KEY POINTS

  • Fraud is becoming a bigger threat to profitability, forcing merchant payment providers to impose strict standards when processing transactions. Fraud is rising in the US, costing merchants 1.47% of annual revenue in 2016, up from 0.51% in 2013. As fraud eats into revenue, merchant processors and acquirers are seeking to blunt its impact by enforcing strict rules to block suspicious transactions.
  • E-commerce merchants have even more at stake when it comes to fraud. Costs per dollar of fraud grew 9% in 2016 for online merchants, and 12% for m-commerce merchants. By comparison, fraud costs rose just 3% for brick-and-mortar retailers.
  • False declines — valid transactions that are incorrectly rejected — are unintended consequences of e-commerce merchants' fraud prevention strategies. False declines, also called "false positives," will cost e-commerce companies $8.6 billion in 2016, according to our estimates. This eclipses the $6.5 billion in prevented fraud, meaning false declines must be reduced in order for merchants' fraud prevention strategies to be cost effective.
  • Causes of false declines fall into three buckets. False declines can be caused by identity-related, technical, or structural issues. Examples of causes include conflicting shipping and billing information, outdated card information, and differing risk appetites among issuers and merchant acquirers/processors.
  • There are solutions for two of the types of causes. E-commerce merchants can solve identity-related problems by requiring their customers to authenticate themselves through more accurate means, such as 3D Secure and biometrics. Merchants can solve for technical issues associated with false declines by using smart routing, card updaters, and local domains. 
  • But structural problems are limiting the effectiveness of these solutions. Each issuer, acquirer, and processor makes decisions on fraud using their own set of standards. This makes it difficult to contain the problem of false declines because stakeholders can't control each other's criteria.

Introduction

Merchants are dealing with rising fraud, and in response, they're putting stronger safeguards in place to try to protect against these unlawful transactions. However, preventing fraud can have unintended consequences — in particular, it can result in legitimate transactions being rejected. In fact, these "false declines" are becoming a costlier problem than actual fraud, and players in the payments chain are increasingly looking for ways to prevent fraud while mitigating false declines.

In this report, we look at the rising cost of fraud and how false declines are actually a larger direct [...]