘regular’ customer alike. ?
It also opens a door for another abuse category that poses a risk to merchants – the unapproved reseller. These parties see an opportunity to make money by systematically and repeatedly consuming offers, or misusing products and services in a way to make them accessible, then sell on. ?
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This might look like an individual who has found a way to redeem in bulk an offer such as a free trial and sell access to the generated accounts for a profit. In some cases, this can be done without any malicious intention, but with a lack of awareness of the consequences. ?
What are the impacts of first-party fraud and abuse??
Situations where products and services are consumed but not paid for, create an obvious revenue loss for merchants. When considering refunds, disputes or claims there is also an operational cost to facilitating these compensations.???
Distinguishing abuse and first-party fraud from a typical third-party payment fraud transaction can also create challenges. Skews in feedback data and incorrect labelling can cause updates to AI-based risk controls that may adversely impact genuine customers. ?
How can merchants protect themselves from friendly fraud??
Conclusion?
As fraudsters, as well as average consumers, continue to seek ways to save money online, the risks of fraud and abuse are diversifying. Consider a robust fraud prevention and payments strategy to include lower-risk payment options, strong forms of user authentication, and transparency with PSPs and Issuers.?
Boku works closely with merchants to understand what success looks like for their business and offers an extensive network of secure payment methods. Tackling all types of fraud and abuse is a key component in Boku’s LPM optimization and customer success initiatives. Please get in touch if you would like to learn more: boku.com/contact-us
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