Yesterday it was fraud. Today it’s false declines: collaboration’s latest challenge
As seen in The Paypers
by Julie Fergerson, SVP Industry Solutions
Flashback: ecommerce fraud in the ‘Wild West’
In the early days of ecommerce, simply stopping fraud was a seemingly insurmountable problem with limited solutions. In 2000, just 15% of retailers had automated systems for detecting fraud, making it a USD 500 million headache at the time.
Back then, ecommerce was a little like the ‘Wild West’ – a lot of pioneering through trial and error, limited choice for consumers and only a handful of effective sheriffs keeping law and order. To make matters worse, bandits were actively communicating with each other – sharing best practices and tactics for becoming better fraudsters.
It was in this environment that I began to wonder: If the bad guys are working together to commit fraud, why aren’t the good guys working together to stop it? So, I and like-minded ecommerce professionals from leading consumer brands set up the Merchant Risk Council (MRC) in 2000. Invested in supporting online merchants’ risk management efforts, the organisation has fostered cooperation and open communication between some of the world’s biggest retail competitors and banks, playing a key role in pushing fraud rates below one percent (0.9% in 2017). Since then the idea of collaboration has really taken off, and global merchant-issuer collaboration networks – like Ethoca – have become increasingly popular.
In 2018, with collaboration being firmly established as an effective way to fight fraud, many have started to ask “what’s next?” As it turns out, the next big challenge has already presented itself – one born from efforts to stamp out fraud. That threat is false declines, and it’s incredibly serious.
Today’s card acceptance problem
According to Aite, US card issuers falsely declined USD 264 billion in 2016 (card-present and card-not-present combined). In 2018, that number is expected to grow to USD 331 billion. Those are some big, intimidating figures. But, even if we go with Javelin’s more conservative number of USD 118 billion falsely rejected in 2014, that’s still 13 times the cost of fraud at USD 9 billion. In short: If you haven’t put any thought into what false declines cost your business, you really should. Because it’s not just the initial transactions that are lost, the experience can leave customers reluctant to make purchases in future, resulting in even more lost revenue. And for issuers? They run the very real risk of having their card relegated to the back of the wallet.
How has this state of affairs come to be, and how can it be resolved?
The fraud fear factor
A key reason acceptance rates are on the decline is that online merchants and card issuers have become so fearful of fraud and its ramifications that they’re over-tightening their fraud rules. Consequently, they end up turning away genuine customers. In response, 39% of these customers will abandon the card and 25% will move it to the back of their wallet. And that’s just the start. Not only are fraud rules overaggressive, they’re often ‘tuned’ incorrectly thanks to ‘noise’ from friendly fraud.
Whether benign or hostile, friendly fraud results in good transactions being incorrectly labelled as fraudulent. This has a ripple effect on authorization strategies across the value chain and causes merchants and issuers to decline more – leading to even more good customers being turned away. With some merchants reporting friendly fraud rates between 60-90%, there is a lot of ‘noise’ and a lot of false declines.
The difference between the days of the “Wild West” and now is that technology has evolved to the point where merchants can work and collaborate effectively with issuers to find solutions, fight friendly fraud and drive acceptance rates. In fact, recent enhancements to collaboration solutions are giving issuers access to detailed merchant order and account history in real-time. This gives issuer call centre agents the information they need to engage with cardholders the instant a dispute appears to confirm the transaction is genuine. It also lets cardholders access this information through their mobile banking app or online portal – eliminating the need to call in at all. In doing so, friendly fraud can be stopped at the source, reducing ‘noise’, improving fraud models and reducing false declines.
Solving the problem
What our investigation into the growing false declines problem demonstrates, is that the way card issuers and merchants communicate today is fraught with challenges and lost opportunities. Both parties are squarely focused on doing the right things to stop growing CNP fraud losses, but without a reliable way to share intelligence and a broader set of data, one of the unfortunate outcomes is good customers unduly penalized by false declines.
One thing is crystal clear: increasing transaction acceptance across the board is going to take an orchestrated transformation of the existing payments value chain. The CNP ecosystem today functions in silos, yet ironically, the relationship between card issuers, merchants and customers/cardholders has never been more intertwined. The good news is that the problems and barriers that prevent both parties from realizing full value from the CNP opportunity can be solved through collaboration.
Ethoca has several pilots underway with our card issuer and merchant customers, and card acceptance is at the top of our list. Please contact us at firstname.lastname@example.org for information on participation and to secure your place.
 Aite: “Chargebacks and False Declines” August 2016
 Javelin: “Future Proofing Card Authorization” August 2015
 Javelin: “Future Proofing Card Authorization” August 2015
 Ethoca: “Solving the False Decline Puzzle: Collaboration is Key”