Why Automatic Declines Are Dangerous for Online Businesses
It seems like combatting credit card fraud should be easy. After all, many e-commerce platforms come with simple fraud filters already built in. So what’s wrong with using those solutions to quickly and automatically identify and decline potentially fraudulent transactions?
It’s a solution, for sure, but it’s not as beneficial as it sounds.
While these automatic reviews may seem like they can save time, money and resources, they can actually be extremely damaging to the health of your e-commerce store for three important reasons.
1. Fraud Filters Routinely Decline Good Transactions
Many merchants use the basic fraud filters that come with their e-commerce platform, believing they’re enough to catch fraudulent orders. And if one filter is good, more must be better, right? So merchants layer filter on top of filter, hoping to flag even more suspicious transactions.
But instead of catching more fraud, merchants often end up assuming more risk. Because if they aren’t careful about the order in which the filters are layered, some of these rules may cancel each other out, reducing the amount of protection they offer and resulting in false declines.
Another problem with this automated approach is that fraud filters can’t account for variable customer purchasing behavior. For example, customers may make purchases at odd hours, ship orders to multiple locations, or make purchases from high-risk locations — and these suspicious behaviors alone may be enough to cause automated solutions to decline the transactions. But rather than being fraudsters, these individuals are simply night owls, shipping gifts to family across the country or traveling overseas. Unfortunately, these solutions simply can’t differentiate between the two.
2. False Declines Cause Businesses to Lose Money
Many e-commerce merchants are fixated on the costs of approving fraudulent orders; however, statistics show the costs of declining good orders may actually be higher. False decline losses total an estimated $118 billion yearly, which is 13 times more than the losses to credit card fraud merchants are trying to prevent.
And depending on the e-commerce merchant’s profit margins and business model, one mistakenly approved fraudulent order could take a dozen or more good transactions to make up for it.
3. False Declines Frustrate Customers
Merchants who use strict fraud filters may not keep all the fraudsters away — but they probably will frustrate legitimate customers. In fact, 32% of customers who experience a false decline choose not to shop with that merchant again.
And unhappy customers are often vocal ones, sharing their displeasure with all of social media. American Express found that consumers tell an average of nine people about their good experiences, but they tell 16 people about the bad — a move that can quickly create lasting brand damage.
Even merchants who offer identity proofing challenges based on personally identifiable information as a way to more confidently identify legitimate customers may be surprised to hear how ineffective this tactic is. Gartner reports that an average of 15% to 30% of customers fail these challenges, while up to 60% of criminals and fraudsters pass.
Even worse, merchants will never know whether they declined legitimate orders or orders from fraudsters — until customers take to social media or call customer service lines to complain. And by then, the damage has been done.
How a Robust Fraud Detection Solution Can Help
The good news is that merchants don’t need to accept false declines as a cost of doing business. Instead of leaving their fraud prevention systems up to an inflexible algorithm, merchants can use a system that flags questionable transactions and gives merchants the opportunity to manually review these “gray area” orders.
A multilayered approach to fraud prevention incorporates machine learning and manual reviews to evaluate orders that fall into this grey area. This is the only way to be confident you’re declining as many fraudulent orders as possible, while simultaneously approving as many good orders as possible.
False declines can have a serious impact on your business’ bottom line, and it’s important that you find ways to create an effective — and efficient — transaction review process. By adding expert fraud prevention staff who can use their experience and resources to evaluate transactions, online retailers can be confident they’re minimizing. Learn how to tell if you have a problem with false declines — and what you can do about it — by downloading our free e-book “Understanding the e-Commerce Payment Chain” today.