Alea Consulting – Risk Mitigation | Due Diligence

The Reserve Bank of India (RBI) reported 23,953 fraud cases amounting to over USD 4 billion in FY 2024-25, a sharp increase from USD 1.39 billion the previous year, despite a decline in the number of cases.

Digital transaction frauds, primarily involving card and internet-based payments, were the most frequently reported. These often involve unauthorized access to customer data by third parties, but they can also be committed by the customers themselves. In many instances, individuals misuse their own credentials to falsely dispute transactions, claim refunds, or exploit system loopholes for financial gain. Such behaviour falls under first-party fraud, where the perpetrator appears to be a legitimate customer.

What are first-party frauds and their types?

First party fraud happens when a person or a business gives false information or hides facts to gain financial or material benefits. Unlike traditional fraud, which usually involves someone using stolen details, first-party fraud is committed by individuals using their real identities, such as their actual names, contact details, and active accounts. This makes it harder to detect, as the fraud comes from someone who appears to be a genuine customer.

Types of First party fraud:

Chargeback fraud: This occurs when a customer makes a purchase using their credit card and later falsely claims to the card issuer that the transaction was unauthorized, to get a refund while keeping the product or service.
Government loan fraud: In this type, an individual provides false personal or financial information to access benefits from loans or stimulus programs when they are not eligible.
Fronting scam: This involves using someone else’s identity, often a family member or friend, to open an account or access a service, usually to gain financial advantages like lower insurance premiums.
Bust-out fraud: Opening a credit account and responsibly use it over time to build a good credit history. Once access to higher credit limits is gained, they max out and disappear.

Why are they difficult to detect?

First-party fraud is hard to detect because it uses real personal information and appears to come from genuine customers. Unlike third-party fraud, which often involves stolen identities and triggers security alerts, these transactions look legitimate, using valid names and active accounts.

With no clear signs of deception, such cases are often missed or misclassified as credit issues. Fraudsters may even build trust before acting, making detection tougher.

Impact on Business

First-party fraud causes financial losses from unpaid loans, false refunds, and defaulted credit. Since fraudsters often appear as genuine customers, recovery is difficult, and losses are usually written off.

Managing these cases requires extra resources, increasing costs, and slowing operations. It also affects customer trust; strict fraud controls can frustrate genuine users and complicate onboarding. Non-compliance with regulations like KYC and AML may lead to penalties and regulatory scrutiny.

Best industry practices include:

Enhanced customer verification: Implement enhanced procedure to verify customer identities more accurately. This helps prevent fraudsters from exploiting weak onboarding systems.
Behavioural analysis: Entities need to analyze transaction patterns. Frequent disputes, mismatched/incomplete addresses, or unusual spending habits can be early indicators of fraud.
Stronger return and refund policies: Clearly define and communicate return and refund policies, especially for high-risk items. Require proof of purchase and condition checks before processing returns. 
Employee training: Train frontline staff and fraud teams to recognize suspicious behaviour and respond appropriately. Employees should be aware of common fraud tactics and know how to escalate cases when needed.

Conclusion

As India’s financial landscape becomes increasingly digital, organizations must enhance verification methods, adopt advanced fraud detection technologies, and promote awareness among staff and customers to stay ahead of emerging risks.