In the eCommerce world, we talk a lot about decreasing fraud and how much it costs merchants. So much so that it's hard to believe there’s another payment transaction problem that costs even more. What we're referring to is the false declines you get when processing credit card transactions. And they cost merchants more than fraud ever will.
Merchants are tasked with creating a positive customer experience while also creating a robust fraud prevention strategy. These two things overlap greatly. It's hard for merchants to give customers a frictionless buying experience while also subjecting them to enough verification to prove there’s no fraud.
For all the benefits of fraud prevention software, it does have some limitations.
Many of the red flags that detect potential fraud can actually be real purchase scenarios. These are called false declines.
A false decline is when a legitimate customer purchase gets declined on the basis of suspicion of fraud. Many times, neither the customer nor the merchant knows the real reason the transaction was flagged as potential fraud. The customer doesn't understand the problem and gets annoyed.
Unfortunately, merchants often take the brunt of the blame for something that's not their fault.
When a transaction error message or a declined payment transaction occurs, it stems from the cardholder’s bank. The transaction details are submitted to the bank that, for a myriad of reasons, feels they cannot process the payment. This can be anything from insufficient funds to expired card to card number not on file, or no such card issuer. At any rate, none of these issues is the fault of the merchant.
But consumers don't like to be inconvenienced. They don't usually bother reaching out to customize service, who might not be able to help them anyway. If they want to know what the problem is, they have to call their card issuing bank. Most of the time they just move on to a competitor, annoyed.
False declines hurt merchants more than they may realize.
Did you know that losses from false declines cost businesses across America more than the losses from fraud?
Ecommerce merchants are very aware of online fraud and risks it poses to their business and their profits. They are also aware of the potential of a credit card transaction triggering a false decline. But most don't fully understand just how bad false declines are for long-term business health, current profits, and future profits.
ECommerce merchants are expected to lose $6.4 billion to fraud by 2021. That may seem like a small fortune until you realized the projected stats for false declines. A recent study projected losses due to false declines to reach a staggering $443 billion by 2021 for eCommerce merchants! Yikes!
Consumers who have been declined falsely have proven to be quite intolerant. In fact, one third of customers that experience a false decline won't even try to complete the purchase again. On top of that, they leave with negative feelings about the experience and the business. This could affect their decision to ever come back and buy from the business again.
If the customer walks away, merchants lose revenue. But they potentially lose a lot more than just the revenue from that sale. They lose the initial cost of customer acquisition as well as potentially lose lifetime customer value.
And when friends tell friends about their bad experiences with a business, you also have to worry about the ongoing brand damage. You know the old saying… they tell 10 friends and then they all tell 10 friends, and so on.
Considering how hard merchants work to gain repeat customers, this is not something you want to risk.
Increased false declines are the result of a chain reaction:
- Merchants have seen a huge increase in eCommerce sales, partly due to the pandemic.
The holidays always bring an increase in sales, but this year will be unprecedented. Consumer shopping behavior has changed drastically, mostly due to Covid-19. Because of stay home mandates, consumers were ordering online at levels not before experienced. People are not only ordering more online, but they're ordering things they never thought to order online.
Now we're coming into the holidays when online sales are expected to blow up even more.
- Following on the heels of increased online sales: increased fraud and friendly fraud - partly due to the pandemic.
ECommerce fraud attacks are also increasing at an unprecedented level. They were already increasing due to the EMV switch. As it became harder for fraudsters to commit credit card fraud due to EMV, they moved to the path of least resistance. That path was eCommerce.
But covid poured gasoline on that fire. As online shopping increased monumentally, so did fraud attempts. Because of this, merchants have, rightly, increased their fraud fighting efforts.
- This in turn leads to an increase in false declines.
Tightened fraud detection rules is one thing that contributes to an increase in false declines. Certain types of transaction behavior triggers fraud prevention software. It's supposed to do this, it's what helps prevent fraud before it happens. But it also leads to declines for legitimate purchases. And with consumer shopping behavior changing, this is happening a lot more often.
