False Positives: The Unintended Consequences of Mitigating Card-Not-Present Fraud by Maria Schuld

When EMV took hold in the United States, it came as no surprise that card fraud shifted to card-not-present (CNP) transactions. Pymnts.com reports that fraud is now 81 percent more likely to occur online than at point-of-sale. With e-commerce growth far outpacing that of in-store, this is troubling.

Merchants Respond

Merchants are responding to CNP fraud by adding more detection and prevention tools. On average, e-commerce merchants added three or more fraud mitigation tools and more advanced ones over the course of last year. Those combatting the “fast fraud” prevalent in digital goods sales added the most tools, according to LexisNexis.

Unintended Consequences

The unintended consequence of stricter controls, however, is the rise in false declines – or false positives. Visa reports 1.2 billion CNP purchases are declined worldwide every year, and Aite estimates $331 billion worth of false positives in 2018.

False positives make up a large percentage of declined transactions. LexisNexis found that one-third of declined transactions by online merchants were false positives – up from one-fifth in 2016. Another study conducted by Ethoca, in collaboration with major merchants and a few major issuers, discovered that 52 percent of the transactions that merchants declined for fraud turned out to be good orders that could have been fulfilled.

The opportunity cost of false positives to merchants and issuers is huge, and the impact lasts beyond declined transactions. Irritated consumers become retention risks. Ethoca found that 62 percent of cardholders will abandon or move their declined card to the back of the wallet.

How to Get More CNP Transactions Across the Finish Line

Reducing false positives benefits all stakeholders – merchants, issuers and consumers. Updated tools and approaches for mitigating CNP fraud reduce false positives and friction in transactions, greatly improving the customer experience and cardholder satisfaction.

A multi-layered approach to fighting fraud – common core solutions layered with advanced identity and transaction risk assessment solutions –reduces false positives. Merchants with basic layers of protection experience a rate of false positives of 33-34 percent while merchants using a multi-layered approach experience a 21 percent rate.

The introduction of second-generation of card authorization tools will enable behind-the-scenes authentication based on hundreds of data points from multiple sources. For example, 3D Secure 2.0 employs data points from issuers, and merchants or merchant vendors to authenticate 95 percent or more of transactions. These data inputs will allow issuers to more precisely determine when a transaction should be challenged, in real time. Merchants can then control whether they accept the challenge or decide to take the risk of fulfilling an unprotected order.

Another source of unwanted declines is that cardholders often fail to update reissued card information. Updater tools, such as the Visa Account Updater or MasterCard Automatic Billing Updater, automatically update information on file for recurring payments with participating merchants. This also translates to higher rates of approval for merchants. Meanwhile, cardholders benefit from convenience and reassurance that their payments will be accepted. Issuers also benefit because they reduce the chance of the consumer changing card brands when the transaction cannot be authenticated.

All stakeholders benefit from these new tools and approaches that improve the ability to discriminate between truly fraudulent transactions and false positives. And the best news is that even small improvements result in more satisfied, “stickier” consumers, as well as additional revenue for merchants and issuers.