False declines: The checkout threat costing merchants up to 2% of revenue

Merchants are facing challenges with the rise of false payment declines, where valid transactions are mistakenly flagged as fraudulent. This issue is growing rapidly, costing merchants billions. As card fraud increases, fraud detection gets tightened, inadvertently accelerating the declines.

Merchants build trust with their customers in several key ways, and one of the biggest is having a smooth checkout experience. But the rate of false declines is skyrocketing. It’s affecting nearly 40% of consumers, is disproportionately affecting the next generation of shoppers – and is costing merchants billions each year.

False declines are a real and growing phenomenon. They’re valid transactions that a merchant – or more typically their payment processor – declines out of fear of fraud. It’s called a “false decline” for a reason: it’s erroneously flagged as fraudulent. And it could be for simple reasons; a shopper could change their behavior – like buying from a new country or merchant.

To the payment processor, the unusual behavior is potentially fraud and the transaction is declined. For the merchant, it means losses of between 1-2% of total revenue.

According to Checkout.com, false declines have grown staggeringly in recent years – from $21.1 billion in 2019 to $50.7 billion in 2022 for the UK, US, France and Germany alone. This represents a compound annual growth rate (CAGR) of 34%. And the global totals are even more stunning.

Increases in card fraud are driving false declines

False declines are growing because credit card fraud has been on the rise. The increase is due to several factors, one of which is the sheer increase in the number of digital transactions.

The most significant risk is posed by card-not-present (CNP) fraud. CNP fraud was estimated to grow by almost 9% in 2023 – despite efforts in the EU to mitigate it through increasing its enforcement of Strong Customer Authentication (SCA) for transactions.

The scale of the problem is tremendous; nearly 8 out of 10 merchants reported a rise in fraud over the last 12 months, with CNP fraud cited as by far the most significant risk.

So risk engines are dialed up to detect more fraud, but they also end up detecting more “false positives” – situations that appear fraudulent but are not. A recent Merchant Risk Council survey found that 53% of merchants pegged their rate of false declines at between 2-10% of their total order volume – and 19% of merchants assessed it to be even higher.

Enterprise merchants are the ones reporting the highest rates of false declines, potentially indicating a higher incidence of fraud attacks – and/or undergoing stricter fraud assessments.

Negative shopping experiences creating a trust crisis for merchants

Merchants are already fighting an uphill battle. Increasing competition, reduced margins, and a 71% rate of online shopping cart abandonment means the last thing any merchant needs is to unnecessarily decline a payment – and turn away legitimate, paying customers.

And while fear of fraud is a legitimate reason to falsely decline a transaction, it’s a contributing factor to a lack of trust between merchants and their customers.

Nearly 40% of shoppers have reported experiencing a false payment decline in the last three months, according to a recent global survey. And it’s the next-generation of shoppers that are disproportionately affected – with Millennial (born 1981-96) and Gen Z shoppers (born 1997-2012) being four times more likely to be impacted than baby boomers (born 1946-64).

What that means for merchants is a substantial loss of trust and loss of business – 45% of shoppers say they would not retry a declined payment. Even if the fault lies with the payment processor, it is the merchant’s fault in the eyes of a first-time customer.

The impact becomes even greater when you factor in the relationship damage. Data from Checkout.com shows that as many as 40% of customers wouldn’t return to a merchant that had incorrectly declined their purchase – a loss of loyalty and future purchases that could represent an even higher cost than the immediate transaction loss.

In fact, Forter estimates that false declines are typically 5-10 times higher than actual fraud – and most devastatingly – for every $1 retailers lose to fraud, they forfeit $30 by declining legitimate consumers.

Merchants experiencing the limits of credit cards online

One of the simplest explanations for these merchant struggles is that credit cards are bumping up against its limits online. While it’s still Europe’s biggest payment method, credit cards were not created for an online world.

The fraud challenges posed by credit cards are so numerous in an online environment – card-not-present fraud, phishing and data breaches, weak authentication, and man-in-the-middle attacks where hackers intercept credit card information between the customer and merchant.

In addition, you have the hassle of customers needing to enter 23 digits for an online payment – and the high risk that they’ll abandon the cart if something goes wrong in the process.

The struggle to reduce fraud will be an ongoing struggle for merchants. Even as risk engines improve, merchants will be exposed to the tradeoff that most payment processors are forced to accept either:

• More complexity causing higher carts abandonment
• A higher risk of fraud with more lenient detection, or
• A higher false declines because of stricter detection.

Promoting next-gen payments to decrease fraud and boost CX

The next-generation of Open Banking payment methods – specifically designed for digital purchases – are solving many of these challenges. Instead of relying on a sensitive medium like a card or digits, it connects directly to a source of truth – the customer’s bank account.

Customers pay directly with their bank accounts – authorizing everything using their bank authentication methods (often a mobile app with biometric identification). And every transaction is signed with Strong Customer Authentication (SCA). Customers skip manual inputs because all of the information they need to provide to pay is accessed with the right approvals.

For consumers and merchants, it provides the safest checkout experience – as well as a fast and easy one.

While fraud is still theoretically possible with Open Banking payments, it would have to be much more elaborate to succeed. Standing up against fintech companies like Trustly – which use advanced risk engines and track unusual behavior in line with best-in-class security protocols – it’s a tall order.

For example, Trustly customers experience a much lower rate of fraud and therefore can also avoid the need to falsely decline transactions.

And this is the promise of 2015’s PSD2 directive in the EU and the UK’s Open Banking Initiative in 2018 – the modernisation of banking after decades of stagnation to promote greater financial inclusion, innovation, and improved customer experiences.

So instead of fighting fraud with fear – you fight it with access to the right data.

Further Reading

1. Explore the Trustly Payment product
2. On Trustly’s security: Securing online payments - beyond cards to bank-level security

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