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Businesses are enjoying a surge in e-sales this season, thanks in large part to the most recent emergence of the omicron Covid variant and the public’s growing reliance on the online marketplace for everything from groceries and other everyday purchases, to seasonal, electronic, automotive and lifestyle items.
Despite this growth, online profitability is not nearly what it could be, due to both increasingly sophisticated internet fraudsters and the growing costs of false declines.
What are False Declines?
The term “false decline” is applied to a situation when a legitimate credit card purchase is erroneously declined and a sale prevented when it was truly legitimate and should have been approved.
These declines are almost always triggered by some form of automated fraud prevention software that seeks out fraud at various levels, multiple times throughout a transaction. Although occurring within just an instant, each point of examination reflects an opportunity for a false decline.
How Common are False Declines?
A recent study cited that the average online store declines almost 3% of all orders because of suspected fraud. Investigations have revealed that almost 60% of all declines should have been approved, and a staggering 15% of US consumers have reported having their attempted purchases falsely declined at one time or another. Why does this happen and why is it of concern to both retailers and customers alike?
It is well-documented that cyber-crime is at an all-time high, and what began with viruses, malware, phishing, and pharming has evolved into a nefarious fraud-riddled arena of increasingly complex, sophisticated, and deceptive scams that are expected to cost businesses a painful $12 billion this year alone. Retailers seeking to limit their exposure to these sorts of attacks have implemented robust anti-fraud filters that are oftentimes overly hermetic in their approach.
Each step of the sales process is examined with some of the most common filters scanning parameters such as customer location, or shipping address, with the most complex among them inspecting up to 500 individual factors. Some companies even set blanket decline conditions based upon country of sales origin. With anti-fraud software programmed to detect mundane details and even the most minute of discrepancies, it is no wonder that legitimate sales are getting caught up in their net. And that net is only expanding.
Since the advent of Covid, online shopping continues to rise, translating into an influx of what are considered “new shoppers” to the online shopping space. Being “new,” they are not recognized as “return customers” by anti-fraud software aimed at identifying risky sales, as there is less data to rely upon for their positive identification and verification purposes. In fact, first-time shoppers at an online store are up to seven times more likely to suffer a false decline on an attempted purchase than a repeat customer.
Another example is with vendors selling high-priced luxury items. Statistically, the rate of declines increases with higher-priced merchandise, as those retailers tend to apply extra-stringent parameters to their anti-fraud filters, yielding more declines than are truly warranted. And who among us hasn’t experienced an embarrassing payment decline while traveling to another city or country? In their quest to protect their online businesses and sales, retailers are effectively harming themselves by embracing protocols that are too discriminatory in practice. Why does any of this matter? For starters, nobody likes to be falsely accused of something they did not do. A would-be customer may take a false decline very personally, thereby resulting in uncomfortable friction between them and the vendor.
The Costs of False Declines are Staggering
A recent research study revealed that a sobering 33% of American consumers say that they would never shop in a store again that had erroneously declined their purchase. That reflects an immediate sales loss for the retailer, not to mention whatever repeat business that may have transpired over the course of a consumer’s lifetime.
In fact, a documented 40% of customers admit that they would deliberately seek out a retailer’s direct competition to complete the purchase they originally wished to make. And that’s not all. The age-old adage about the fury of a woman scorned may be applied to a rejected customer, who may take to the phone lines, email, and chat applications to issue complaints, tying up business resources. Or even worse, jilted customers may air their grievances via social media, which can last far longer than the feeling of insult itself, not to mention the untold reputational damage and potential loss of revenue that word of mouth reporting can wreak. While people may talk about the positive experiences they have had, studies show that negative experiences receive almost 50% more attention. What is known as “the negative effect” is, therefore, a real concern and risk to future business.
Statistics demonstrate that false declines are costing businesses up to seventy-five times more than fraud itself, to the tune of almost $120 billion per year. In fact, it can take upwards of twelve approved transactions to recoup the cumulative losses of just one false decline. No business with an online sales component is immune, and with sobering numbers like these, everyone should take notice.
To learn how your business will benefit from an effective fraud prevention program that will yield the highest level of processing approvals, contact NoFraud.com for your assessment today.
The eCommerce industry is growing rapidly. It’s become more critical than ever for merchants to realize how false declines can significantly impact their bottom line.
False declines can be a bigger problem than fraud itself. Research by Javelin Strategy shows that 15% of all cardholders have experienced a false decline in the past year. Furthermore, in the US alone, $109 billion more was lost to credit card transactions falsely identified as fraud than to actual credit card fraud.
The value of False Declines is more than 13 times the total amount lost to actual credit card fraud. Yup, you read that right. For every $1 in losses due to credit card fraud, merchants lose $13 to false declines (Aite).
What Are False Declines?
To understand false declines, you need to understand what happens behind the scenes when online orders are placed.
