First-party fraud has become a major issue for financial institutions (FIs). In fact, according to Cornerstone Advisors, 68% now believe that intentional fraud for financial gain has been driving up suspicious disputes, and 63% rank distinguishing legitimate from fraudulent claims as one of their top pain points in managing fraud and disputes today. As these scenarios grow in their complexity, aided by artificial intelligence (AI) and other technology tools, it becomes increasingly difficult to flag them from the start.
I recently had Nanci McKenzie, Director, Product Operations, Treasury Management and Payments Expert at Capital One, join me for an episode of NEACH’s Wrestling Payments podcast to dive deeper into first-party fraud and what it means for financial institutions in today’s environment.
The changing nature of first-party fraud
Historically, first-party fraud or “friendly fraud” often consisted of consumers disputing card transactions, saying they didn’t receive an item, or they didn’t authorize a purchase. While that sort of fraud continues, new forms have emerged that take advantage of consumer protections and put FIs on the defensive.
“First-party fraud has changed a little bit over the years,” shared McKenzie. “We've got a digital-age world that we're living in, and things are quickly shared. People are like, ‘Hey, you know, you can do this,’ which leads to new scenarios like bust-out fraud, account opening fraud, and more.”
McKenzie describes bust-out fraud as a person who has a legitimate account and an established relationship with a financial institution. That individual then applies for a line of credit, either a loan or a credit card, maxes it out, and then disappears, leaving the FI on the hook for the loss.
Account opening fraud, in the form of synthetic ID fraud, has emerged as another type of first-party fraud. A seemingly legitimate customer/member, with stolen and falsified credentials, opens an account. They keep the account open and in good standing for thirty or sixty days, just enough time for the FI to begin allowing automated ACH debits to be done online. The problem with that is that it is premeditated, so they wait until that time, and all of a sudden, the account is overdrawn and the customer/member has vanished.
“We've been seeing a lot of this type of fraud, and it is continuing to get worse because it's so hard to uncover,” explained McKenzie.
In addition, new first-party fraud scams have emerged in certain vertical markets, for instance, healthcare. McKenzie described a whole other level of fraud, in the form of the 2026 National Health Care Fraud Takedown. The Justice Department reports charging 455 defendants in connection with over $6.5 billion in alleged (first-party) fraud, including significant Medicare and Medicaid fraud in the form of false filings.
“There are three different things in the healthcare industry that are first-party fraud that go under the radar, but we now need to be looking at it,” shared McKenzie. “Number one is durable medical equipment. There are doctors and healthcare professionals who can write orders, and then they submit the claims and they're doing it on false pretenses. Second is hospice: People that are claiming that they need to go into hospice, and they file the claim and the hospice care is way overcharging Medicaid for stay. And the third is home health care, and again, exorbitant costs for minimum care.”
Fighting back against first-party fraud
But with such massive-scale attacks and the level of sophistication these first-party fraud attempts bring, what can an FI do to protect itself?
On the Originating Depository Financial Institution (ODFI) side, it’s about knowing the customer, restricting the liability, and monitoring activity on the account. Recognize when there is a sudden change in the behavior of that member or customer and follow up on what it means. Investigate larger deposits/withdrawals and new credit applications. Limit the amount of money that can flow out of an account for the first six months to a year.
As for Receiving Depository Financial Institutions (RDFIs), pay attention to items that are unusual for the account holder to be receiving or ones that come in and then immediately flow back out. Institute an account validation process or authentication process. Explore the systems already in place and what more they can do to monitor out-of-character account transactions or how you can adjust their parameters to better protect your FI.
“In some cases, the receiving depository financial institution is sometimes the best position to identify first-party fraud. And in many cases, we've got a very robust fraud monitoring process on our originating end. And with the new rules that have come into play in March and June of this year, the RDFI now has that responsibility to instill fraud monitoring practices. This is one of the ways that we are going to help to reduce the amount of first party fraud is putting these more sophisticated monitoring processes in place,” summed up McKenzie.
Above all, as first-party fraud continues to grow, FIs need to remain vigilant in their fraud mitigation, evolving to meet the shifting landscape. Because as these attacks become more calculated and sophisticated, discerning their presence will be all the more complicated. FIs need to be armed with the right tools and information to protect themselves and their customers/members.
To dive deeper into these emerging fraud trends, access the recording of NEACH's End-User Payments Fraud Symposium, where McKenzie shares additional insights and practical strategies for identifying and mitigating first-party fraud. You'll walk away with tangible ideas for strengthening your institution's fraud defenses in today's increasingly complex payments environment. For more information or to access the recording, visit NEACH.org.
NEACH - New England Automated Clearing House Association is a neutral, member-focused advocate. Our role is to give you the intelligence, context, and connections you need to make informed strategic decisions. We bring together industry leaders, policymakers, and innovators so you can evaluate innovation through the lens of your institution’s mission and market strategy. For more information, visit neach.org.