First-Party Fraud: Why It’s More Expensive Than You May Think and What You Should Do About It

First-party fraud (FPF) — fraud committed by individuals, typically a financial institution’s own customers who have no intent to pay — is not a new issue, but it is extremely costly and more expensive than you may think. The reason: It is so difficult to detect and address that it is most often misclassified as bad credit debt by the affected organizations, and therefore placed into collections. Industry analysts suggest that higher than average unemployment rates and lack of access to credit are key factors contributing to an upward trend of FPF. According to the Federal Reserve,1 charge-off rates have spiked to 9.95 percent, nearly double the average rate of five percent over the past 18 years. This translates to approximately $85 billion of the $850 billion outstanding in revolving consumer credit being written off each year. Of this amount deemed uncollectible, roughly five to 20 percent, or $4 to $17 billion, is misclassified as bad debt when it should be categorized as FPF.