According to a new report by Aite Group, merchant losses to e-commerce fraud are projected to grow to $6.4 billion by 2021. Fraud is a persistent and increasingly sophisticated threat to retailer profits, and that is concerning enough in itself – but merchants need to be wary that fraud-busting can also backfire and cost them even more.
‘False declines’ – when legitimate transactions are flagged as fraudulent – are of growing concern amongst online retailers. Shockingly, as the Aite research shows, there is actually more money at stake with false declines for merchants than there is with the original issue of fraud. But most importantly, false declines have a severe and negative impact on the customer, who upon finding their legitimate transactions rejected by merchants take their custom elsewhere.
How fraud prevention can cost companies more than fraud itself
As our economy becomes increasingly digitised, and payments made on our cards and smartphones gradually replace cash transactions, retailers and consumers alike are making themselves more vulnerable to criminal activity. As a result, online retailers must prioritise fraud prevention and assess whether digital payments made to them are legitimate or fraudulent, then accept or decline them.
Around 2 billion card not present (CNP) purchases are declined each year, and transaction approval rates for digital transactions stand at around 85%, compared to 97% for in-store transactions. This contrast makes sense, given that it is much easier to assess whether a transaction is fraudulent in person rather than online. But if merchants are overzealous and flag legitimate transactions as fraudulent, then they are creating a whole new issue: that of false declines. The new Aite report shows that losses due to false declines will grow to $443 billion by 2021 – far outstripping the losses caused by the original issue of fraud.
The true cost of a false decline
Any decent fraud management will naturally involve declining transactions that appear fraudulent – but it is unfortunately likely that legitimate transactions will be declined along the way. The Aite data shows that as many as 62% of surveyed merchants reported their false decline rates have increased over the past two years.
The negative effects of false declines are both short- and long-term. In the short term, money is lost through refusing a legitimate customer the ability to complete a transaction. In the long term, and of far more concern, customers are left angry and refuse to return to that merchant in the future. A false decline could lead to the customer affected writing negative reviews online which may have the knock-on effect of making others avoid that retailer.
Savvy ways to deal with false declines
It is difficult to fix the transaction approval process when you do not know when or how problems have occurred. Adding insult to injury is the fact that false declines are notoriously hard to measure – some merchants are even completely unaware of the problem. But there are ways of preventing false declines.
Firstly, monitor second attempts. If a legitimate customer is falsely declined, they will often make a second attempt to purchase the product. By measuring the number of second purchase attempts that do not result in a chargeback, merchants can assess whether it is likely or not that a false decline was behind the original transaction.
Secondly, use a control group. Merchants can create a control group with some suspicious-looking transactions and analyse which orders result in chargebacks. This will help them understand what legitimate customer behaviour looks like comparison to fraudulent activity, and they can fine-tune their fraud management accordingly.
Thirdly, contact customers about suspicious orders. Have a system in place for authenticating orders, whether it is a one-time passcode texted to their phone or a human-to-human phone call. The latter might not be possible with every order, but when it comes to important customers or large orders, putting a human face to your fraud prevention strategies will avoid any negative customer experiences while protecting your revenue.
Fraud prevention is no easy task
… That is why 25% of merchants completely outsource card-not-present (CNP) fraud prevention to a trusted third party. But whether they choose to review online payments internally or through a third party, merchants must measure their false declines to protect their profits.
Luckily, the Aite report found that 79% of merchants are doing just that. The largest proportion (61%) found false decline rates between 1.1% and 5%, while 10% saw rates below 0.5%. Just 3% of merchants saw rates over 10%. And, considering that over half of merchants surveyed are seeing greater numbers of false declines in the last two years, these figures are likely to rise.
How you choose to tackle the issue of false declines ultimately depends on your unique e-commerce business. There is a balance to strike and you must of course consider the resources available to you. But as false declines are alienating customers while causing larger holes in pockets than fraud itself, it is worth it for any online retailer to take the problem seriously.