False Declines

Nobody likes rejection, whether you’re applying for a job, asking somebody out on a date, or just trying to complete a simple credit card purchase. Nevertheless, every card transaction carries the risk of being rejected and declined, and for good reason—the ability to decline suspicious transactions allows banks and merchants to avoid fraud and other attempts to use a payment card without proper authorization.

In practice, however, it is extremely common for legitimate, valid transactions to get declined out of error or an excess of caution. Why do credit card transactions get falsely declined, and what can merchants do to lower their false decline rate?

False declines happen frequently. Every year, as much as $20 billion in valid transactions get rejected. Some of that money ends up going to the competitors of the merchant that rejected the transaction, but much of it never gets put back into the e-commerce economy. As frustrating as it may be to find out that you’ve turned away perfectly good money that a customer was trying to give you, false declines do happen for a reason.

In most cases, these transactions are rejected because the merchant or bank has detected signs of fraud. However, fraud indicators can be subtle, subjective, and easy to misinterpret, so it’s not hard for a legitimate transaction to show up with obvious (but misleading) red flags.

For merchants, this poses a never-ending challenge. They have to be vigilant enough to catch and block fraudsters, but not so much that they turn away their real customers over minor issues. Even when merchants are losing more money to false declines than to actual fraud, accepting all transactions and opening the gates to fraudsters is no solution.

Each instance of fraud is likely to result in a chargeback, which takes away merchant revenue, subjects them to fees, and can get them kicked off of their payment processing platform. When these things are factored in, it’s no contest—fraud and chargebacks are far more damaging, and so false declines persist. But there are ways to prevent them.

What is a False Decline?

False declines occur when a cardholder presents a valid payment card transaction, but either the merchant or the bank declines it anyway. This may happen due to processing errors, but often it’s because the merchant or bank detected some kind of fraud indicator.

In an anti-fraud context, false declines may be referred to as “false positives,” because they get rejected when anti-fraud filters mistakenly identify a valid transaction as fraudulent.

Unsurprisingly, customers don’t like false declines and tend to hold them against the merchant. They’re inconvenient, because the customer will have to go through the transaction process again in order to complete their purchase, and many people find it insulting to be treated like they might be some kind of criminal fraudster. When false declines happen, there is a very real chance that the customer will simply leave and find someplace else to shop.

Why Do False Declines Happen?

When you’re talking about credit cards, “declined” usually means that the issuer did not approve the transaction authorization request that was sent to them. This type of false decline can happen when the cardholder enters their payment credentials incorrectly or some similar error occurs. If the transaction is reattempted with the correct information, it should get approved.

The more concerning sort of false decline is when the merchant or bank mistakenly identifies the transaction as fraudulent or invalid and rejects it on those grounds. Fraud prevention methodologies rely heavily on analyzing transaction data for telltale signs of fraud, such as:

• The billing address and shipping address don’t match.
• The geolocation is nowhere near either address.
• The purchaser has initiated several transactions in rapid succession.
• The purchaser is located in a country known for high fraud rates.
• The purchaser has included unusual delivery instructions.
• The order is for an unusual quantity or combination of items.
• The order is for an expensive item with high resale value.

The problem is that all of these signs can have perfectly innocent explanations, so anti-fraud filtering software often employ complex algorithms and artificial intelligence in order to make a fraud determination based on a variety of factors. Even then, they still get it wrong at times.

How Can Merchants Prevent False Declines?

Anti-fraud tools tend to be the culprit behind most merchant-initiated false declines, so it’s very important to choose high quality anti-fraud solutions that are a good fit for your type of business.

One your solution is up and running, you need to review the data on a regular basis to determine whether it is performing effectively without creating too many false declines.

Your filtering settings must be monitored and adjusted frequently in order to ensure you’re maintaining the most cost-effective balance between false declines and stopping fraud.

Also, don’t reject flagged transactions out of hand. Whenever possible, manually review these transactions and apply human intelligence and judgment to the question of whether or not they’re fraud. You can also try reaching out to customers who submit orders with inconsistent information and try to explain the situation and salvage the sale.

When minor issues cause soft declines at the authorization step, you always have the option to retry the transaction, but be careful about this. Merchants who force stubborn transactions through by submitting them multiple times run a high risk of getting hit with authorization-related chargebacks. If you can, ask the customer for an alternate payment method instead.

Conclusion

On the whole, it’s better to get a false decline than a fraud chargeback, but that doesn’t mean that the only harm done by false declines are the missed sales. Customers do experience some inconvenience from false declines, especially if they become a recurring problem.

To get the best possible ROI on any anti-fraud solutions you use, you need the filtering settings to be just right: not too strict to alienate your customers, but not so loose that fraudsters can waltz through.

Finding the right anti-fraud software and calibrating it for maximum efficacy is a key facet of a comprehensive chargeback prevention strategy, and the right chargeback management company should be able to provide knowledgeable guidance and support in these matters.

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