Chapter 7

How the Wrong Fraud
Approach Threatens Revenue

As stated earlier, a single fraudulent transaction can have a tremendous impact on any luxury ecommerce retailer’s bottom line. Not only is  the merchant out the price of the product and the cost of shipping, but too little — or too much — fraud sensitivity can cost them significant money in the way of chargebacks and false declines.

The Cost of Chargebacks to Luxury Goods Retailers

Chargebacks are an issue in the fashion and luxury goods industry because of their prevalence and how much they eat away at revenues.

Chargebacks are an enormous and growing problem for ecommerce businesses,” explains Rafael Lourenco, EVP and Partner at ClearSale. “Supply chain issues and friendly fraud are climbing, with 45% of chargebacks now attributed to delivery delays.”

Additionally, recent research shows 94% of businesses identify chargebacks as significantly affecting their business. While these claims are disputable, the process to do so is time and resource-intensive for online retailers, and the fees associated with a chargeback, plus loss of merchandise, can double the cost of the original purchase. The risks are high, and retailers need support to protect themselves.

“Lost revenue isn’t the only risk, however,” says Eduardo Gerolamo, Data Scientist with ClearSale. “The industry standard for chargeback rate threshold is 1%. When merchants exceed that rate, their payment processing partners will likely place them into a monitoring program with associated fees, as well as timelines for reducing chargeback rates.”

The longer a business is in a monitoring program and the higher the chargeback rate, the more money in fees they will incur.

Eventually, regardless of brand status, businesses that cannot keep their chargeback rates within acceptable range run the risk of being denied participation with a credit card company. And when one credit card company terminates its relationship with a merchant, other credit card companies become less forgiving of chargebacks as well.

In the end, luxury ecommerce retailers that do not have a handle on fraud to prevent exposure and subsequent chargebacks can lose their businesses altogether.

On the other end of the spectrum is what happens when fraud prevention practices are too sensitive. Recent consumer behavior analysis shows that shoppers are not exactly forgiving when they’ve been incorrectly declined.


The Cost of False Declines to Luxury Ecommerce Retailers

False declines occur when a legitimate transaction is denied by the merchant, usually due to a sensitive or one-size-fits-all filter on that merchant’s ecommerce platform.

If the transaction is being attempted in person, the consumer must endure the embarrassment of having their credit card declined (keep in mind how important status is to luxury goods consumers). When the transaction is being attempted online, the resulting frustration is no less upsetting.

False declines also create inconvenience for the customer as they investigate whether something is wrong with their card – not exactly the luxurious, high-end experience these customers were looking for.

False declines are estimated to have cost merchants $443 billion in revenue in 2021 — and 62% of businesses say their false decline rates are increasing. Compare that to the losses associated with ecommerce fraud and false declines are almost 70 times more costly.

In fact, for every $1 in losses due to credit card fraud, merchants lose $13 to false declines.

When you consider the long-term costs, it becomes even more concerning.




False Declines Weaken Brand Reputation

Shoppers who experience a false decline are none too pleased, especially if they’re long-time customers.

For that reason, the biggest cost of false declines comes from angry customers who not only take their business elsewhere, they also take to social media and complain.

In our own State of Consumer Attitudes on Ecommerce, Fraud & CX 2021, a full 40% of consumers say if their order were to be falsely declined ... they would never place an order with that same retailer again. 

What's even more alarming? Customers are increasingly likely to complain online: When asked about the same experience, 34% of consumers would post a negative comment on social media, a jump from last year's 28%. 

That’s where the real damage is done to luxury ecommerce retailers.

The biggest consumer demographic for luxury goods are millennials and Gen Z – all of whom are heavily influenced by social media. A scathing review for a luxury ecommerce retailer can seriously impede sales.


The Luxury Goods Customer & False Declines

Further proving the need to be wary of false declines, one American Express study found that consumers tell an average of nine people about their good experiences, but they tell 16 people about the bad. And the rule in customer service is that consumers are much more likely to talk about their negative experiences than their positive ones.

What’s truly telling is the data from ClearSale’s Consumer Behavior Analysis, which showed the following behaviors from high-spend customers when it comes to false declines:

  • High-value customers are less forgiving of false declines: 40% would post a negative comment on social media. Similarly, 40% would never shop with that merchant again. (Fortunately, a greater percentage would reach out to a customer service rep — which means luxury ecommerce retailers need to make sure these teams are well-trained in retention.) 
  • The younger the customer gets, the more likely they are to speak out on social media. In the 18-24 group, 50% said they would complain on social media platforms about a false decline. This is a clear alert to luxury goods retailers as they target younger generations — one false decline can quickly turn into a social media storm.


There are geographic differences as well:

  • With plenty of options to choose from, U.S. consumers aren't afraid to take their business elsewhere. 52% of high-spend customers would forever boycott an online business that falsely declined their order. 
  • Only 36% of their Canadian counterparts, on the other hand, would refuse to shop again with an ecommerce retailer who'd declined them. 
  • Consumers in Mexico were the most likely to voice their displeasure on social media. 43% of high-spend Mexican shoppers would complain online about a false decline. 

Chapter 8

5 Best Practices for Preventing Ecommerce Fraud