Third-Party FraudCriminal Fraud Goes Far Beyond Identity Theft

What Is Third-Party Fraud? How Does It Impact Merchants?

Your business is doing well. You’ve had a profitable month, with a couple of big sales to brand-new customers.

Everything looks rosy... until you get hit with a notification saying those two new customers weren’t real customers at all. They were scammers, and the real cardholders were victims of identity theft.

This is a textbook example of third-party fraud. In other words, stolen credentials were used by unauthorized third party for making a purchase.

How does this happen? Who’s liable for the damage? Let’s take a look at what constitutes third-party fraud and what differentiates it from other types of payment fraud. We’ll also look at some preventative measures merchants can take to protect their businesses.

What is Third-Party Fraud?

Third-Party Fraud

[noun]/THərd • pär • dē • frôd/

Third-party fraud refers to any crime committed by using false identification to pose as another person or organization, without that party’s knowledge or authorization.

With third-party retail fraud, criminals hide behind a false identity. The fraudster can pose as a legit cardholder, or use data points from different users to create a completely synthetic profile.

Third-party tactics are often used to facilitate transaction fraud. Cyber-criminals use that stolen info to take over existing accounts, or open accounts without the victim’s knowledge. These are often credit card accounts that can then be used to make purchases.

That's not true in every case, though. Criminals have even been known to apply for major loans and mortgages under false identities, for example, which also constitutes third-party fraud.

First-Party, Second-Party, or Third-Party Fraud: What’s the Difference?

Since third-party fraud exists, it stands to reason there would be first- and second-party fraud as well.

The primary difference with third-party fraud is that the legitimate owner of the information isn’t involved at all. In fact, there may not even be a legitimate cardholder;  the fraud may originate with a falsified account. All totaled, 38% of financial crimes committed in 2022 were attributed to third-party fraud.

Common Types of Third-Party Fraud

The term third-party fraud is often used interchangeably with “identity theft.” This is a bit of an oversimplification, though.

The truth is that there are dozens of different third-party fraud tactics out there. Here’s a rundown on some common third-party fraud schemes you might encounter:

Third-Party Fraud Red Flags

With that big list of tactics we just outline above, you might’ve already guessed that there’s another list a mile long of “red flags” suggesting a transaction might be fraudulent.

You’re not wrong there; each tactic has it’s own telltale signs that may help expose an attack. That said, there are some common red flags that will help you identify most fraud attacks:

• Transactions with abnormally high dollar values
• Repeated transactions for small amounts in rapid succession
• Mismatches of shipping and billing address
• Multiple declined payment attempts
• Unfamiliar IP addresses or unusual locations
• Emails from obscure or disposable domains
• Vague or incomplete contact details
• Requests for overnight shipping on expensive items
• Multiple accounts linked to the same device or IP address

None of these should be considered absolute proof of fraud. But, when you see multiple red flags flying... it’s probably wise to subject that order to additional screening.

How to Identify Third-Party Fraud

Each category of fraud requires its own approach to prevention. First-party fraud, for example, happens post-transaction. Combatting it requires contesting invalid customer claims, or using an alerts program to catch disputes before they escalate to formal chargebacks.

In contrast, third-party fraud needs to be countered at the verification stage, before the transaction is completed. Conducting due diligence to investigate and pinpoint the red flags outlined above can be difficult and time-consuming, though. The good news is that you can largely automate that process.

Advanced fraud filters employ artificial intelligence and machine learning to verify that a cardholder’s documents are genuine. Detailed customer profiles can be used to help identify any actions that seem to be out of character or don’t match the buyer’s purchase history.

Learn more about fraud filters

You can then take those customer profiles and subject them to fraud scoring. This will look at all the key indicators, weigh the potential risk, and give you a simple numeric score between 0 and 100 to say how likely it is that a transaction is a scam. You can then choose to reject those orders automatically, or set them aside for manual screening.

Learn more about fraud scoring

Preventing Third-Party Fraud

Simply put, the best way to prevent third-party fraud is by validating buyers. As a merchant, you can’t stop identity theft from happening. What you can do is put a system in place to recognize it prior to a transaction. 

There are a number of tools available to help identify risky transactions. Deploying the right fraud prevention solution is as vital as adopting the right internal processes. Here are some suggestions:

Learn more about fraud detection

In addition to the above tools, make a habit of assessing and analyzing the methods by which people present their identity. This may help detect suspicious buying activity, inconsistencies, or patterns similar to past instances of known fraud.

Fraud prevention is about combining the right tools and the right approach to combat the specific issues you’re dealing with.

But, you’ve got to be clear eyed about the situation here. Criminals get more sophisticated all the time, and staying up-to-date on the latest risks can be a full-time job on its own. So, even with the best strategy in the world, your business will still be susceptible to fraud.

The experts at Chargebacks911® are constantly uncovering new fraud threats and developing innovative strategies and technologies to combat them. This includes not only third-party fraud, but fraud from all other sources.

Need a hand preventing third-party fraud and the resulting chargebacks? No worries: we can help. Contact us today for a free demo.