Most merchants in non-3DS regulated markets see 3DS as a hammer, used to force the bank to accept liability for fraudulent transactions. And when all you have are hammers, every problem starts to look like a nail.
A blanket 3DS approach is a pretty big hammer — but your customers aren’t nails. Treating them as such will only harm your conversion rates.
The key is to be highly selective on which transactions you send to the bank for review. If a merchant sends too many (likely) fraudulent transactions, the bank will view them as riskier. Focusing on those that aren’t obviously legitimate or obviously fraudulent allows the bank to see a blend of risk, resulting in higher completion rates.
The benefits of sending borderline transactions to 3DS
Every payments team has a version of the same problem: a segment of transactions that are not clear cases of fraud nor obviously good.
These transactions are considered borderline, and should not be automatically approved. A typical borderline segment range falls between 10 and 20% of risk declines, though it depends on merchant risk tolerance and the impact to the complete rate.
Instead, we can leverage 3DS.
We are okay with a very small segment of transactions seeing a challenge. They would have been declined for being too risky anyway. Not sending 100% of risky transactions to the bank improves our overall completions on 3DS transactions. Many of them are approved by the bank without a challenge to the customer.
We end up seeing about 40% of these borderline 3DS transactions being approved frictionless. These tend to increase over time as the bank trusts the volume sent to them in 3DS.
What you’re actually asking the issuer when you route to 3DS
When merchants send borderline transactions to 3DS, most think they’re asking the issuer to help them decide if a transaction is fraudulent or not. That’s not exactly what’s happening.
The issuer doesn’t have a meaningfully better fraud signal on your customers than you do. What the issuer does have is the ability to take on the liability.
When you route a transaction to 3DS, you’re not saying, “Help me decide.” You’re actually asking the bank, “I’m not comfortable owning this one. Can you take it?”
What happens when you use 3DS purely to shift liability
If you rely too heavily on 3DS liability shift, you’ll start to see your 3DS complete rates drop. You’ll also see higher challenge rates in your 3DS traffic, which will impact your conversion in both the near and distant future.
The banks will expect higher risk transactions from you, and challenge more and decline more. They could also approve your 3DS request — and their authorization rules may still decline the transaction for being high risk.
In this case, you’ve paid for 3DS, but did not complete the sale. The bank learns that you’re using 3DS for risk mitigation and not for sharing additional data to help the issuer make good decisions.
Why expanding your 3DS population doesn’t fix rising chargebacks
When a merchant gets this wrong, chargeback rates creep up. The instinct is to expand the 3DS population. Routing more transactions to 3DS and creating more of a liability shift feels like a prudent move.
But what actually happens is, friction goes up for mostly legitimate customers. Authorization rates drop. And the issuer’s view of the merchant’s transaction quality deteriorates.
The chargeback problem hasn’t been solved and the conversion rate problem is worse.
Priceline introduced Smart 3DS to shift chargeback liability and increase approvals without adding friction. Borderline risky transactions are now sent to 3DS, while Forter uses frictionless 3DS for those that are lower risk.
This approach helped Priceline increase customer completion rate by 1% and reduce chargebacks by 25%.
How (and why) to calibrate your borderline population
Defining your borderline population comes down to risk tolerance, which will vary between merchants, verticals, and geographies. You’ll want to go back through historical transaction performance and isolate the segment of transactions that is risky, but not risky enough to decline outright.
Send this segment to 3DS. You’ll know you’ve calibrated it right when the transactions in this band that used to sit in your risk-decline bucket start completing instead. Expect complete rates to move up and down over time as you keep refining the band.
Success is completion rate: getting more of these transactions approved, with zero impact to known good customers.
From there, complete rates and challenge rates are the metrics to watch. If challenge rates start climbing, abandonment and failure rates tend to follow. This can be a sign the band has drifted too risky, customers can’t complete the challenge and the bank doesn’t want to absorb the risk.
Learn how 10 issuers respond to 3DS in real life
3DS is not one-size-fits-all. What works for one issuer actively hurts you at another. The cost then shows up in your authorization rate whether you see it or not.
Join Forter’s VP of Payments and MRC Advisory Board member Galit Michel on Tuesday, August 4 to walk through how 10 major issuers actually respond to 3DS in real life, and break down how to win more transactions with 3DS.
