Being an online retailer today is fraught with challenges. Whether one is the chief financial officer, chief technology officer or head of customer experience, new issues occur almost every day. On top of that, consumers are demanding price reductions even though costs remain high.
Ecommerce fraud is one of the primary issues that online retailers face in today’s world. According to a study by Juniper Research, eCommerce payment fraud will cost merchants more than $343 billion globally from 2023 to 2027. Statistics like these may trigger business executives and fraud teams to tighten the requirements for order approval in order to reduce risks. However, tightening these requirement carries a risk of declining legitimate customer orders.
Staying ahead of both competitors and online-commerce fraud requires complex decisions and sophisticated technology. Businesses must take a holistic approach to online security; mitigating fraud must be a priority when it comes to protecting the entire online purchasing process. Merchants need to identify risk throughout the entire customer journey and utilize data to make intelligent decisions.
Fear of false declines
When a merchant reviews an online order, either in real-time or as a part of a manual review, and mistakenly flags it as fraudulent, it’s called a “false decline.” A false decline is one of the worst experiences a customer can have. It’s a bad experience when the customer has committed to a purchase and is looking forward to receiving the product and, they are turned away by the merchant while being implicitly accused of wrongdoing.
False declines are an expensive problem. Merchants reject 6% of all eCommerce orders, but between 2% and 10% of those are actually legitimate orders placed by good customers, according to the Merchant Risk Council’s 2024 Global E-commerce Payments & Fraud Report. Another recent study put a dollar sign on the problem: $81 billion a year2. In addition to costs, false declines impact customer experience, which can result in your customers shopping at your competitors instead.
Yet there is so much confusion surrounding false declines that some merchants don’t know when they are declining legitimate orders. They are missing the chance to capture revenue, while creating poor experiences for their customers.
Cascading problems when approval is improperly denied
Business executives are ultimately focused on generating revenue and controlling costs. False declines hit the bottom line from both directions. Here’s a few ways false declines cost companies:
Lost sale: The most obvious cost is the immediate one: The customer was trying to buy something, and the company has now lost that sale and the revenue that it would have generated.
Acquisition cost squandered: The loss of their sale — and potentially the loss of the customer altogether — means the company wasted the money it spent to acquire that customer. And with the soaring cost of customer acquisition, this is no small matter.
Customer service costs: When a sale is declined and a customer doesn’t understand why, the customer may engage with customer service, costing the company money and staff time.
Loss of investment in a loyal customer: False declines don’t happen only to first-time customers. They can happen even to longtime customers who, by no fault of their own, are declined by a fraud prevention system. When that happens, the company risks losing its marketing and customer service investments in that customer. Plus, creating friction during any purchase may frustrate the customer so much that they may leave the site, never to return again,
Lost future sales: The value of a repeat customer is measured in customer lifetime value — and this value drops when a customer is a victim of a false decline. Among loyal customers (those who had purchased from the merchant at least three times in the past), a false decline led to a 65% decline in the number of orders placed3 by that customer, according to a Signifyd analysis.
How business leaders can address false declines
To help prevent false declines — and improve predictability for customers — businesses need to ensure they understand how their current fraud prevention policies work, and how often they are erroneously declining customers.
For example, some merchants still manually review orders to determine whether they should be approved — a cumbersome system that is susceptible to human error and even in the best case can slow order fulfillment. Legacy rules-based systems may also cause concerns. These systems can have trouble distinguishing, for example, between a customer who is shipping to a new address to commit fraud and one who has entered a new address because they are sending a wedding gift to their cousin. And as the system tries to adjust to catch newly discovered fraud schemes, it may add so many rules that it becomes overly restrictive.
The best way to avoid false declines — and the attendant costs and reputational damage — is to have a system that can evaluate the risks, review declined orders, adjust to become more accurate, and ideally shift the chargeback liability from the merchant. Newer AI-based fraud protection systems are designed to do just that — which can make for a better customer experience and yield higher revenue.
At Fiserv, we have a modular Fraud Mitigation offering which can be tailored to unique business needs. Fraud Mitigation Guarantee (powered by Signifyd) is one of the solutions that gives merchants the freedom to confidently approve customer purchases without the fear of chargebacks. Having that confidence allows merchants to approve more good orders that they would otherwise decline for fear of fraud.
Connect with a Fiserv specialist today if you’d like to learn more about strategies to help prevent false declines and keep your customers happy.
Sources:
1 Juniper Research, Online Payment Fraud Losses to Exceed $343 Billion Globally Over the Next 5 year, 2022 https://www.juniperresearch.com/press/online-payment-fraud-losses-to-exceed-343bn/#:~:text=Fintech%20%26%20Payments-,Online%20Payment%20Fraud%20Losses%20to%20Exceed%20%24343%20Billion%20Globally%20Over,2027%20will%20exceed%20%24343%20billion.
2 Fraud Management, False Declines and Improved Profitability PYMNTS, 2023 https://www.pymnts.com/wp-content/uploads/2023/11/PYMNTS-Fraud-Management-False-Declines-and-Improved-Profitability-November-2023.pdf // https://www.pymnts.com/digital-payments/2024/nearly-60-of-firms-say-failed-payments-are-expensive-to-track-and-resolve/
3 Internal Signifyd Data, 2024 https://www.signifyd.com/blog/how-the-top-retailers-measure-fraud-false-declines/
