False Declines Industry Report

Key takeaways from our report on false declines:

The Rise of Ecommerce Fraud

Yes, ecommerce fraud attacks are more and more common – both domestically and internationally. In fact, almost all of the merchants we surveyed reported at least some level of attempted fraud in 2018, and 22% said these fraud attacks exceeded 0.51% of their company’s revenue.

22% of merchants experienced attempted fraud exceeding 0.51% of their company’s revenue

Q: As a % of your company’s revenue, what was the % of attempted fraud in 2018?

Organized crime rings are likely behind much of this fraud activity. Because the kingpins of these crime rings are seldom caught, there is little to prevent them from continuing to escalate their coordinated attacks.

Rising fraud levels underscore the importance of implementing robust fraud controls. This is especially true for merchants who have no idea how often they've been a target of fraud attacks.

Losses caused by fraudulent chargebacks are a major contributor to fraud losses, with 19% of merchants surveyed reporting losses costing more than 0.5% of revenue in 2018.

19% of merchants experienced fraudulent chargeback losses exceeding 0.5% of their company’s revenue

Q: What were your losses to fraudulent chargebacks as a % of revenue in 2018?

Despite the expectation that fraud would decrease in the wake of the global EMV implementation, the opposite has occurred. Card-not-present (CNP) fraud has escalated rapidly and is expected to top $6.4 billion in the United States by 2021.

CNP fraud will reach $6.4 billion in the US by 2021

Projected CNP Fraud Losses (in US$ Billions):

Top Fraud Prevention Strategies

When developing a fraud prevention strategy, the first decision a merchant must make is whether to build an in-house fraud prevention team or leverage a third-party fraud prevention provider.

In-House or Outsourced Fraud Prevention?

Our study revealed a market trend towards outsourcing. Only 7% of merchants say they manage fraud prevention entirely in-house, with no outsourcing and no use of external tools. 

This is notable because five years ago, fewer than 5% of merchants outsourced their CNP fraud prevention.

Today, 25% of merchants completely outsource their CNP fraud prevention

Q: Which of the following describes how your company handles CNP fraud prevention?

Automated Fraud Prevention Tactics

For those merchants who choose to partner with a third party, many of the solutions available involve automated processes:

Q: Which automated fraud prevention solutions do you use?

How Merchants Are Incorporating 3DS 2.0

3D Secure, also known as 3DS, is a payment network technology protocol that adds a layer of authentication to digital commerce transactions. With 3DS, the merchant sends additional contextual data about the transaction (such as device fingerprints, IP addresses, or shipping and billing addresses) to the issuer, which enables the issuer to better assess the transaction risk.

Q: Do you plan to deploy 3DS 2.0 in the next 18 months?

Q: For which transactions will you use 3DS 2.0?

The Cost of Fraud Prevention

Fraud isn’t cheap — and neither are the technology investments merchants must make to reduce fraud and protect the customer experience.

The merchants we surveyed are spending an increasingly large percentage of their revenue combating CNP fraud, with 30% spending between 0.21% and 0.5% of revenue in 2018.

Q: What did you spend on CNP fraud prevention as a % of revenue in 2018?

Making Changes in Fraud Prevention Strategies

If merchants are learning anything in today’s increasingly risky marketplace, it’s that they need to take a flexible approach to fraud prevention. Just because they’ve invested in a solution doesn’t mean it will always meet their needs, so it’s important to be willing to consider new and more effective alternatives.

In fact, 72% of merchants surveyed are planning to add or make changes to their fraud solutions.

Q: Do you expect to add/make changes to your automated fraud screening products in the next 18 months?

Q: How likely are you to invest in or upgrade these fraud tools in the next 18 months?

Choosing the Right Fraud Prevention Partner

While the factors listed above may convince an ecommerce merchant to implement fraud prevention measures, these factors alone don’t explain how merchants choose their fraud prevention providers.

Many vendors offer all of these tools. How do merchants select a particular provider?

In our survey, 11 factors emerged as key influencers. The top three? Quality of customer service, the perceived reliability of the provider’s brand, and the ease of integration.

Q: To what extent did each of these factors influence your selection of your current fraud prevention supplier?

Manual Reviews and Automated Declines

Sometimes, correctly identifying fraudulent orders from good orders is like finding a needle in a haystack. The merchants we surveyed use multiple tactics to validate incoming orders, including both manually reviewing questionable orders and automatically declining highly suspicious orders.

