Open Banking and Machine Learning Aid the Battle Against False Declines

Elizabeth Graham, product manager at Entersekt, said false declines carry significant risks for banks and merchants, where consumer loyalty is critical.

Merchants and issuers are losing money through the false declines, as a result — more money than would have been lost to potential fraud, said Graham.

“False declines are such a problem in the industry that 80% of merchants use this measure as a key metric within the organization,” Graham told PYMNTS.

As she described to PYMNTS, false declines — a form of false positive — occur when a legitimate customer tries to transact, but the transaction is ultimately denied. She said the issues might lie on the issuer or the merchant sides of the commerce equation. False positives when legitimate customers are flagged as fraudulent, wrongly label transactions as risky.

No matter the nomenclature, it is pretty much the same thing in terms of the customer experience, said Graham, which results in an unpleasant digital journey — one that will cause quite a bit of reputational damage.

“It’s incredibly frustrating and causes consumers to feel not only that it’s a nuisance — because they cannot buy the product they want to — but also almost like there’s been a personal insult,” she said.

She pointed to her own recent online experiences as an illustrative example. Graham said that she’d recently completed a significant home renovation and had been going online to buy big-ticket items, including a couch. Upon checkout, the transaction failed — for no discernable reason. Graham recounted that she had no idea if the reason had been tied to the merchant, the bank, or perhaps due to an issue with her credit card.

There are negative ripple effects on the other side of the equation, too, tied to increased operational costs for the merchant and the issuer. A rising tide of customer complaints funneled through customer service calls, emails and chats, all add to investments of staffers’ time addressing those complaints.

Complex and Expanding Digital Ecosystem

The friction may not be all that surprising. Graham noted that eCommerce is enabled by a complex ecosystem involving merchants armed with fraud and analytics tools and issuing banks with their own risk management systems and parameters. Multiple lines of defense have become necessary in an environment where digital commerce has grown exponentially with the pandemic.

“An entire industry of companies exist to provide tools and services to spot or to try and spot card-not-present fraud before the transaction is even approved. So when we look at merchants and banks, they use these fraud management software and services to either approve or decline credit card transactions during the payment stage,” she said.

The guardedness of the banks and the merchants has given rise to a boost in false declines that exceeded any amount of fraud that might have conceivably occurred, as noted above.

Abandoned shopping carts translate into lost sales that can never be regained. The merchants that see consumers step away from their site are more than likely to see those dissatisfied customers defect to competitors. The issuers? They lose out as consumers are inclined to put the declined cards at the “back” of the wallet and will opt to use the cards that are not being declined.

Technology, of course, offers a range of avenues and options for stakeholders to embrace as they battle fraud more efficiently and ensure that “good” customers are allowed to transact. There’s no 100% effective strategy, but some promising developments are underway.

“We can mitigate some of the challenges that we experience with false declines as open banking payments integrate with existing options such as credit cards, debit cards, and digital transfer services typically offered by eCommerce retailers at checkout,” she said. Open banking, she added, allows anyone with a bank account to initiate fast and secure payments.

She said that open banking had been around for a while but is not yet an industry norm.

But as she noted that “every payment goes through strong authentication — through the banking app and through biometrics.” She added that through the 3DS, enterprises have the opportunity to challenge customers and step up authentication protocols when a transaction is deemed risky. In addition, no card details are shared with merchants through open banking.

The merchants are not holding that data, said Graham, and they don’t need to implement as rigorous a set of risk rules for transactions going through — and for which they may ultimately be liable.

Machine Learning Helps Reduce Friction

No conversation about advanced technologies would be complete without a discussion of artificial intelligence (AI). Machine learning is of particular value in online commerce because it helps abandon the rigidity of the traditional rules-based system that would normally flag a range of transactions. She said machine learning models could help adjust for the seasonality of shopping seasons and cross-border commerce by viewing purchasing behaviors across a large consortium of consumers to identify and understand patterns.

For the merchants, she said, it’s important to constantly review fraud prevention solutions and to work with issuers on collaborating and sharing insights to streamline online commerce.

“As eCommerce booms,” she told PYMNTS, “the increasingly sophisticated online consumer will choose to spend their time transacting with retailers that offer seamless digital experiences with — of course — a high level of security.”