False Declines and False Positives Are Costing You Revenue

False declines are a strong indicator of a weak fraud prevention strategy. This article explains how false declines impact your business and how you can ultimately win the battle.

False declines, also known as false positives, are a problem that every online retailer has to deal with. They pose a serious dilemma for eCommerce businesses because it's important to prevent fraudulent orders from getting approved, but the cost of false declines is high in terms of both revenue and reputation.

In fact, the overall cost of false declines comes to $443 billion every year according to Aite-Novarica. That number far outweighs actual credit card fraud. The Aite report goes on to mention the reputational damage that merchant's can suffer when legitimate transactions are declined: "Four in ten consumers say that, if a merchant falsely rejects one of their purchases, they will refuse to shop with that merchant again in the future."

In this article, we'll examine how false declines occur as well as the unexpected damage that they can inflict on eCommerce business revenue and reputation.

What Are False Declines?

A false decline is a legitimate transaction that is flagged as fraudulent and rejected.

If you've ever experienced a frustrating moment when you tried to make a legitimate purchase, but it was declined, then you might have experienced a false decline. This occurs when a valid transaction is flagged as fraudulent by a merchant, payment processor, or financial institution.

False declines can have significant consequences for both customers and merchants. For customers, it can lead to embarrassment, frustration, and a loss of trust in the payment system. For merchants, false declines can result in lost sales, damaged reputation, and lost customers.

False declines are particularly common for online transactions, where there is often less information available to verify the identity of the buyer. It's important for eCommerce shoppers to ensure that they've taken a few steps to do their part:

• Is your payment information up-to-date and accurate? It's important for cardholders to keep payment information updated, such as billing address, name, and other account details.
• Have you notified your bank about your travel plans? Cardholders should notify their bank or credit union about travel plans whenever possible. Cardholders today can even complete this step easily through their online or mobile banking app.
• Are you making a large purchase? Most buyers don't buy big-ticket items very often. It can help to notify the issuing bank of a planned, larger-than-normal purchase.

Merchants can also take steps to minimize risk, reduce false declines, and prevent lost revenue. They can work with their payment processor to adjust fraud prevention settings and ensure that their systems are up-to-date with the latest fraud trends.

While false declines can be a frustrating and costly problem for both customers and merchants, robust fraud protection and prevention measures are necessary to stop fraud. It becomes even more important to find a balance between preventing fraud and allowing legitimate transactions to go through. By taking steps to minimize false declines, merchants can create more seamless and secure payment systems for everyone.

Why Do False Declines Happen?

A primary reason false declines happen is due to overzealous fraud prevention measures like rigid rules. For example, they can occur if a user's IP address is in a different country than their billing address, which is a common scenario for business users.

By contrast, forward-thinking merchants, banks, and payment providers have employed sophisticated algorithms and machine learning models to detect and prevent fraud. These fraud prevention systems have proven to be effective for high-risk transactions, adding critical components to their strategy.

A false decline can also fall afoul of other fraud filters, including:

1. Daily velocity filters that limit the number of transactions one IP address can make per day.
2. Shipping and billing address mismatch filters.
3. High ticket purchase filters, which are triggered by transactions that are over a certain value threshold.

Now that we know the causes of false declines, let's look at the damage they can do.

1. Damage to Brand Reputation

Customers who have repeatedly tried to buy something from your eCommerce business and continue to experience declined transactions are going to be frustrated. That frustration can seriously damage your brand.

They may turn to online forums or review sites to complain about your business, and they'll likely find sympathizers that amplify those frustrations. Additionally, other users may well read these reviews and preemptively decide to buy from another business.

This reputational damage is a serious concern: brand reputation means a lot in today's competitive market. If your attempts at combating fraud are hurting your reputation, they could be doing more harm than good.

2. Customer Churn

False declines and false positives can significantly impact customer churn. When a customer experiences a false decline, it can create a negative experience and erode their trust in the merchant as well as the payment system. This negative experience often leads to frustration, anger, and even a decision to stop doing business with the merchant altogether.

In fact, according to a survey by Javelin Strategy & Research, false declines were found to be the leading cause of customer churn in the eCommerce industry, with 38% of respondents indicating that they had switched to a different merchant after experiencing a false decline.

Customers may feel that the merchant is not able to handle their transactions properly or that they are being treated unfairly. They may also feel that their personal information is not being protected, leading to concerns about identity theft or fraud. All of these factors can contribute to a negative perception of the merchant and a decision to take their business elsewhere.

3. False Declines Cost You Revenue

False declines can seriously impact revenue for merchants. When a legitimate transaction is declined, the merchant not only loses the immediate sale but also potentially loses a would-be loyal customer for future sales.

Even with conservative estimates where business revenue losses hover around 3% due to false declines annually, the revenue lost is staggering. For example, in 2020, the eCommerce industry generated $4.29 trillion. Growth of revenue levels through 2023 are projected to increase to $12.87 trillion. At the same 3% revenue loss rate, false declines could potentially cost businesses up to $386 billion annually.

There may also be costs associated with investigating and resolving false declines, such as reviewing transaction logs, contacting customers, and updating fraud prevention measures.

4. False Declines Damage Your Fraud Detection Abilities

Effective fraud detection and prevention solutions need an "always on" data approach to win the battle against fraudsters. This sort of strategy relies much less on rules and manual review--and more on a comprehensive data science method.

For example, if you block all transactions from Nigeria, for instance, then you are not only driving away legitimate customers, you're giving your fraud detection less data to work with, which means that your fraud detection will be less accurate.

This can lead to widespread inaccuracy that could allow real fraudulent transactions to slip through the cracks.

The Cost of False Declines: What's the Solution?

The cost of false declines is high, so preventing false declines should be one of your priorities.

Vesta's end-to-end transaction guarantee platform is designed to deliver unparalleled approval rates and a better customer experience, while also bringing the true cost of fraud to zero. 

Our system allows you to address the causes of false declines easily, cutting down complaints from customers and ensuring security for payments. If you'd like to learn more about our system and how it can help your business, then request a demo today.