E-commerce false declines are when a merchant incorrectly flags a legitimate online purchase as fraud, and declines to fulfill it.
These “false positives” are a problem that often lurks in the shadows. Unlike chargebacks which merchants can see and react to emotionally as theft, they pass silently under the radar by definition. If fact, they are even celebrated. No merchant declines an order they believe to be legitimate — and so every false positive is (incorrectly) feted as a fraudster thwarted.
Too many merchants do not understand the true scope of the problem, and so falsely believe these self-inflicted wounds are no big deal.
They are wrong.
False Positive Declines: A Bigger Problem than Merchants Believe
In fact, the number of merchants underestimating the scope of their false declines problem is huge.
Riskified, a leading e-commerce fraud prevention platform that uses advanced machine learning technologies to decrease false positives, shared some compelling research showing the true extent of the damage.
Their internal data estimates that as many as 66% — that’s 2 out of 3 — orders declined by merchants are actually legitimate orders. And at the same time, research from the Merchant Risk Council showed that 66% of merchants believed their rate of false declines to be no more than 5%.
That’s a huge disconnect that highlights a serious misconception facing many merchants trying to protect themselves from fraud.
Why do E-commerce False Declines Happen?
It’s easy to pass off this large volume of false positives as nothing more than the symptom of poor judgment when it comes to reviewing orders for fraud. However, while that’s strictly speaking true, it’s also an oversimplification.
Research by LexisNexis showed that 55% of merchants believe fraud is simply “inevitable”. That number suggests there is a very powerful culture and mindset of fear in eCommerce. And against that backdrop, it’s easy to see why false positives happen so often.
Merchants, feeling they will inevitably be the target of ever more sophisticated types of eCommerce fraud, do all they can to avoid the visceral emotional experience of a chargeback. Meanwhile, they give less thought to what it costs when they implement an overly aggressive plan to avoid that sense of violation.
In other words, merchants do not keep things in perspective — but they should. Yes, chargebacks hurt. But merchants are in business to make money, not to feel good.
Therefore, what’s required is empirical decision making about eCommerce fraud prevention that maximizes revenue. And unfortunately, even if merchants don’t like to hear it, that means accepting a few more chargebacks in the name of accepting a lot more legitimate orders.
What are the Consequences of Declining Legitimate Orders?
Many merchants also fail to make this calculus because they don’t realize the full extent of the damage of false positives on their profitability. The harm goes far beyond the revenue from a lost sale.
If they understood the true cost of keeping that existential chargeback anxiety at bay, they might change their priorities. Here are just some of the ways false positives hurt merchants:
- Wasted marketing and sales budget. It costs merchants money to move leads through their sales pipeline. Every false positive represents a waste of all the resources expended to convert someone into a customer.
- Lost lifetime value of a customer. Repeat customers are much more valuable to a business than new customers. Research shows that almost 50% of all e-Commerce sales come from repeat customers. Every false positive represents a lost opportunity to create this valuable asset.
- Brand reputation damage. In an interconnected world, customers talk to one another. Legitimate customers view declines as a personal insult, and will often retaliate by actively speaking badly about a brand. This kind of negative word-of-mouth is devastating for merchants seeking a foothold with their target audience.
How to Prevent E-commerce False Positive Declines?
Given the immense damage e-commerce false positive declines cause, it’s important for merchants to fight them proactively. Once merchants get on board with the need to take them seriously, there are a few best practices they can follow to help prevent them:
- Monitor your chargeback rate to see if it’s too low. Chargebacks cannot be entirely avoided. If you notice your chargeback rate is very low (less than 0.30%) it’s an indication you may be declining too many good orders.
- Don’t over-rely on rules based fraud prevention. Ecommerce fraud is not a one-size-fits-all proposition. Things like flagging for AVS mismatches can help identify fraudulent orders, but only as part of a system that views any individual data point as an indicator and not definitive proof.
- Pay attention to orders commonly mislabeled as fraud. Merchants — especially those over-relying on rules — commonly generate a lot of false positives in situations where legitimate orders return mismatches. This is doubly true for situations where a billing/shipping address is common. Examples include shipping to college students, on-base military personnel, and people shipping packages to their office. Review these orders carefully before declining them.
- Use machine learning. Static, rules based fraud prevention is largely going the way of the Dodo. Today, there are many different platforms that exist to help merchants fight fraud using sophisticated algorithmic technology. These solutions work by looking at the interplay between different data points, and continuously learning/adjusting over time, avoiding both false declines and chargebacks as much as possible.
Effective E-commerce Fraud Prevention is a Mindset
Merchants must accept that fraud is an inevitable part of eCommerce. Avoiding chargebacks feels good, but an over-emphasis on that result will harm revenues. Successfully combatting fraudsters doesn’t mean avoiding emotional pain; it means making logical decisions based on what makes the most money.
Against that backdrop, merchants must remember that false positive declines do a lot of harm to a business. More than just a lost sale, they represent a lost opportunity to build relationships with customers. It’s not an exaggeration that suffering too many of them in the name of avoiding the emotion of a chargeback can result in death by a thousand paper cuts.
It’s not easy to know how to prevent eCommerce fraud. But before merchants can do it effectively, they must change their mindset away from one of strictly “fraud prevention.”
Instead, place a focus on “revenue maximization”. Once this way of thinking takes hold, merchants can start taking the proactive steps necessary to take their false positive declines problems seriously.