Fraud is a persistent issue for online merchants. The problem only seems to be growing as time goes on, with fraud costs increasing by over 7% just last year.
For many businesses, this means doubling down on fraud prevention systems. Many merchants leverage a set of filters and tools designed to weed out the fraudsters and ensure that only legitimate transactions are able to pass through.
There’s only one problem with that. Many legitimate transactions end up getting blocked by the very same systems designed to catch the fraud. These are called false declines.
False declines can be a complicated issue to figure out. How and why do they occur? And how do we prevent them?
Since many merchants aren’t even aware that they have an issue with false declines or the true financial impact these may have on their business long term, we’ve put together some answers to several of the most commonly asked questions regarding false declines and some how to’s for minimizing them altogether.
What are False Declines?
To put it simply, false declines are legitimate online transactions that are stopped by a tool or system designed to catch fraudulent transactions. Although false declines may seem like a rare occurrence, they’re more prominent than you might think. One survey suggests that over half of Americans who reported a declined transaction indicated that it was a false alarm.
Declines themselves can be placed into two different categories:
This type of decline is often a temporary issue. Depending on the specifics, the transaction may go through with a retry. Some causes for soft declines include:
- An expired card
- An unusual purchase
- Insufficient funds
- Exceeding the card activity limit
In contrast to a soft decline, hard declines usually can’t be pushed through with a retry, as the decline isn’t temporary. There are a few reasons for hard declines:
- A closed account
- An invalid card
- A stolen card
How do False Declines Happen?
There are several steps in the online purchasing process where fraud checks occur, from the moment that credit card details are entered to the final settlement of payment. Throughout these steps, anti-fraud tools are designed to detect numerous different characteristics associated with fraudulent transactions, including:
- A change in shopper location
- Order data inconsistencies
- Delivery address not matching the country of origin for the cardholder (Or even multiple orders shipping products to multiple locations)
- Larger than average orders
- Missing credit card information
There are hundreds of different tools used by anti-fraud companies to prevent fraudulent transactions. Many companies leverage their own internal fraud and risk prevention teams, some rely on rules-based systems to prevent fraud, and others bring in multiple third parties to protect their business from specific points of fraud.
How do these filters influence false declines?
Since anti-fraud filters and systems are constantly being expanded, more and more fraudsters end up being stopped in their tracks. However, this also means that perfectly legitimate transactions end up in the crosshair as well. Strict anti-fraud filters may seem like a positive solution at first, but they result in unacceptably high numbers of false declines.
How do False Declines Affect Businesses?
It’s not only shoppers that are affected negatively by false declines. When legitimate transactions are caught in the same net as fraudulent ones, businesses suffer as well.
There are multiple reasons for this, most of which stem from the effect that false declines have on a customer’s perception of the business itself.
As a business owner, think of a false decline from the customer’s perspective. They’ve spent their valuable time shopping online for products and have finally chosen your business to buy from. They proceed to the online checkout, only to have their completely legitimate transaction canceled for seemingly no reason.
This scenario is more than enough to have any customer looking elsewhere for the same product. In fact, up to 33% of US shoppers will never shop with the same retailer again after an embarrassing and inconvenient false decline.
These distraught customers can have a negative impact on the overall reputation of a business as well, should they decide to take their frustrations to social media or the reviews section.
False declines also affect a business’ bottom line as well. While many would assume that fraud is the biggest cause for concern, false declines are often just as, if not more detrimental than fraudulent transactions.
Merchants can lose up to 75x more revenue to false declines than they do to fraud.
How to Reduce False Declines
While false declines are detrimental to both businesses and customers, eliminating fraud prevention altogether certainly isn’t the answer. After all, fraud itself is a major concern for online retailers across the board.
The question then remains: How do we reduce false declines while still remaining vigilant against fraudsters?
Instead of defaulting to outdated fraud detection tactics that often result in legitimate transactions being blocked, businesses need to use fraud analytics.
By properly analyzing fraud data, businesses can be proactive instead of reactive in their anti-fraud efforts. This happens by providing context to specific events throughout the transaction. Normally, transactions end up falsely declining due to loosely defined characteristics for fraud with little to no context provided. Powered by richer data and broader context, not only do you end up with more effective fraud protection, but you’ll also drastically cut down on false declines.
A more direct line of communication between merchant and bank is also a vital component of decreasing false declines. With merchants having so little visibility into transaction approval, it can be difficult for them to influence the transaction process in any way. Forter’s Trusted Authorization service is a solution to this problem, providing direct communication between merchants and issuing banks to share fraud decisions, insights, and any relevant transactional data.
When it comes down to it, both contextual fraud data and direct communication between merchants and banks are crucial elements to reducing false declines.
It’s no secret that false declines can be damaging to businesses across the board. In an effort to prevent fraud, many businesses have actually managed to create an equally, if not more detrimental problem in the process.
However, by staying informed and partnering with the right fraud prevention provider to help minimize the occurrences of false declines, businesses can stay ahead of this problem and ensure they are able to approve more good customers.
Seeking Additional Information?
For those who are looking for additional information on false declines, or even how Forter can help reduce false declines for your business, don’t hesitate to reach out to us.