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First-Party Credit Card Fraud: Trends, Analytics, and Prevention Strategies

New Research Sizes the Problem of First-Party Fraud in the United States and Examines Countermeasures

Boston, MA -- Because first-party fraud, in which borrowers apply for and use credit with no intent of paying off their loans, has historically been difficult for credit card issuers to identify as intentional acts of theft, most lenders end up writing it off as bad debt. Recently, the payment industry and vendors that serve it have been intensifying efforts to combat first-party fraud as the criminal underworld exploits vulnerabilities in the banking and credit card system. Issuers have incorporated fraud prevention technologies to identify fraud rings and activity, weed out bad accounts, and respond with greater insight to cases of potential first-party fraud.

Mercator Advisory Group's new report, ‘First-Party Credit Card Fraud: Trends, Analytics, and Prevention Strategies’, examines first-party fraud by reviewing current market statistics on credit card fraud from a number of industry participants and national reporting bodies. The report presents credit quality data and discusses the type of environment that fosters first-party fraud.

Also included is Mercator Advisory Group's estimate of the scope of the first-party credit card fraud problem in the United States. The report describes strategies and vendor solutions and analytical tools for managing first-party fraud as well as some of the broader market implications associated with first-party fraud and banks' tactics when dealing with it.

"Part of building a strong case that demonstrates a first-party fraudster's intent is establishing a pattern of behavior that reveals it, but the best risk management policy is to cut off a fraudster's opportunity to steal in the first place," David Fish, Senior Analyst in Mercator Advisory Group's Fraud, Risk, and Analytics Advisory Service and author of the report, comments. "As fraud schemes increase in sophistication, it is all the more imperative for risk managers to harness the power inherent in broader data sets by applying analytic strategies that can detect correlations between seemingly unrelated incidents and identify behavior that may be predictive of fraudulent activity."

Highlights of this report include:

  • Definition and sizing of first-party credit card fraud in the U.S. market
  • The likely effect of easing credit policies (in future economic recovery) on first-party fraud
  • The steps processors and institutions will need to adopt to lower their risk of exposure
  • Industry wide steps needed to combat first-party fraud
  • Profiles of three vendors of fraud and risk management solutions indicating the direction of the industry's countermeasure strategies

One of nine exhibits in this report:
U.S. Quarterly Credit Card Delinquencies and Charge-offs,
and Net Employment Change, 2006-2011

This report is 33 pages long and has nine exhibits.

Companies mentioned in this report include: ACI, CyberSource, Detica NetReveal, Early Warning Services, Equifax, Experian, FICO, Intuit, MasterCard, NICE Actimize, Opera Solutions, Palantir Technologies, PayPal, Square, Transaction Network Services, and Visa.

Table of Contents

Executive Summary

Introduction

The Credit Card Fraud and Risk Landscape

  • Credit Card Fraud Trends: Where's First-Party Fraud?
  • First-Party Fraud Is Difficult to Identify
  • U.S. Charge-offs and Delinquencies Stabilizing
  • Sometimes Desperate People Do Desperate Things
  • U.S. Credit Scores Improving (Sort of)
  • First-Party Fraud Is a Large Percentage of Bad Debt
  • Identification Strategies, Tools, and Analytics for Combating First-Party Fraud
  • First-Party Fraud Targets More than Credit

Identification of Mules, Command and Control, and Collusive Merchants

  • Analytics: From Bureaus to Big Data
  • Vendor Profile: NICE Actimize
  • Vendor Profile: Palantir Technologies
  • Vendor Profile: Transaction Network Services

Conclusions

  • Classification of First-Party Fraud vs. Bad Debt
  • The Need for More Transparent Reporting
  • Privacy Issues Concerning Use of Big Data and Other External Sources for Fraud Control

Copyright Notice

End Note

Figures and Tables

  • Table 1: Selected Payment Card Fraud Statistics, 2010 - 2011
  • Figure 1: Card Fraud in the United Kingdom, 2001 - 2011
  • Figure 2: Credit Card Fraud in France, 2003 - 2010
  • Figure 3: Credit and Charge Card Fraud in Australia, 2006 - 2011
  • Figure 4: U.S. Quarterly Credit Card Delinquencies and Charge-offs, and Net Employment Change, 2006 - 2011
  • Figure 5: FICO Score Distribution in the U.S., 2005 - 2011
  • Figure 6: Change in FICO Score Tier and Segment Population from 2005 to 2011
  • Figure 7: Card Issuer Charge-offs and Fraud Losses in the U.S. by Reason/Type, 2011E
  • Figure 8: Customer Data Sources of a U.K. Credit Bureau
  • Figure 9: Palantir - Analytics for Fraud Management
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