In the world of credit card processing, there are many challenges that businesses must navigate. One of the most frustrating for merchants and customers alike is the issue of false declines. A false decline is a denial of a legitimate transaction by a credit card processing system. This can happen for various reasons, including technical glitches, security concerns, or simple errors. Whatever the cause, false declines can have serious consequences for both merchants and customers.
In this article, we will explore what false declines are, why they occur, and what businesses can do to prevent them. We will also examine the impact of false declines on the ecommerce industry as a whole.
What Is a False Decline?
A false decline occurs when a credit card processing system denies a legitimate transaction. In other words, the credit card company or bank rejects a valid transaction as fraudulent, even though there is no evidence of fraud. In other words, a false decline is a case where a genuine customer’s transaction is declined without any actual fraud occurring.
According to a Javelin Strategy & Research study, false declines cost merchants an estimated $118 billion in lost revenue each year. This staggering number highlights the serious impact of false declines on the ecommerce industry.
The Scope of the Problem
The Merchant Risk Council’s Global Fraud Survey found that an average of 2.6% of orders in online stores are declined due to suspicions of fraud. It was observed that the likelihood of a decline increases proportionally with the purchase price.
According to a Javelin Strategy & Research study, false declines cost merchants an estimated $118 billion in the US in 2014, due to suspicion of fraud, compared to $9 billion in actual fraud – making a ratio of 13 to one.
Reasons for False Declines
There are several reasons why false declines occur, and understanding these causes can help businesses minimize their occurrence and maintain customer satisfaction. Here are some common reasons for false declines:
Overzealous Fraud Prevention Measures
Payment processors and card issuers implement fraud prevention measures, such as real-time fraud detection tools, to catch and prevent fraudulent transactions. However, these measures can sometimes be overly aggressive, leading to legitimate transactions being incorrectly flagged as fraudulent.
Technical Issues
Technical issues within the payment processing system can also lead to false declines. For example, a glitch in communication between the merchant’s payment processor and the card issuer’s authorization system could result in a false decline.
Human Error
Mistakes made by customers when entering their payment information, such as typos in the credit card number, incorrect expiration dates, or invalid CVV codes, can result in declined transactions. Similarly, errors made by merchants, such as incorrect transaction coding or failure to update a customer’s payment information, can also cause false declines.
Risk Thresholds and Decline Rules
Card issuers and payment processors often set risk thresholds and decline rules to automatically block transactions that meet certain criteria, such as transactions above a specific amount or from specific countries. These rules can sometimes lead to false declines if these filters inadvertently catch legitimate transactions.
Account Limitations
Card issuers may place account limitations due to factors like excessive spending or frequent chargebacks. These limitations can result in false declines for legitimate transactions.
Data Mismatch
When a customer’s billing information doesn’t match the information on file with the card issuer, the transaction may be flagged as potentially fraudulent and declined. This can happen if the customer recently moved or made a typographical error when entering their billing information.
Expired or Canceled Cards
If a customer attempts to use an expired or canceled card, the transaction will be declined, even if the purchase itself is legitimate.
Types of False Declines
To better manage and address false declines, it’s important to understand the different types: soft and hard declines.
Soft Declines
Soft declines occur when a transaction is temporarily declined by the card issuer or payment processor, but the issue causing the decline can potentially be resolved. In many cases, the customer or merchant may be able to take immediate action to correct the problem and successfully complete the transaction.
Common Causes
Insufficient Funds: A soft decline may occur when a customer’s account has insufficient funds to cover the transaction. In this case, the customer may be able to transfer funds or use an alternative payment method to complete the purchase.
Exceeded Credit Limit: A soft decline may result if a customer’s credit card is close to or over its credit limit. The customer may need to pay down their balance or request a credit limit increase before the transaction can be approved.
Temporary Holds: Some transactions, such as those for car rentals or hotel bookings, may place temporary holds on funds. A soft decline may also occur if these hold cause the customer’s available balance to drop below the transaction amount.
System Glitches: Occasionally, temporary system glitches or communication errors between the merchant’s payment processor and the card issuer can result in soft declines.
Addressing Soft Declines
Soft declines can often be resolved with prompt action. Merchants should inform customers of the issue and provide guidance on the necessary steps to address the problem. If the issue is on the merchant’s end, such as a system glitch, it should be resolved as quickly as possible to minimize disruption to the customer’s shopping experience.
Hard Declines
Hard declines are more severe than soft declines, as they indicate that the card issuer or payment processor has permanently declined the transaction. In most cases, the issue causing the decline cannot be immediately resolved, and the customer will need to use an alternative payment method to complete the purchase.
Common Causes
Fraud Suspicions: A hard decline may result if the card issuer or payment processor suspects a transaction is fraudulent. This could be due to unusual spending patterns or an attempt to use a stolen credit card.
Expired Card: If a customer attempts to use a credit card that has expired, the transaction will be declined as a hard decline.
Incorrect Information: If a customer enters incorrect payment information, such as an invalid card number or CVV code, a hard decline may occur.
Account Closure: If the card issuer has closed the customer’s credit card account, any attempt to use the card will result in a hard decline.
Addressing Hard Declines
When faced with a hard decline, merchants should inform the customer of the issue and suggest alternative payment methods. In some cases, customers may need to contact their card issuer to resolve the issue, such as updating their card information or addressing suspected fraud.
