Life’s not fair. And that’s a fact that we tend to learn very early on in life. But the level of unfairness generated by fraud in the UK is grotesquely unfair. The Fraud Advisory Panel states that UK Fraud is estimated to cost every adult in the country an average £765 per adult.
Against that backdrop, there is a requirement (particularly among those in the water industry, energy providers, telcos and financial services) that businesses should “treat customers fairly” – a challenging goal, given the increasing sophistication and ongoing evolution of fraud.
The many faces of fraud
Fraud has many faces – and it’s somewhere between difficult and impossible to keep up with the latest innovations from fraudsters. Fortunately technology, combined with experience, provides solutions to some of the problems. Identity verification, address and age verification, voice analysis, IP address checks, CCJ and credit checks all help in the battle against identity theft, cybercrime, password theft, credit card fraud, consumer scams and so much more. Transactional and social media all have a part to play – and can be particularly effective in the area of first party fraud.
First party fraud
So what is first party fraud? And how big a problem is it? Fraudscreen defines it as “your own customers, using their own identities, taking advantage of your inability to challenge their version of the truth, in a distance selling environment”.
And why not? It’s easy to do if you’re so inclined – just tell lies to businesses in situations where they can’t prove that you are not telling the truth.
The result? Higher costs for everyone. £765 per adult, much of which is due to first party fraud, is a huge amount of money for any individual. And it is the innocent, the vulnerable and the honest who end up paying the price for other people’s dishonesty.
Changes in culture and consumer behaviour
What’s particularly alarming is that this kind of opportunistic behaviour is continuing to grow across all demographics and throughout the UK. According to the National Fraud Authority Experian Fraud Index 2010 (April 2011), private sector fraud cost the UK economy £9.5 billion in 2010. Of this, over half was attributed to first party fraud – and when talking about automotive fraud, the percentage shot to a massive 80%!
We can make excuses about the economy, but this increase is at least in part driven by the shift in UK culture. Even in 2010, according to an ABI survey, 44% of individuals consider it acceptable to inflate the value of an insurance claim; in addition, consumers have been encouraged by the legal profession and others to claim injuries that cannot be disproved (soft tissue damage such as whiplash) – needless to say, this drives motor insurance prices ever upwards – last year saw a 39% increase!
‘Society’ has become increasingly tolerant of dishonest and opportunistic behaviour, and this acceptance has led to increases in first party fraud across home shopping, TV licensing, government-funded benefits, insurance, water and energy companies, lenders (credit cards, mortgages, banks and building societies, payday lending).
The common denominator? All these sectors offer the consumer the opportunity to receive goods, services, or money dishonestly, by exploiting weaknesses within a business’s systems and processes – particularly where there is no comeback in terms of CCJ or credit score. For example, first party fraudsters deliberately
- Apply or place an order for goods, services, or loans with the pre-meditated intent NOT to pay
- Tell lies on application forms
- Claim that home shopping parcels have been returned or were never received
- Falsify insurance claims and/or inflate the value of the claim
- Falsely claim injuries that cannot be disproved
- Fail to pay insurance instalments once certificate has been received
Until relatively recently, this sort of behaviour has gone largely unchallenged and has simply been attributed to bad debt, or delivery issues, or just not picked up at all.
The rule is simple. When it’s pre-meditated, it’s first party fraud.
Treating your customers fairly
The simplest solution for businesses is to tar all customers with the same brush and spread the costs among everybody. Unfortunately this means that the honest, the innocent and the vulnerable end up paying the price for the dishonest minority.
It’s hard to know that an individual “intends” to behave in a dishonest way before he has actually done so. But the good news is that, in statistical terms at least, it is possible to pull apart your customers into predictive segments of good, bad or mixed behaviour. Fraudscreen, for example, can be applied as early as prior to making an outbound marketing decision; for inbound, at point of application; even after the horse has bolted – ie when you’re at the point of collections or, worse, recoveries.
Having used conventional fraud prevention techniques to ensure you know to whom you are talking, it is then a matter of applying additional data that tells you how consumers are likely to behave. Most particularly, how they will behave in an environment where they can ‘get away with’ opportunistic behaviour – where it actually doesn’t matter what they do – because there will be no come-back in terms of credit score or litigation.
Third Party Data for First Party Fraud
There is a range of data sets that are used, individually and in combination, to prevent fraud of all types, including first party fraud.
Credit data identifies a customer’s ability to pay. CCJ and similar data is also extremely useful, but works best in combination with other data sets as it provides absolutely no information on individuals who have no CCJ against them. Geo-demographic data can also be useful as part of an overall data solution, as can transactional data like Goods Lost in Transit – a tricky area as not all GLIT is caused by bad people – it can just be that something’s genuinely gone wrong, or the person delivering is lazy or dishonest.
Consumer behaviour and attitudes
There are also data sets which can be used to understand a consumer’s behaviour and attitudes. Social data is becoming an interesting tool from a first party fraud perspective – useful insights can be carefully drawn from self-reported data on Linked In, Facebook, Twitter, Google + etc. In insurance, CUE, though it has some bugs to iron out, provides claims information which can be a useful tool to verify whether or not people are telling the truth on their application forms – especially as the consumer is now quite sophisticated in his use of aggregator sites to test which answers to which variables will provide the lowest premium. The application form has now become more about price than telling the truth.
And, of course, there’s Fraudscreen, a data solution which was designed from the outset to identify consumer groups who are likely (or not) to behave opportunistically (ie first party fraud), and provide categories of consumers who are statistically more or less likely to lie for their own gain, or steal if it’s easy, or claim money or refunds from service providers. Fraudscreen can be applied across sectors to segment customers into groups of predicted good, bad or mixed behaviour. It’s an ideal solution for helping businesses in their goal of treating customers fairly as its data provides insights into consumer attitudes towards payment and honesty. And it means that the innocent or vulnerable consumer is less likely to pay for the behaviour of the opportunistic consumer.
First party fraud isn’t going anywhere, and the issues of treating customers fairly will continue to grow. A water company recently quoted that honest consumers end up with an additional £16 on their water bill, purely to cover the costs of those who won’t pay. Rather than make everyone pay for the faults of the few, surely it would be fairer to punish the dishonest, reward the honest, be fair to the innocent, and help the vulnerable?
Fraudscreen was designed to help businesses treat consumers fairly, and succeeding in that challenge will provide businesses with a real edge over their competitors, help them gain and keep new customers, afford excellent PR opportunities and improve their profitability.
Victoria Tuffill is a direct marketing consultant with over 30 years experience. She founded Tuffill Verner Associates consultancy with Alastair Tuffill in 1996. She is also founder and Director of Fraudscreen – a data tool that assists in the prevention of 1st party fraud. Her experience ranges across businesses including publishing, home shopping, insurance, utilities, telcos and collections.
© Victoria Tuffill and Tuffill Verner Associates, April 2012. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Victoria Tuffill and Tuffill Verner Associates with appropriate and specific direction to the original content.