Merchants today are dedicating more of their operations costs to fighting and managing ecommerce fraud than ever before. A recent study conducted by Javelin Strategy & Research and Vesta Corp. found that fraud management now consumes up to 23% of merchants’ operational budgets, due to associated software, hardware and personnel costs.
Fraud management has other, hidden costs as well. Consider false positives, transactions that are wrongly declined due to suspected fraud. When merchants tune their fraud controls too tightly they might decline legitimate transactions, with little way of knowing if they’ve turned away a fraudster or a loyal customer.
Anti-fraud technology may stop a transaction because, for example, the billing address didn’t match the shipping address. This information could indicate a fraudulent attempt, but it could also mean the customer is simply traveling and needs the package delivered to a different location. These declined transactions pose a serious threat to merchant revenue in more ways than one:
According to the Javelin/Vesta study, 30% of all transactions declined due to suspected fraud are actually believed to be legitimate. And these declines add up: Merchants as a whole are losing 2.79% of their revenue to false positives, compared to only 0.52% to chargebacks. Merchants specializing in digital goods like e-tickets, ebooks, and music downloads are the most vulnerable, losing 3.06% of annual revenue to false positives, compared to just 1.81% for merchants selling strictly physical goods.
Damaged customer relationships
In addition to the immediate revenue lost to false positives, declined transactions can significantly impact customer relationships. One study found that when an authorization of a credit card is declined on the first attempt, most customers will try again; after that most will abandon the purchase and blame the merchant or its site. In fact, 78% of consumers have bailed on a transaction or not made an intended purchase because of a poor service experience, according to an American Express study.
Unfortunately those negative feelings can spread, especially if consumers tell their friends or social media followers. The same American Express study found the typical consumer tells an average of nine people about good customer experiences, but they tell nearly twice as many—an average of 16 people—about the bad ones. Those word-of-mouth interactions drive 13% of all sales according to research from the Word of Mouth Marketing Association. Just one word-of-mouth impression is anywhere from five times to 100 times more effective than one paid advertisement.
Dissatisfied customers don’t often return once they’ve had a negative experience with a merchant. In fact, 89% of consumers turn to a competitor following a poor experience, according to an Oracle study. The loss of these customers is costly in multiple ways. For one, the same Oracle study found that 86% of consumers will pay more for a better customer experience.
Multiple studies have found that it costs anywhere from 5x-30x more to acquire a new customer rather than retain an existing one. According to a Bain & Company report, just a 5% increase in customer retention produces more than a 25% increase in profit, as returning customers tend to buy more from a company over time.
Roughly one-third to one-half of merchants believe they can’t further reduce their false-positive rates with their current anti-fraud solutions. Yet it’s important for them to seek a balance between protecting against fraud and turning away legitimate transactions. Just a few adjustments could help reduce the rising costs and negative effects of false-positive transactions.
Tom Byrnes is Chief Marketing Officer of Vesta Corp.