Defining False Declines

A false decline occurs when a legitimate transaction is incorrectly rejected by a fraud detection system. This happens when security measures mistakenly classify a genuine payment as fraudulent. While fraud prevention is essential for businesses, overly strict or inaccurate risk assessments can lead to lost revenue and dissatisfied customers. Examples of false declines include the following:

1. E-Commerce transactions.
   Suppose a customer attempts to purchase a high-value item online using their credit card. The transaction is flagged as suspicious due to the unusually large amount, even though the customer has a history of making similar purchases. The payment is declined and the merchant loses a potential customer and profit.
2. International purchases.
   A traveler tries to use their credit card in a foreign country, but the transaction is rejected because the system detects an "unusual location." Despite the fact that the cardholder is indeed present in that country, the payment is declined due to rigid fraud prevention measures.
3. Recurring payments.
   A subscription-based service bills a customer’s card for a monthly payment. If the system incorrectly flags the charge as unauthorized, the payment may be declined, potentially causing an interruption in service.
4. Card-not-present (CNP) transactions.
   Many online and phone transactions fall under the category of card-not-present purchases. A bank or payment processor might block a valid CNP transaction because the risk of fraud is higher compared to in-person transactions, even when the payer has successfully verified their identity.

In any case, a false decline always leads to rather significant revenue losses for merchants since not only is a business deprived of an opportunity to sell its product/service, but also loses a potential loyal customer. Thus, using a reliable fraud protection system that will not block legitimate transactions like Germius is so important.

Reasons Behind False Declines

Even though most false declines occur due to overly cautious fraud detection measures, there are several other reasons for them, which include the following:

To minimize false declines, businesses need to refine fraud detection systems, implement multi-factor authentication, and allow customers to verify flagged transactions.

Consequences of False Declines

The Global Fraud Survey by the Merchant Risk Council revealed the data that shows that merchants report false declines on 2%-10% of total e-commerce transactions. False declines have significant negative effects on both consumers and businesses. As a matter of fact, these consequences extend beyond lost revenue, impacting customer relationships and brand reputation. So, let’s take a look at the most common ones.

• Customer frustration and loss of trust.
  When legitimate transactions are rejected, customers experience inconvenience and frustration; in fact, 47% retailers claim that false declines always lead to customer dissatisfaction. Repeated declines can erode trust in the merchant or financial institution, leading consumers to seek alternative providers.
• Revenue loss for businesses.
  Each false decline represents a missed sale. When customers face frequent transaction rejections, they may abandon purchases altogether or switch to competitors, resulting in reduced revenue. In fact, it is estimated that, in 2023, US merchants lost $81 billion due to false declines, and $157 billion e-commerce sales were at risk.
• Increased cart abandonment.
  In e-commerce, false declines contribute to high cart abandonment rates. Customers may hesitate to complete future transactions if they anticipate payment issues, further affecting sales.
• Reputational damage.
  A business that frequently declines valid transactions may develop a negative reputation for poor payment processing. This perception can discourage potential customers and harm long-term brand value.
• Higher operational costs.
  Merchants and financial institutions must allocate resources to handle disputes, customer complaints, and fraud system refinements. These additional costs strain business operations and reduce efficiency.
• Strained customer support services.
  False declines often lead to an increase in customer service inquiries and complaints. Resolving these issues requires time and effort from support teams, diverting resources from other essential tasks.
• Regulatory and compliance risks.
  Excessively restrictive fraud prevention measures may violate consumer protection regulations. Businesses must balance security with accessibility to ensure compliance with industry standards.

To mitigate these consequences, use elaborate and up-to-date fraud detection systems like Germius, adopt multi-factor authentication, and provide customers with transaction verification options. A well-calibrated fraud prevention strategy ensures security without compromising user experience.

Minimizing False Decline

To reduce the occurrence of false declines, businesses must implement a balanced approach to fraud detection that enhances security while ensuring a seamless customer experience. Key strategies include the following steps.

Refining Fraud Detection Systems

Advanced machine learning algorithms and artificial intelligence (AI) can improve fraud detection accuracy by analyzing transaction patterns and distinguishing between legitimate and fraudulent activities. Such up-to-date AI-powered tools are available within Germius CRM.

Implementing Multi-Factor Authentication (MFA)

Requiring additional verification steps is a rather strong measure for preventing false declines. These authentication steps may include one-time passwords (OTPs), SMS codes, phone calls, biometric authentication, etc. Ultimately, MFA allows legitimate customers to confirm their transactions, reducing unnecessary declines.

Utilizing Real-Time Transaction Monitoring

Dynamic fraud detection models that assess real-time transaction behavior can help identify anomalies while minimizing the rejection of legitimate purchases. Therefore, businesses must make sure they use up-to-date and, most importantly, dynamic fraud detection models.

Maintaining Updated Customer Information

Ensuring that customer data, including billing addresses and card details, is relevant helps prevent unnecessary declines due to outdated information. So, kindly ask your loyal customers to confirm or update their data regularly.

Customizing Fraud Prevention Rules

Customers of different ages and in different geographical locations obviously have divergent shopping and spending habits. Thus, adjusting fraud detection settings based on customer profiles, purchase history, and location can help reduce overly rigid security measures that lead to false declines.

Improving Communication Between Banks and Merchants

Communication between banks and merchants is of crucial importance. In fact, strengthening collaboration between financial institutions and businesses ensures better fraud risk assessment and reduces unnecessary transaction rejections. Therefore, as a merchant, you need to establish seamless communication with banks and payment providers.

Offering Alternative Payment Methods

Sometimes, even the most elaborate fraud prevention systems block legitimate payments. In this case, providing multiple payment options, such as digital wallets or direct bank transfers, gives customers alternatives if their primary payment method is declined. This way, you can significantly increase the chances of a purchase even if the first transaction attempt was declined.