Fixing Retail’s $600 Billion False Declines Problem When Fighting Fraud

Payment Declined

Fighting fraud and pushing back cybercriminals has become the central focus of cybersecurity – and for very good reason. Cybercriminals have proven themselves to be resourceful, technologically advanced and disturbingly successful at leveraging digital tools, making off with staggering sums in ill-gotten gains. Pushing back those efforts has rightfully become a central concern among merchants.

And while fighting fraud is certainly a good and rational thing to do, As Alon Shem-Tov, head of the product group at Riskified, told PYMNTS in a recent conversation, it comes with a cost that merchants often aren’t aware of: false declines. That lack of awareness is understandable, considering that false declines get a small fraction of the press that cybertheft does, despite the fact that some quick math indicates that it’s not an inexpensive problem. In a $4.3 trillion global eCommerce market in 2020, said Shem-Tov, an estimated 10 to 15 percent of payments fail due to fraud concerns that are later discovered to be misplaced.

“If between 10 and 15 percent of payments fail upon authorization, that’s a big loss,” Shem-Tov explained. “If you take that 15 percent and apply it to $4.3 trillion, you end up with $645 billion lost to merchants, which is what we consider to be the scope of this problem.”

While successful cyberheists get all the publicity, false declines are also incredibly costly — particularly among retailers with higher-than-average rates. Though 8 percent to 15 percent is the flat industry average, Shem-Tov said, there is a fair amount of fluctuation. High AOV (average order value) merchants tend to report higher false declines alongside higher instances of attempted fraud, for example.

The trouble, Shem-Tov explained, is that while false declines tend to get written off as not a big deal, they tend to create two problems for merchants. The less serious and most obvious consequence is the lost sale — the consumer put out by a decline will probably abandon their cart and go elsewhere. But more likely, the consumer will never come back. Not only has the merchant lost out on the sale, but they’ve probably sent a potential new customer into the arms of a competitor that will likely keep them. After all, consumers tend to return to retailers where they have good experiences at checkout, not bad ones.

“Consider yourself as a consumer, going to a website. You know what you want to buy. You pick it, enter your credit card details and shipping information — the whole checkout process — and in the end, you’re declined, likely don’t really know why,” Shem-Tov said. Like most consumers, he said, you would find a retailer where you don’t run headlong into irritating friction during checkout, and choose to do business there instead.

Now a little over a year into a massive digital dive, merchants are starting to catch on to the game. In the eight years since Riskified’s founding, they have gotten much more sophisticated in their fraud management approach, said Shem-Tov. Merchants are by now more aware of the idea that good strategies stop the bad from getting through — without upending the normal flow of commerce for legitimate customers.

With Riskified’s tech, merchants no longer have to resign themselves to the opacity of banks’ explanations for the “why” of a card being declined at checkout, Shem-Tov said. He estimates that Riskified can help firms recoup about 20 percent of revenue lost to false declines.

“Merchants don’t really believe there is much that can be done when the bank declines. That’s the story with the merchants that we work with,” he explained. “But we have proven that’s not the case –there’s definitely a lot you can do, even though it’s kind of hidden.”

Merchants are starting to realize that they don’t simply have to swallow the losses any more than they have to accept fraud itself. It’s not that they can completely eliminate false declines, any more than they can fully make fraud attempts disappear. “But we can help merchants strike a better balance going forward – one that succeeds in keeping them safe, but also supports their sales,” Shem-Tov said.