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The danger of false positives

Published April 24, 2019

We explore how false positives can affect your bottom line and how they happen.

In fraud protection, everyone tends to focus on the cost of losses due to fraudulent activity. This myopic strategy is understandable because fraudulent sales are expensive. However, the true cost of a fraudulent transaction can cost a business 2 to 3 times the purchase amount.

Newer technologies, like EMV, lessen the risk of card-present fraud, while at the same time, data breaches create a market for stolen card data. What’s a fraudster to do? Technology has driven fraudsters to embrace the internet and a life of crime from the comfort of their own homes, leading to a fraud increase of 33% for eCommerce merchants in 2017.

The natural reaction for an eCommerce (or card-not-present) merchant is to tighten up the defenses and make sure no evil gets in. But what happens when the defenses get too good and even your real customers cannot get in?

You lose money. Valuable sales are lost to customers that are unlikely to return to your business. Your brand may be damaged by an angry customer who turns to social media—not the way you want to go viral.

Oh, and the dollars you spent driving that traffic to your site in the first place also lost as well.

How Much Are You Really Losing?

While not an easy metric to summarize in a neat little graph, the cost of false positives, sometimes referred to as false declines, can have a big impact on your finances and reputation.

  • Research from Oracle has shown 89% of consumers will abandon a merchant after a poor experience, while 86% will pay more for a better experience.
  • A Nielsen study suggests that 92% of consumers rely on recommendations from people they know when making a purchase. If you do not have the ability to control your customer experience, you are losing money.

Consider This

Imagine a VIP customer is traveling and places a large order to be shipped to an alternate address while on vacation. A too stringent fraud tool steps in and cancels the order because the shipping address does not match the address on file with the customer’s payment card. What happens to that revenue? What happens to the future revenue of that customer? How many people will they complain to about your business? As a merchant, you should instead hold the order and verify it with the customer.

After all, a bad customer experience will reach twice as many people as a good one.

This same scenario can happen to a customer for many reasons: they move to a new house, they place an order from work, or they are sending a gift to an alternate address. Many customers blame the easiest target when a problem occurs (namely, the merchant) because they don’t understand why they are essentially being called a thief. They then just move on to the next website to make their purchase.

What Can You Do About It?

The real solution is to use a fraud prevention strategy that minimizes both false positives and real fraud. With manual review, this can be a lengthy process. You will need to create a system that provides verification options for customers and has in-depth reviews to handle any suspect orders. Automated fraud tools can make this process easier, but they come with their own issues. Make sure you ask a fraud provider what their acceptable level of risk is with suspect orders and how your protections can be adjusted when false positives occur. Choose a provider that can offer you protection on all sides rather than just covering one aspect as this can lead to losing more revenue in the long run.

Post Author: John Brown
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Solutions Consultant at NS8. After years in the payment industry, John now lends his expertise to NS8 clients by helping them implement effective fraud protection.