In 2015, an estimated $40 billion in total was lost globally due to fraud. Of that, $18 billion were losses associated with false declines, as Card Not Present reported a couple of days ago. Perhaps even more interesting was the fact that it was a 29% increase from the year before.
As National Merchants reported in a December 2016 blog entitled, False Declines More Costly Than Fraud, according to Business Insider, U.S. ecommerce merchants lost $8.6 billion due to falsely-declined transactions in 2016. Ironically, this amounted to over $2 billion more than the $6.5 billion in fraud these transactions were actually supposed to prevent, proving that false declines definitely undermine a merchant’s ability to effectively combat fraud. But what about card issuers?
In layman’s terms, false declines are valid credit card transactions that are incorrectly rejected. Also called “false positives,” false declines can be caused by identity-related, technical, or structural issues. Examples of these may include: conflicting billing and shipping information, outdated card information, card-not-present purchases, and differing risk appetites among issuers and merchant acquirers and processors. Ideally, they are meant to safeguard merchants from fraud essentially saving them money, but a lot of the time, they end up being even more costly, even to issuers.
Featurespace, a worldwide leader of adaptive behavioral analytics technology showed that the fraud systems being used by banks are preventing 10 legitimate transactions for every actual fraudulent purchase. When card-not-present transactions alone are considered, the number of false declines to legitimate customers rises to more than 20 for every one fraudster stopped.
While false declines are especially problematic for e-commerce merchants, issuing banks also are affected by this increasingly pernicious effect of efforts to curtail legitimate card-not-present fraud. Of the $18 billion lost globally in 2015 by banks due to false declines, Featurespace estimates that $6 billion went to competitors in lost market share when a declined customer simply pulled out another card. The other $12 billion was accounted for by additional costs associated with customer service calls and resolving customer complaints.
No matter how you look at it, there are literally billions of dollars of potential revenue that card issuers are missing out on, simply because banks are being overly-cautious in their attempts to curtail fraud. A major challenge going forward for card issuers will be to prevent future losses while not risking the security and privacy of card holders.
False declines are poised to reach record levels in 2017 but it is hoped that some of the financial losses that result from them will be able to be recovered. National Merchants Association is determined to help eliminate the hassle of false declines and with our dedicated safety practices and proprietary software, we aim to mitigate the risks associated with them.