First party fraud is not a novel concept or challenge for financial institutions. However, due to a unique blend of market forces and downwards pressures on Australians, it is likely to undergo a significant evolution over the next 12 months.
To successfully manage and mitigate the risks of first party fraud, fintechs need to understand what motivates perpetrators, and how to integrate measures that detect and prevent fraud whilst not putting off legitimate customers.
First party fraud is a specific type of financial fraud where an individual omits key information such as debts or liabilities when making an application for a financial service. Unlike other types of financial fraud, which involve the exploitation or stealing of a third-party’s information, money or identity, the fraudster in first party fraud scenarios is usually the genuine holder of the information — a ‘regular’ individual making false representations.
Economic trends can and will influence how first party fraud evolves Fintechs need to pay particular attention to the economic trends that are likely to influence how Australians engage in first party fraud. With six successive cash rate hikes and a years-high inflation figure of 6.1%, the cost of living pressures for everyday Australians is only set to continue.
For some, the resulting anxiety and fear from these pressures can lead to omission of information such as debts when making a loan application. However, many consumers are unlikely to associate such behaviours with fraud, and may unknowingly be putting themselves at
Recent research indicates a majority of people would not knowingly lie on loan applications, in spite of increased financial stresses. However, one in five Australians believe it’s ok to tell a ‘white lie’ and report having less debt than they actually have in a financial service or loan
application. This belief is ill-founded, as the consequences can be severe, ranging from fines, damage to credit history, or even criminal charges. Concerningly, only 22% of Australians claim to be confident in understanding the rules, legislation, and consequences of lying in a financial service or loan application.
This lack of community-wide understanding of the serious implications of first party fraud to the individual themselves is a call to action for fintechs looking to stamp out first party fraud once and for all.
A key preventative step fintechs can take is better communication with and education of their customers about the seriousness of first party fraud and the consequences for individuals who lie in applications or during the onboarding process.
The first party fraud issue is unlikely to dissipate unless there is increased communication from fintechs about the consequences, whether the fraud is committed as a direct result of need, or for more malicious reasons. With clear educational materials and onboarding processes,
consumers can make better-informed choices, and financial institutions can minimise the risk of alienating those who genuinely do not realise they are putting themselves at risk.
Fintechs should adopt security measures ahead of time With ongoing financial pressures and rising inflation, which may lead to intentional or
unintentional financial information omissions in financial service applications, fintechs need to seriously scrutinise their customer onboarding processes. Taking a proactive and preventative approach will help mitigate the risk of first party fraud. But fintechs also need to strike a balance between robust security measures and a seamless onboarding process which will help them attract and keep customers in the long term.
Fintechs should consider the following methods to combat first party fraud:
- Fraud analytics: Due to the often imperceptible nature of first party fraud, having an application fraud management solution can identify potential fraud attempts in a real-time manner, picking up subtleties in the risk indicators that are not obvious to the human eye.
- Machine learning: By focusing on potential risk indicators and having a machine learning platform study and adapt to the fraud patterns over time, fintechs can have the confidence that fraud detection strategies are fully up to date. It eliminates the need to constantly train and re-train employees to do similar work and automates both the detection and reporting.
Rather than focus on the potential for fraud growth in 2023, fintechs should view this unique set of circumstances as an opportunity. By implementing proactive security measures now, and making information about the rules and regulations of loan applications more transparent to customers, the impact of first party fraud can be limited.
By Carol Chris, Regional General Manager, Australia and New Zealand, GBG