How businesses can protect themselves against first-party fraud

First-party fraud occurs when a legitimate cardholder makes an authorized purchase using their own payment credentials, but later disputes the charge or misuses commercial policies to obtain refunds falsely.

First-party fraud is different from third-party fraud, where a fraudster uses someone else’s identity or payment information to make unauthorized purchases.

There are different types of first-party fraud, these include:

• Chargeback abuse: When a customer disputes a legitimate charge with their bank instead of seeking a refund from the merchant.

• Refund abuse: A small group of identities driving a disproportionate amount of refund value through false claims.

• Promotion gaming: Exploiting marketing offers or discounts beyond their intended use.

• Serial returner behavior: Patterned behavior where customers frequently return items, impacting inventory and margins.

• Trial abuse: Signing up for free trials with low-quality or invalid credentials with no intent to convert to a paid subscription.

• Reseller and arbitrage activity: Purchasing goods to resell them, often violating merchant terms of service.

First-party fraud costs businesses billions of dollars annually. Beyond the immediate revenue loss of the original sale, merchants face several compounding damages:

• Merchandise loss: Permanent loss of physical goods or unrecoverable provision of digital services.

• Administrative fees: Substantial chargeback processing fees imposed directly by card networks.

• Operational overhead: Significant labor hours spent compiling evidence to represent and dispute false claims.

If a merchant's chargeback ratio rises too high, they risk severe penalties from card schemes or even losing their ability to accept card payments entirely.

First-party fraud typically looks something like this: 

1. The purchase: A customer browses an online store, selects items, and completes a legitimate checkout using their actual credit card, digital wallet, or local payment method.

2. The receipt: The business processes the order, and the physical goods or digital services are delivered successfully to the customer as promised.

3. The dispute: Instead of reaching out to the merchant's customer support team for a standard refund or return, the customer contacts their credit card issuer or issuing bank directly to dispute the charge. They may claim that they don't recognize the transaction on their bank statement, that the item never arrived, or that they were billed multiple times in error.

4. The chargeback: The issuing bank initiates a formal chargeback, immediately withdrawing the funds from the merchant’s account and returning them to the consumer while the case is under review.

Often, it’s difficult to separate an honest customer mistake from deliberate, opportunistic fraud.  A shopper might genuinely have forgotten about a recurring subscription, or a parent might not realize their child used their device to make an in-game purchase. 

In contrast, malicious actors deliberately exploit consumer-centric policies of credit card companies to obtain free luxury goods, electronics, or services.

First-party fraud is now one of the most common forms of abuse, reported by 44.3% of businesses in our survey. It’s a systemic industry challenge that businesses must actively address to protect their profit margins and secure sustainable growth.

One of the reasons it’s on the rise, is because financial institutions are making disputing a charge as simple as tapping a button on a mobile banking application in an effort to increase customer experiences. On the one hand, this protects consumers from genuine theft. 

On the other hand, it’s lowered the barriers to consumer payment abuse. To build an effective defense, merchants must look closer at the underlying consumer motivations and key industry factors fueling this behavior.

• The "double-dip" incentive: Some consumers have realized they can keep a high-quality physical product or continue accessing a premium digital service while getting their money back, essentially obtaining premium goods for free.

• Friendly forgetfulness: Automatic subscription renewals and unclear billing descriptors often catch customers off guard. This leads them to dispute a charge they don’t recognize on their bank statement.

• Economic pressures: During periods of high inflation or financial strain, some consumers turn to opportunistic chargebacks as a way to claw back funds without returning their purchases.

First-party fraud can be difficult to detect since it’s committed by the actual buyer who has full rights to use the payment instrument. However, there are strategies businesses can take to prevent first-party fraud:

1. Use clear billing descriptors: Match bank statement names with your brand so shoppers easily recognize purchases.

2. Track deliveries and gather proof: Require signatures and keep detailed delivery records to refute false non-receipt claims.

3. Implement 3D Secure 2 (3DS2): Verify cardholder identities during checkout to shift chargeback liability to issuing banks.

4. Keep an extensive data trail: Log device metadata, IP addresses, and user activity to construct compelling evidence files.

5. Optimize return and cancellation policies: Provide simple direct refund and cancellation options to discourage bank disputes.

These strategies will help mitigate the significant impact fraud has on your business. 70% of businesses expect fraud to actively limit their revenue growth over the next two years. Consequently, prevention is no longer just a defensive measure but a critical requirement for securing future expansion.

While the core dispute mechanism remains the same, there are many ways in which customers can exploit disputes. The execution and impact vary considerably depending on whether you sell digital goods, on-demand services, or high-value physical items.

They key is identifying the particular  patterns of abuse in your industry. Because across different sectors, a very small group of actors often accounts for the vast majority of financial damage.

Digital goods and subscription services

In digital media, gaming, and software, fraudsters often consume content and later claim they didn't authorize the charge. 

For instance, a parent might dispute in-game purchases made by their child, or a user might claim a monthly subscription renewal was unauthorized despite actively using the platform. 

Adyen helps businesses like Nord Security reduce fraud, strengthen its local presence globally, and keep private data secure.

On-demand delivery and marketplaces

In food delivery and ride-sharing, a user might claim their meal was never delivered or their ride never happened, even if GPS tracking and delivery photos prove otherwise. This abuse damages profitability and trust across the marketplace network.

Marketplaces like Delivery Hero work with Adyen's Protect module to distinguish between genuine customer service issues and fraudulent claims. This ensures good users enjoy smooth checkouts, while bad actors are blocked.

Luxury retail and high-value ecommerce

High-value luxury brands often face sophisticated chargeback schemes where buyers claim a shipped box arrived empty or the premium item inside was damaged. By combining delivery proof, carrier weights, and checkout data, physical retail brands can counter these false claims. 

Prevent first party fraud with Adyen through a combination of Unified Commerce data, machine learning, and customizable risk rules. Our platform collects rich data points from millions of daily global transactions, letting us accurately spot and block repeat offenders while genuine shoppers enjoy smooth checkouts.

Partnering with Adyen gives you access to a powerful suite of risk management tools to protect your business:

• Protect: Our built-in risk engine uses advanced machine learning to evaluate transactions in real-time. It assigns a risk score based on behavioral patterns, historical transaction data, and device fingerprinting to stop chargeback abuse.

• Chargeback services: We automate the dispute process, instantly gathering compelling evidence, like delivery notes and 3DS2 logs, to help you win disputes with minimal manual effort.

• Unified Commerce insights: By connecting online and offline channels, we help you track behavior across multiple touchpoints to flag customers who frequently abuse refund policies.

This lets you scale globally knowing that your revenue is protected.

Are you ready to protect your business from first-party fraud without compromising on customer experience? Contact our payment experts today to see how our risk solutions can protect your revenue, prevent payment abuse, and optimize authorization rates.

• What is first-party fraud: First party fraud occurs when a customer abuses the chargeback process to get a refund for authorized purchases.

• Ease of dispute drives its rise: The convenience of mobile banking dispute buttons and economic pressures have driven first party fraud.

• Evidence is the ultimate defense: Keeping delivery proof, clear billing descriptors, and 3DS2 logs is crucial to winning disputes.

• Adyen provides an automated shield: Using Protect and automated dispute management helps you scale without increasing operational overhead.