Elizabeth Grahamproduct manager at entersektsaid false dips carry significant risks for banks and merchants, where consumer loyalty is key.
As a result, merchants and issuers are losing money to false declines — more money than would have been lost to potential fraud, Graham said.
“False dips are such a problem in the industry that 80% of traders use this metric as a key metric within the organization,” Graham told PYMNTS.
As she described to PYMNTS, false declines — a form of false positives — occur when a legitimate customer attempts to complete a transaction, but the transaction is ultimately declined. She said the problems could be on the issuer side or the merchant side of the trading equation. False positives when legitimate customers are flagged as fraudulent, mislabeled transactions as risky.
Whatever the nomenclature, it’s much the same in terms of the customer experience, Graham said, which results in an unpleasant digital journey — which will cause quite a bit of reputational damage.
“It’s incredibly frustrating and consumers feel not only like it’s a nuisance – because they can’t buy the product they want – but also almost like there’s been a personal insult. “, she said.
She cited her own recent experiences online as an illustrative example. Graham said she recently completed a major renovation to her home and went online to shop for big ticket items, including a sofa. At checkout, the transaction failed – for no apparent reason. Graham said she wasn’t sure if the reason was merchant-related, bank-related, or perhaps a problem with her credit card.
There are also negative ripple effects on the other side of the equation, related to increased operational costs for the merchant and the issuer. A growing wave of customer complaints channeled through customer service calls, emails and chats, adds to the investment of staff time to deal with these complaints.
Complex and growing digital ecosystem
The friction is perhaps not so surprising. Graham noted that e-commerce is enabled by a complex ecosystem involving merchants armed with fraud and analytics tools and issuing banks with their own risk management systems and settings. Multiple lines of defense have become necessary in an environment where digital commerce has grown exponentially with the pandemic.
“A whole industry of companies exists to provide tools and services to detect or attempt to detect cardless fraud even before the transaction is approved. So when we look at merchants and banks, they use these fraud management software and services to approve or deny credit card transactions during the checkout phase,” she said.
The caution of banks and traders resulted in an increase in false dips that exceeded any amount of fraud that may have occurred, as noted above.
Abandoned carts result in lost sales that can never be recovered. Merchants who see consumers drifting away from their site are more than likely to see those dissatisfied customers move on to competitors. The transmitters? They lose because consumers are inclined to place declined cards on the “back” of the wallet and will choose to use cards that are not declined.
Technology, of course, offers a range of pathways and options that stakeholders can adopt to more effectively combat fraud and ensure the “right” customers are allowed to transact. There is no 100% effective strategy, but promising developments are underway.
“We can mitigate some of the challenges we face with fake drops because open bank payments integrate with existing options such as credit cards, debit cards and digital transfer services typically offered by e-commerce retailers. at checkout,” she said. Open banking, she added, allows anyone with a bank account to initiate fast and secure payments.
She said open banking has been around for a while but is not yet an industry standard.
But as she noted, “every payment goes through strong authentication – through the banking app and through biometrics.” She added that with 3DS, companies have the ability to challenge customers and strengthen authentication protocols when a transaction is deemed risky. Additionally, no card details are shared with merchants via open banking.
Traders don’t own that data, Graham said, and they don’t need to implement such a stringent set of risk rules for ongoing transactions — and for which they may ultimately be held liable.
Machine learning helps reduce friction
No conversation about advanced technologies would be complete without a discussion about artificial intelligence (AI). Machine learning is particularly valuable in online trading because it allows you to move away from the rigidity of the traditional rules-based system that would normally flag a range of transactions. She said machine learning models could help adapt to the seasonality of shopping seasons and cross-border trade by visualizing the shopping behaviors of a large consumer consortium to identify and understand models.
For merchants, she said, it’s important to constantly review fraud prevention solutions and work with issuers to collaborate and share information to streamline online commerce.
“As e-commerce explodes,” she told PYMNTS, “the increasingly sophisticated online consumer will choose to spend their time transacting with retailers who offer seamless digital experiences with – of course – a high level of security.”
