What Are False Positives?
Ready for an easy, one-question quiz?
False positives are:
A. Credit card transactions that are actually legitimate but merchants or financial institutions decline/cancel due to suspicion of fraud.
B. A $118 billion gap in annual revenue for merchants.
C. Are also known as “false declines” or “sales insults.”
D. All of the above
The answer is D, all of the above.
You may be surprised to learn that the actual fraud rate in the US averages only around 1% (it’s higher in certain vertical industries, payment channels, and international markets). That’s far lower than the rate at which merchants turn down eCommerce transactions, which averages from 2% to 15%, depending on merchant size and other factors. There are typically two ways orders get turned down:
- Declines take place when merchants or financial institutions refuse to process orders due to negatives lists, fraud rules (e.g., “block all transactions from Afghanistan”), and/or the order is deemed too risky by fraud tools or systems.
- Cancellations take place when merchants or financial institutions escalate suspicious orders for review by human agents or automated processes. After gathering additional information about the transactions and/or users that reveal excessive risk (e.g., invalid shipping address), the orders are not processed.
Of course, risk management and fraud prevention professionals are absolutely justified to be wary about card-not-present (CNP) fraud, account takeovers, identity theft and other malicious behavior.
- CNP fraud jumped 40% in 2016 and is projected to cost online businesses $7.2 billion in fraud losses by 2020.
- 4 million consumers were victims of identity theft or fraud last year.
- Card testing was up 200% in early 2017.
- More than 1 in 5 young adults “borrow” passwords to streaming services.
However, the justifiable fear of fraud is seriously aggravated by inaccurate risk assessment. This inability to correctly quantify fraud risk is what causes merchants and eCommerce sites to wrongly decline or cancel millions of good transactions each year. In fact, a Javelin study found that at least 15% of all cardholders have had at least one transaction incorrectly declined. That accounts for the $118 billion in foregone revenue.
Are you incurring a lot of false positives? A good way to find out is to first calculate your decline rate. How? Simply divide the number of orders declined and/or cancelled after manual review by the total number of orders processed.
The next step is to calculate what that may be costing you. Subtract 1% from your decline rate percentage and multiply that by the number of orders you process each year. This will give you a rough estimate of how many false positive orders you are likely incurring. Next, multiply those foregone orders by your average ticket total. This dollar amount will be the revenue impact of those false positives. Here’s an example of how that might look:
Decline rate: 9% = 9,000 orders declined and/or cancelled-after-review divided by 100,000 orders.
False positives: 8,000 = 9% (your decline rate) minus 1% (average U.S. fraud rate) equals 8% multiplied by 100,000 orders processed.
Revenue impact: $440,000 = 8,000 false positives x $55 average ticket total.
This dollar amount won’t be perfectly accurate, but it will give you a reasonable idea of how big (or small) your problem with false positives is. For a more accurate calculation, top enterprise-class fraud prevention solutions can actually calculate pro forma rates for false positives. Further, they can project what changes in your policies and decisioning can have on future revenue.
Want to know more about false positives and how you can avoid them? Download the eBook “The Silent Sales Killer: False Positives”. You’ll find out more about how to reduce false positives and increase revenue—without increasing fraud losses.