Online transactions must pass through payment gateways that are set in place by companies. These gateways may contain filters at each step during the online order process, set up to try to detect fraud. Orders are not approved unless they pass gateway filters. If one of these filters indicates that an order is fraudulent, the order gets blocked by the system and cannot be placed by the consumer.
While these filters may do a fair job of detecting the most obvious fraud attempts, they often make mistakes. When a fraud filter flags and blocks legitimate transactions, this is called a false decline (or a false positive).
False declines are not usually accounted for in fraud losses because they can be tough to quantify. Many companies are unaware that many of their orders declined on fraud suspicion are actually from good customers. Yet. 58% of declined transactions have been proven to be perfectly legitimate orders. This is costing companies money.
How False Declines Happen
Since fraud filters use simple rules or algorithms that judge common characteristics of fraud as inputs, there are many reasons why a purchase can be declined.
Some typical reasons orders get declined include:
- If the location of the shopper is different than previous purchases
- The delivery address is different than the consumers billing address
- If the shopper requests the fastest shipping method
- Inconsistent order data – for example: if the zip code and city don’t match
- Larger than average order
- Multiple shipping addresses
- Multiple orders from many credit cards
- Missing card information
False declines are so common because companies are over-reliant on automation to screen their orders. For instance, there might be a legitimate reason why the customer’s billing address doesn’t match their shipping address. And companies who only rely on simple fraud filters are missing out on several diverse data sources that give you a much more complete picture of the transaction’s risk profile.
The Cost of False Declines
While false declines have an immediate impact on revenue due to canceled orders, the main cost of false declines is the long-term result of unhappy customers. After an experience with a false decline, dissatisfied customers tend to take their business elsewhere – perhaps never to return – and spread their poor experiences with others. But that’s not the only cost of fraud.
3 Major Ways False Declines Hurt Your Company
- More unhappy customers
- Less revenue generated
- Damaged Reputation
Look at a false positive from the lens of a buyer: You spend hours researching a product online, comparing features, and reading reviews. Finally, you decide to buy the item at a trusted store, only to have your purchase blocked by the store. How would that make you feel about the company you had decided to trust?
From a customer’s perspective, a false decline can be unsettling. More than 80% of cardholders who experienced a false decline said it wasn’t just inconvenient but embarrassing and aggravating.
In Javelin’s survey of 3,200 U.S. consumers, 32% said they wouldn’t shop with a merchant again following a decline.
Less Revenue Generated
False declines cost a lot more money than you think. Since the value of declined orders is 1.6 times higher than the average purchase, online merchants are losing more revenue to false declines.
Javelin reports that U.S. merchants lose nearly $118 billion each year to falsely declined transactions. This may be because most eCommerce merchants don’t realize that false declines can cost them up to 13 times as much as fraud itself.
According to the Merchant Risk Council’s 2017 Global Fraud Survey, the average online store declined 2.6% of all incoming orders because of fraud concerns. These same merchants declined 3.1% of all orders valued at over $100.
Frequently after having a negative experience with a company, consumers find outlets to vent their frustrations. An American Express study found that consumers tell an average of nine people about their good experiences, but they tell 16 people about the bad ones.
These days, poor buying experiences don’t just spread by word-of-mouth. They’re glorified all over social media, product reviews, and business review sites. Consumers trust other consumers. These reviews placed on the internet by other consumers shape the decisions of future potential customers.
How to Reduce False Declines
1. Stop Relying on Gateway Filters: Unfortunately, simple rules such as auto-declining orders with an AVS mismatch are not a smart way to manage fraud. In fact, at NoFraud, we find that about 90% of transactions with an AVS mismatch are accepted as good orders. If you’re relying only on gateway filters, you’re almost certainly being way too conservative in your approach.
2. Rely on Dedicated Fraud Analysts: In organizations where customer service representatives primarily manage fraud screening, you might have more false declines than expected. This is because most CSRs don’t have the expertise or incentives to take measured risks regarding fraud pass/fail decisions.
While it’s easy to determine which representative is responsible for approving an order that ended up being a chargeback, false declines are nearly impossible to track. Additionally, CSR performance is measured based on customer satisfaction, not on revenue or order approval rates. Therefore, most CSRs tend to be overly cautious, resulting in more false positives.
3. Choose the Right Partners: There’s a reason why full-service fraud prevention solutions are known to improve order approval rates. Fraud companies leverage diverse data sources and large customer networks that eCommerce businesses just don’t have access to. This results in far more accurate decisions than simple rules-based filters can provide.
At NoFraud, accurate decision-making is nothing short of an obsession. We know through experience that pushing order approval rates as high as possible requires a combination of powerful analytics, diversified data sources, AND expert review. While 99.5% of transactions are determined through advanced machine learning, NoFraud also automatically escalates all “grey” orders to seasoned fraud analysts. We call this Proactive Review, and it’s the reason why merchants who switch to NoFraud can cut their order declines in half.
False declines can be highly damaging to a company’s bottom line. With the continuous growth of the eCommerce industry, merchants need to realize how false declines happen, and more importantly, how they can prevent them.