False positives are a big problem, particularly for ecommerce merchants. Everyday, online stores turn away legitimate customers from placing orders because they appear to be fraudulent. But these efforts are doing more harm than good.
A recent white paper from Cardinal Commerce explains just how big the false positive problem is from the perspective of the issuer. In the white paper, the experts at Cardinal examine the problem of false positives, their impact on CNP financial institutions, and how issuers can minimize the rate of false positives and authorize more legitimate orders.
We loved Cardinal’s perspective on false positives and wanted to explain to ecommerce merchants the impact and what they can do to help issuers in the fight against this damaging side-effect of front-end fraud prevention solutions.
What is a False Positive?
False positives are simple enough to define:
A false positive is when either a financial institution or merchant rejects a legitimate transaction due to the suspicion of fraudulent activity.
If a financial institution returns a valid authorization response to a merchant’s request, the merchant can still choose to decide not to accept the transaction. However, if a financial institution returns a declined authorization response to a merchant, that’s usually the end of the line for the transaction. The merchant can retry the authorization attempt, but the issuer will most likely decline once again. Which leaves the merchant unable to collect funds from the consumer for the transaction.
False Positive Losses
In their white paper, Cardinal Commerce cites a Javelin study which found 15 percent of all cardholders experienced a transaction that was falsely declined. Those false positives amounted to a total of $118 billion in 2014. During the same year, $9 billion was lost to actual payment card fraud. Javelin also found that the false positive decline rate is over 3 times the rate of existing card fraud.[et_bloom_inline optin_id=optin_11]
The Acceptance Gap
The very nature of card-not-present transactions makes them more susceptible to fraud than card-present transactions. With card-present transactions, the merchant or financial institution can validate the buyer because the credit card and cardholder are physically present. On the other hand, this ease of validation does not exist with card-not-present transactions.
Because of this risk difference, card-not-present transactions have up to a 16 percent lower authorization rate than their card-present counterparts. Financial institutions authorize 96 percent or more of card-present transactions, while less than 80 percent of card-not-present transactions are authorized. The lower authorizations in card-not-present environments is referred to as the ‘acceptance gap’.
What Can Merchants Do?
As a merchant, there’s little you can do to impact the authorization response provided by a financial institution at the time of the transaction. Unfortunately, this leaves merchants with an ultimatum where neither end result is optimal:
|Loosen front-end fraud filters to authorize more transactions.||or||Tighten front-end fraud filters to restrict all suspect transactions.|
If a merchant chooses to loosen front-end fraud filters, they put themselves at risk to lose revenue to fraud. Conversely, tightening front-end fraud filters can lead down the path of even more false positives.
Not only does this impact lost revenue, but it’s also very damaging to legitimate customers trying to make a purchase who are declined. Put yourself in the shoes of a consumer: if your legitimate online order kept getting declined, how would you view the merchant? You’d likely take your business somewhere else, permanently.
Instead, merchants should loosen their front-end fraud filters to authorize more transactions. But doing so does not need to equate to rampant fraud losses, as long as the right post-transaction fraud management tools are in place.
The Answer to the False Positive Problem
Merchants can easily turn the less-than-optimal outcome of loosening fraud filters into one that is measurably beneficial by utilizing fraud alerts and automated chargeback responses. These two solutions allow merchants to allow more legitimate transactions, without suffering from the consequences of increased fraud rates.
With fraud alerts, merchants get to enjoy the fraud filters of the financial institutions and are notified when a transaction is identified as fraudulent. The merchant then has 24 hours to refund the customer and mitigate the additional fees associated with receiving chargebacks. While automated chargeback management allows merchants to respond to every customer dispute with the right, properly formatted, and relevant compelling evidence. As a result, the merchant recovers as much as 80 percent of revenue they were losing to chargebacks.
False positives are a multi-billion dollar problem, and they’re particularly damaging for ecommerce merchants. But they don’t have to be chalked up to a cost of doing business online. Through loosening fraud filters while enabling fraud alerts and automated chargeback responses, merchants can decrease false positives and increase revenue.