What types of triggers pique fraud prevention software?
Software scrubs transactions for anomalies that may reveal a potentially fraudulent transaction. It looks for purchases where people are buying in bulk, when they don't normally do that. Is the item being shipped to an address different from the billing address? Is the purchase originating from IP addresses not recognized for that customer?
These are all things consumers are doing during Covid. Buying more than normal. Staying with family or in another residence while they shelter in place. Shopping using other people’s internet connection… They’re doing all the things that fraud prevention software rules are set to detect and flag.
This is a big problem since more than half of eCommerce merchants report that they’ve seen their false decline rates increase in the last couple of years.
Detect fraud more accurately - reduce fraud attempts and lower your false declines.
The goal of fraud prevention tools is to detect potential fraud accurately. By catching and stopping fraud, merchants can lower their incidence of chargeback filings. They also avoid the negative connotation that comes with a breach. But when you decline a transaction due to fraud that is not there, nobody is happy.
Some estimates claim that up to 30% of declined orders are not actually fraudulent! That means you could be losing almost ⅓ of every 100 declined orders unnecessarily! Wouldn't you want to have those sales back?
And most fraud detection software includes machine learning algorithms. Which most of the time is a really good thing. But false declines can have a negative effect on machine learning that ultimately leads to more false declines.
Merchants must find a way to gather more information while still providing a fast, frictionless customer check out experience. The best way to do that is to leverage fraud prevention technology. Your business must adapt to the changing times and needs of consumers. And as such, so must your fraud prevention strategies.
So before we get deep into holiday sales, now is a great time to review your fraud prevention efforts.
How effective are the fraud prevention tools you're currently using? Do they need to be updated to newer, more effective methods? Merchants need a fraud prevention strategy that allows them flexibility in how they set the rules.
Update fraud rules to better reflect how consumers are shopping now.
In most cases, red flag rules for potential fraud can be tailored to a company’s specific level of risk. And to take it one step further, red flag and rejection rules can also be tailored to each sales channel. This allows merchants to tailor rules for mobile device purchases differently than they might for laptop or tablet purchases, and so on.
To automate or not to automate? Both.
A lot of times, merchants leave the entire thing up to an automated fraud detection program. They take it at face value that all denied orders are fraud. And they don't implement a system for follow- up analysis of flagged or declined orders.
Instead of having a completely automated system, switch to an automated flag followed by a manual review of flagged orders. This way, you'll have a better idea of what percent of your declines are legitimate purchases. You can make better decisions about your fraud strategy. And you won't risk false declines by automatically rejecting every transaction that pops a red flag.
Is your fraud prevention strategy outdated?
In addition to manual reviews, there are newer solutions that employ a layered approach to fraud detection. The strategy is to re-evaluate a flagged order for fraud before it is actually declined.
In order to reduce your incidence of false declines, you must review your results to get a benchmark for declines in error. This will also help you to understand how much you are losing to false declines.
The data gathered from recognizing false declines from real fraud can help your machine learning algorithm get smarter. It basically teaches itself to tell the difference between a legitimate order and a fraud attempt.
Addressing false credit card processing declines is a win-win.
As we enter the holiday season it may seem like addressing how you approach fraud detection is the last thing you have time for. But with the inevitable boom in online shopping that comes with the holidays, there is no better time.
By reviewing flagged orders, you'll decrease false declines in real time and boost your profit margin along with it. And by teaching your system to tell the difference, you’ll have fewer falsely flagged orders to review in the future. Lastly, by taking the time to address false declines, you'll provide a more personalized customer service. Which in turn creates a better overall relationship with your customer base.
In the long run you’ll enjoy higher profits, reduce customer acquisition costs, and enjoy a better lifetime value from your customers. The benefits are many and everlasting.
To learn more about how our fraud detection software can help you lower your incidence of false declines, call us today!