Understanding Card Declines Due to Suspected Fraud: Navigating Challenges and Solutions for Card Issuers

Understanding Card Declines Due to Suspected Fraud: Navigating Challenges and Solutions for Card Issuers

Mar 1, 2024

In today’s digital age, credit card fraud has emerged as a significant threat, costing billions annually and affecting millions of individuals and businesses worldwide. The ramifications extend beyond financial loss, damaging reputations, and eroding trust between consumers, businesses, and card issuers. As eCommerce grows, so does the number of legitimate transactions mistakenly rejected due to suspected fraud, a phenomenon known as false declines. This blog delves into the complexities of card declines due to suspected fraud, outlining advanced security measures for card issuers aimed at safeguarding transactions and fostering consumer trust.


Understanding Suspected Fraud and False Declines

False declines – also known as false positives in the realm of fraud detection – represent a significant challenge for both consumers and financial institutions. These declines occur when a legitimate credit card transaction is erroneously rejected under the suspicion of fraudulent activity. The reasons for such declines are varied and can include behaviors perceived as atypical for the cardholder, such as making high-value purchases that deviate from their normal spending habits, conducting transactions in geographic locations where they don’t usually shop, or making several online purchases in quick succession.

For example, consider a scenario where a consumer, typically making modest purchases in their hometown, suddenly attempts to buy expensive jewelry while on vacation abroad. Despite the transaction being legitimate, the sudden change in spending pattern and location might trigger a fraud alert, leading to a declined transaction. Similarly, during the holiday season, a shopper might purchase multiple high-ticket items online to take advantage of Black Friday deals. Such an unusual spike in online spending could also be misconstrued as fraud, resulting in declined transactions.

The real-world consequences of false declines are not trivial. According to research,  approximately 10% of all eCommerce dollars are rejected by fraud detection systems, but up to 70% of these declined orders are from legitimate customers. In some industries, payment decline rates can be as high as 20% or even 30%.  This highlights the financial impact false declines can have, even exceeding the losses they aim to prevent.

In addition, the global reach of e-commerce and the increasing sophistication of fraudsters have exacerbated the issue. Fraud tactics are constantly evolving, with scammers finding new and innovative ways to bypass security measures.  The ongoing struggle for card issuers to refine their fraud detection algorithms—balancing sensitivity to suspected fraud (decline reason) with the need to minimize inconvenience to legitimate customers—remains a critical concern in the financial industry.


5 Fraud Monitoring Tools to Help Card Issuers Reduce False Declines Due to Suspected Fraud

To combat these challenges, card issuers are implementing more advanced fraud monitoring and authentication measures. These initiatives are not just reactive steps in response to the current threats but are also part of a broader strategy to improve the ratio between stopping the “good guys” vs stopping the “bad guys”. Through these concerted efforts, card issuers protect their customers and themselves from immediate risks while reducing the number of false positives that negatively impact the payment ecosystem.


1. Enhanced Authentication Techniques

    • EMV Chip Technology: This technology has significantly reduced fraud by transmitting an encrypted, one-time code containing the card information to the card reader, making it nearly impossible to counterfeit cards.
    • Biometric Verification: Incorporating fingerprints, facial recognition, or iris scanning adds an extra security layer, ensuring that the cardholder is the one making the transaction and reducing incidents of false declines due to suspected fraud.
    • Two-factor Authentication: This requires the cardholder to provide two forms of identification (something they have, like a card and something they know, like a PIN), enhancing security.
    • 3D Secure (3DS): A credit card security technology that helps card issuers check the authenticity of online transactions. The technology requires consumer action such as a one-time password (OTP) or other multi-factor authentication method via phone call, text message, or email before completing the purchase.


2. Real-Time Transaction Monitoring and Analytics

    • Machine Learning and AI: These technologies analyze transaction patterns to identify anomalies that could indicate fraud, enabling real-time decision-making and preventing unnecessary false positives that cause cardholders to experience a card decline for suspected fraud.
    • Cross-channel Monitoring: This helps detect coordinated fraud attempts across different transaction platforms.


3. Tokenization and Network Tokenization

    • Tokenization: This process involves replacing sensitive card details, such as the 16-digit account number, with a unique digital token. These tokens are then used to complete transactions without exposing actual card details, significantly reducing the risk of card data being stolen or misused.
    • Network Tokenization: This involves the creation of tokens by the card networks (such as Visa, MasterCard, and American Express) that are specific to each transaction, merchant, or device. This means that even if a token were to be intercepted or stolen, it would be virtually useless outside of the specific transaction context for which it was generated. Network tokenization not only secures the cardholder’s data during the transaction process but also across the entire payment ecosystem, including online, mobile, and in-store environments.


4. Collaboration with Networks and Merchants

    • Information Sharing: By exchanging data on fraud trends, card issuers, networks, and merchants can stay ahead of fraudsters. In this realm, solutions like Kipp‘s can play a crucial role.
    • Universal Security Standards: Implementing shared security measures creates a unified defense against credit card fraud.


5. Investing in Customer Education

    • Awareness Programs: Educating consumers on secure transaction practices is crucial for preventing unnecessary instances of false declines.
    • Practical Tips: Offering guidance on recognizing and avoiding fraud helps consumers protect themselves.



Future Trends in Card Security

The landscape of card security is rapidly advancing, signaling a future where predictive analytics and advanced AI models take the forefront in the battle against suspected fraud as a decline reason. These technologies promise to revolutionize how transactions are secured, particularly as contactless and mobile payments become more prevalent.

This evolving fight against card fraud necessitates relentless innovation and adaptation from all stakeholders involved. Card issuers, in particular, bear the critical responsibility of fortifying transaction security, thus protecting financial assets and bolstering consumer trust by reducing false declines. It is through their ongoing commitment to deploying cutting-edge security measures and fostering collaboration within the financial ecosystem that we can anticipate a significantly more secure digital transaction environment. This synergy of technological advancement and strategic cooperation heralds a promising horizon for fraud prevention, ensuring a safer future for consumers and businesses in the digital age.