The Prevalence of Manual Reviews

We were somewhat surprised to find that all our survey respondents review at least some of their transactions, and 15% review every transaction. Only 2% of merchants review fewer than 10% of transactions.

Q: What % of your sales transactions do you manually review?

The Prevalence of Automated Declines

Given the inefficiencies around manual reviews, it may seem prudent to automatically decline orders that are highly suspicious. More than half of the merchants we surveyed report their fraud prevention solution automatically declines between 3.1% to 7.5% of all their transactions.

Q: What % of transactions are auto-declined by your fraud prevention solution?

In fact, there is a high correlation between auto-declines and false decline rates.

The Impact of False Declines

For both merchants and consumers, false declines are frustrating. False declines are good orders that end up declined due to suspicions of fraud – meaning the merchant loses a sale, and a customer is prevented from placing an order.

The Importance of the Customer Experience

The potential impact unhappy customers can have on revenue underscores just how important the customer experience is in online shopping:

• A customer is 4x more likely to go to your competitor if a problem is service-related, rather than price- or product-related. (Bain & Company)

• Repeat customers spend 2x more than new customers. (McKinsey)

• 96% of consumers classify customer service as an important factor in their choice of loyalty to a brand. (Microsoft)

• A promoter has a 1400% higher value than a detractor. (Bain & Company)

• Detractors are 2x as likely to talk about bad brand experiences. (TARP Research)

• For every customer who complains to the customer support department, there are 26 unhappy customers who don’t bother to contact the company. (TARP Research)

Q: To what extent did each of these factors lead to your decision to implement your current fraud prevention process?

Revenue Losses Due to False Declines

Just how high can these false declines get? Aite Group estimates that losses due to false declines will grow to $443 billion by 2021, up from $331 billion in 2018. Considering that ecommerce fraud only costs merchants $4.4 billion in 2018, this means merchants lose 75x more revenue to false declines than they do to fraud.

Generational Differences and False Declines

Another challenge with managing false declines is that different generations of consumers react to false declines differently.

Millennials – individuals who were born between 1981 and 1996 – make more than 50% of online purchases, and their spending power is growing, as demonstrated in the graph below. This is important for merchants, because millennials have high expectations around their online shopping experiences. They are far less willing to forgive a merchant for a false decline than older generations might be.

Q: Would you leave your financial institution due to a false decline?

Measuring False Decline Rates

False declines are such a problem in the industry that 79% of merchants we surveyed measure false decline rates as a key metric.

Q: How does your company identify false declines?

Q: What is your false decline rate?

Q: How much has your % of total declined transactions changed in the past two years?

Understanding Where False Declines Happen

What makes reducing false declines even more challenging is that a transaction can be declined at any part of the authorization process — not just by the merchant, but by any party in the payment authorization process.

This is where measuring false declines can yield useful insights.

Our survey revealed that payment gateways and credit card networks are the most common sources of declines.

Q: What % of your false declines are from these sources?

Other Important Fraud Metrics

When it comes to monitoring CNP fraud, the false decline rate is just one important metric to track. After all, if you can’t measure it, you can’t improve it. Here’s what other key metrics merchants are keeping their eyes on when it comes to reducing fraud risk:

Q: What other key metrics related to CNP fraud do you measure?

Recommendations for Moving Forward

Tips for balancing false declines, fraud prevention, and the customer experience

While ecommerce fraud continues to escalate rapidly, false declines can also wreak havoc on revenue and customer relationships.

So, how can merchants balance fraud prevention, revenue, and the customer experience?

Here are four recommendations to consider implementing today:

  Understand the business case behind implementing a new fraud protection layer.

Our Data and Methodology

We conducted our research in May 2019 as a collaboration between ClearSale and Aite Group. Aite conducted an online survey of executives at 100 U.S. merchants with annual revenue between $100 million to $999.9 million.

To qualify for their survey, merchants with revenue between $100 million to $499 million had to generate at least 30% of their revenue via ecommerce, while merchants with revenue of $500 million to $999.9 million had to generate at least 20% of their revenue via ecommerce. Ultimately, 75% of the participating merchants generated at least 50% of their total annual sales via digital channels.

Q: What are the primary types of goods sold by your company?