Impact of False Declines on Merchants
False declines can significantly impact merchants, affecting their revenue, operational costs, customer relationships, and overall reputation. Here are some ways false declines impact merchants:
Lost Revenue
When legitimate transactions are declined, merchants lose out on potential revenue. Customers may abandon their purchase, resulting in lost sales. Moreover, these customers might shop with competitors offering a smoother payment experience, further affecting the merchant’s revenue stream.
Increased Operational Costs
False declines can lead to higher operational costs, as businesses may need to invest in resources to investigate and resolve these issues. This can include hiring additional customer service personnel or investing in more advanced fraud prevention tools to minimize false declines.
Damaged Customer Relationships
False declines can frustrate customers, leading to dissatisfaction and potentially damaging the merchant’s relationship with them. If customers consistently face payment issues, they may choose to shop elsewhere, reducing customer loyalty and potentially harming the merchant’s reputation.
Negative Reviews and Reputation Damage
Customers who experience false declines may leave negative reviews about the merchant on social media platforms or review websites. This can damage the merchant’s reputation, making attracting new customers and maintaining a positive brand image more difficult.
Increased Chargebacks
In some cases, customers who experience false declines may choose to dispute the transaction with their card issuer, resulting in a chargeback. This not only leads to lost revenue but can also increase the merchant’s chargeback rate, potentially affecting their relationship with payment processors and leading to higher fees.
Lost Opportunities for Cross-Selling and Upselling
When customers experience false declines, they may abandon their purchase altogether, leading to lost opportunities for cross-selling and upselling. Merchants lose the chance to promote additional products or services, which could further increase revenue.
Lower Conversion Rates
False declines can contribute to lower conversion rates on a merchant’s website, as frustrated customers may abandon their shopping cart after a declined transaction. This can negatively impact the merchant’s overall sales performance and make it more challenging to achieve business objectives.
Impact of False Declines on Costumers
False declines can also significantly impact customers, affecting their shopping experience, trust in the merchant, and overall satisfaction. Here are some ways false declines impact customers:
Frustration and Inconvenience
False declines can cause frustration and inconvenience for customers, as they may be unable to complete their desired purchase. This may require them to spend additional time resolving the issue or searching for alternative payment methods.
Embarrassment
In brick-and-mortar stores, a declined transaction can cause embarrassment for the customer, particularly if a line of people is waiting behind them. This can lead to a negative experience that may deter them from shopping with the merchant in the future.
Lost Time
When customers experience false declines, they may need to spend time contacting their card issuer or the merchant’s customer service to resolve the issue. This can be time-consuming and frustrating, especially if the issue is not resolved quickly.
Reduced Trust in the Merchant
False declines can erode a customer’s trust in the merchant, as they may believe the merchant is unable to securely process their payment. This lack of trust may lead them to seek out alternative merchants for future purchases.
Negative Perception of the Brand
Customers who experience false declines may associate the merchant’s brand with a negative experience, impacting their overall perception of the merchant and their willingness to shop there again.
Reluctance to Use Credit Cards
False declines may make customers more hesitant to use their credit cards for future transactions, particularly if they have experienced multiple declines. This can lead them to opt for alternative payment methods or avoid purchasing altogether.
Abandoned Purchases
When faced with a false decline, customers may abandon their purchase altogether due to frustration or an inability to find an alternative payment method. This not only leads to lost sales for the merchant but can also result in customers missing out on desired products or services.
Reducing False Declines
Reducing false declines is essential for businesses to maintain customer satisfaction, increase revenue, and reduce operational costs. Here are some strategies merchants can implement to reduce the occurrence of false declines:
Optimize Fraud Detection Tools
Evaluate and optimize your fraud detection tools to balance preventing fraudulent transactions and allowing legitimate ones to go through. This may involve fine-tuning the settings of these tools, customizing the risk thresholds, and regularly monitoring their performance.
Streamline the Checkout Process
Make the checkout process as simple and user-friendly as possible to minimize the likelihood of customers making errors when entering their payment information. Provide clear instructions, implement auto-fill features, and offer multiple payment options to cater to a wide range of customers.
Train Staff and Implement Best Practices
Provide staff training on handling declined transactions effectively and implementing best practices for managing false declines. This may involve creating a system for flagging and investigating potential false declines and ensuring efficient communication between customer service representatives and customers when a decline occurs.
Use Address Verification Service (AVS)
Implementing an Address Verification Service can help reduce false declines by verifying the customer’s billing address with the card issuer. This can help identify and prevent fraudulent transactions while minimizing the chances of legitimate transactions being declined due to address mismatches.
Keep Customer Data Updated
Ensure that you maintain accurate and up-to-date customer information in your system. Encourage customers to update their payment details when necessary and implement a system for tracking changes in customer data.
Monitor and Analyze Decline Patterns
Regularly monitor and analyze transaction data to identify patterns and trends in false declines. This can help you pinpoint areas that need improvement and make informed decisions about your fraud prevention strategies.
Communicate with Customers
Maintain open communication with your customers when a decline occurs. Inform them of the reason for the decline and provide guidance on the necessary steps to resolve the issue. This can help prevent customers from becoming frustrated and abandoning their purchases.
Final Words
False declines in credit card processing are a significant concern for both merchants and customers, impacting revenue, customer satisfaction, and trust. Understanding the reasons behind false declines and the difference between soft and hard declines is crucial for businesses to effectively address this issue.
To reduce false declines, merchants should optimize their fraud detection tools, streamline the checkout process, train staff on best practices, implement address verification services, keep customer data updated, monitor decline patterns, and maintain open communication with customers. By taking these proactive steps, businesses can minimize the occurrence of false declines, enhance the overall shopping experience, and ultimately improve customer satisfaction and loyalty.
