False Declines

What is False Decline?

As the popularity of e-commerce rose, so did e-commerce fraud. In response to this, the entire world of digital finance instituted measures to help keep legitimate consumer's financial transactions safer. Individual websites instituted various security protocols to help authenticate the identity of the buyer and banks and card issuers started using AI-powered software to track spending patterns in order to better identify identity theft or fraudulent transactions immediately. The faster fraudulent transactions are identified, the more likely banks and card issuers are to stop fraud in its tracks and possibly even apprehend the perpetrators.

This increase in security, however, has also created a number of headaches for consumers and even for businesses. In many cases, increased security measures make it difficult for consumers to access their own accounts and even to make purchases. When consumers are unable to make purchases, it hurts businesses. One of the many reasons consumers are often unable to make purchases is that their payments cards are sometimes being declined, even though they have funds available and they are the legitimate cardholder. These declines are called "false declines" and they are becoming a serious issue for businesses. While e-commerce fraud is estimated to cost banks and businesses more than $6.5 billion, e-commerce false declines are estimated to cost nearly $8.6 billion in lost income and revenue.

What Causes False Declines?

One of the most common types of fraudulent e-commerce activity is an ATO or Account Takeover. This is when an unauthorized individual gains access to someone else's account, ATO is different from identity theft, since they are not opening any new accounts in someone else's name, but simply taking over an active account. In many cases, the legitimate owner of the account may not discover the takeover until they receive a credit card or bank statement, by which time the fraudulent party may have already racked up several thousand dollars in purchases. The account owner is not liable for this amount, but the liability is instead carried by either the merchant or the card issuer.

Needless to say, the longer fraudulent spending goes unnoticed, the more spending thieves can do. With millions of electronic and e-commerce purchases being made every moment, however, there is no way for banks and card issuers to manually check every purchase. Instead, complex algorithms are employed that track regular spending habits and patterns so that any irregularities can be spotted quickly, if not immediately. When irregularities are detected, the bank will often try to contact the legitimate account holder to ensure the purchases are legitimate, but they can't always reach the card or account holder immediately. In addition, online purchases can be made in a matter of seconds, so thieves can rack up several thousands of dollars in fraudulent purchases in a matter of minutes.

To combat this, banks and credit card companies institute protocols that will instead decline any transaction the algorithm believes to be irregular. These can be initial purchases after the card has been out of use for some time, purchases made in a different location from where the cardholder lives or even unusually large purchases.

How False Declines Lead to a Decrease in Sales

When a legitimate cardholder attempts to make a purchase which is declined by the system because it seems unusual, the cardholder can always call the bank or card issuer to get the issue resolved and finalize the purchase. Many will not do so immediately, however, which results in huge losses to merchants. Two of the predominant reasons that cardholders may not call the bank immediately are:

  • Shame: It can be hugely embarrassing when a card is declined, even if the individual has the funds or credit line available to cover the purchase. Generally, when a card is declined, no reason is given, so cardholders may often simply retreat rather than attempt to discover the reason the card was declined. While this is not as prevalent in e-commerce because there is no salesperson or cashier to have to face, discovering the cause of the decline generally involves having to call and speak to a live person on the phone. Even if the cardholder checks online to determine they have the funds available, they still may not wish to speak to someone to determine why their card was declined.
  • Time: Most cardholders know that any phone transaction is going to involve a long wait time. In many cases, they may be too busy at the moment to spend time trying to sort things out with their bank or card issuer. They may instead try and use a different card or just abandon the purchase entirely. If the purchase is important enough, of course, the cardholder may call the bank immediately, but for many smaller purchases, they will not. In fact, they may not call the bank for some time, which can also limit the purchases they might have otherwise made, leading to a loss of income for several businesses over a longer period of time.

While the algorithms that power these false declines may prevent a great deal of fraud, it also raises the question of whether it is worth it when it might be costing nearly $2 billion more in lost income than the amount of fraud it may be cutting down on.

False Decline Detection & Prevention

As e-commerce sites improve their security, it may cut down on e-commerce false declines. When sites use multi-factor authentication to authenticate the identity of a cardholder before submitting a purchase transaction for approval, card issuers may revamp their algorithms to allow for fewer false declines. One of the biggest reasons for the high rate of false declines is the previous inability of many businesses to fully verify the identity of the purchaser. With increased security tools like biometric scanning and web beacons that can determine a buyer's location, however, false declines may also be on the decline as well.

iovation is a leading provider of fraud prevention and detection solutions as well as advanced multifactor authentication software for online banking, e-commerce, insurance, gambling, online communities, and travel and ticketing organizations.

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