The stricter fraud controls card issuers put in place during the pandemic are triggering a higher number of false declines.
Despite the recent boom in online shopping, only 85% of transactions attempted online are completed, compared to 97% of in-store sales, payments research firm CMSPI said last week.
CMSPI estimates that retailers lost about $30 billion in potential online sales last year from e-commerce transactions that were declined for a variety of reasons including fraud, insufficient funds, technical problems and errors.
Overall, fraud rates for cards used online are twice as high as in-store card transactions, because the physical presence of a card results in fewer declines versus the e-commerce environment, which relies solely on data customers supply, CMSPI noted.
The pandemic exacerbated online fraud by enabling criminals to perpetrate scams exploiting economic chaos and uncertainty, while leveraging stolen account data to drive up rates of account takeover fraud and
Banks and merchants reacted by increasing fraud surveillance and using an expanding number of tools to identify bogus transactions.
But CMSPI said banks went too far in tightening controls so that false positives now account for about 20% of all rejected online transactions.
“Online transactions should be rejected when actual fraud has been detected, but sometimes rejections are the result of an error by the bank or card processor or rules that emphasize protecting their interests over merchants and consumers,” said Toby McFarlane, CMSPI’s head of approvals and fraud.
CMSPI estimates that higher fraud rates cost merchants $1.8 million for every $1 billion of sales that move online, compared with $800,000 for the same amount of in-store sales.
Smaller retailers suffer more than large e-commerce merchants from lost online sales, according to CMSPI.
“Retailers can work with card processors and card issuers to address these problems, but the process is complicated and smaller retailers often don’t have the necessary in-house expertise,” McFarlane said.
