In recent years, the payments industry has started to view the growing Card Not Present fraud problem through an entirely different lens.
Today, the overwhelming consensus is that the Card Not Present fraud problem, while increasingly costly, ultimately drives a much larger card acceptance problem.
To combat the rise in Card Not Present fraud, both card issuers and merchants alike are deploying multi-layered fraud tools more aggressively to stem the tide of losses and damage to the customer 
relationship, while effectively controlling operational expenses.
The unfortunate and unintended consequence is false declines: good transactions wrongly rejected due to the suspicion of fraud, leading to lost customers.
Ethoca’s research demonstrates the true nature of this problem goes far beyond declines due to suspicion of fraud, and as an industry we must work together to solve this problem more holistically.
The bottom line is that good customers who transact online are suffering a bad purchasing experience – and this is doubly harmful to both card issuers and merchants. Cardholders may elect to abandon a purchase altogether, seek a different online store to minimize purchase friction, or pull out a different card – sending their go-to card to the back of wallet.
This paper explores the size of the problem, explains the destructive impact on customers who are wrongly turned away, delves into why transactions are declined and reveals how the industry currently manages declines from both a card issuer and merchant perspective.
The Size of the problem
Ethoca’s estimate is that 1.9 Billion Card Not Present purchases – representing $145.9 Billion in sales – are declined each year globally. It’s critical to clarify that this number represents all declines (i.e., fraud risk, insufficient funds, lost/stolen, etc.), not just declines due to the suspicion of fraud.
Analyst firm Aite recently published estimates on a subset of these overall declines – ‘false declines’ – that are due to overcompensation by card issuers’ fraud systems. Aite estimates that in 2016 in the US, false declines are at $264 Million and trending to $331 Million in 2018 (Chargebacks and False Declines, August 2016, Card Present and Card Not Present combined).
Javelin research estimates that in 2014 US card issuers falsely rejected $118 Billion in transactions (also Card Present and Card Not Present combined) due to suspicion of fraud, compared to $9 billion in actual fraud – that’s a ratio of 13 to one.
In direct response, 39% of cardholders will abandon a card post decline, and 25% will move a declined card to the back of the wallet (Future Proofing Card Authorization, August 2015). This is a card issuer’s worst nightmare: not only is their card no longer first in the cardholder’s wallet – it’s potentially at the very back.
This is a material impact in a highly competitive space of card issuers vying for ‘first in wallet’ position with cardholders.
Based on Ethoca’s overall Card Not Present decline estimate (1.9 Billion transactions) and Javelin’s back-of wallet estimate (25%), we can extrapolate that globally 475 Million unique cardholders change payment methods and potentially move their card to the back of the wallet.
Cardholder lifetime value is estimated to be between $3,600 – $48,0002 (inclusive of revenue streams like interchange fees), suggesting the overall financial impact of the decline problem goes well beyond lost merchant sales. In our research, it is clear the majority of declines are actually caused by cardholders having insufficient funds.
The NY Fed Bank Quarterly Report states one in 20 cardholders is at least 30 days late on their credit card and 8.38% of all delinquent cardholders are 90+ days late (Source: NY Fed Bank Quarterly Report on Household Debt and Credit in 2015). Given these levels of late payment and delinquency, it should be no surprise that a significant percentage of declines are related to insufficient funds.
Download the REPORT HERE
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