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May 18th 2022

3 Ways Retailers Are Losing Millions Through Their Checkout

While some merchants may have achieved marginal cost reductions or incremental sales through targeted interventions, in CMSPI’s experience, many of these merchants are still losing millions of customers and paying higher fees as a result; some may not be doing enough, others may be doing nothing at all, and some may be trusting their payments partners more than they should. The outcome: their payments strategy is not fully optimal.

What does fully optimal mean at CMSPI? It means looking at cost, approvals, and fraud holistically, rather than tackling each one in isolation. In this blog, we look at three ways retailer are losing millions through their checkout; where merchants can be missing out on eight-figure savings, steering to the wrong payment method, or fighting good customers when they think they’re fighting fraud.

1. Even with the best fraud strategy, your business may be fighting customers rather than fraud

For many merchants, a declined transaction may not be their fault. When the customer hits pay, their card information is sent through a series of fraud screenings, ranging from the pre-auth screening performed by the merchant’s fraud provider to the final fraud screening by the issuer. Throughout each step along the transaction’s journey, a threat looms: a false . False declines don’t just mean losing a sale: they may also mean losing a lifelong customer – and all the customer acquisition costs it took to get them.

What’s a False Decline?

While global card fraud was estimated to exceed $32 billion in 2021, CMSPI estimates that false declines—when a good customer sees their payment rejected due to inefficiencies in the supply chain—can cost merchants up to six times their losses from fraud. A false decline can be caused by multiple factors: Suboptimal fraud rules at the gateway or checkout can generate excessive declines, a lack of communication and transparency among payments firms can create inefficiencies in getting good customers through the checkout, and post authorization fraud rules can reject transactions deemed non-fraudulent elsewhere in the supply chain. Globally CMSPI estimates that false declines are predicted to increase to $230 billion in 2022.

(Taken from CMSPI’s May 2022 Insights Magazine: The Payments Fraud Ripple Effect – May 2022)

When approached holistically, an optimal fraud strategy will deliver benefits above-and-beyond a fraud strategy that is optimized in isolation. In a recent practical example, CMSPI worked with a merchant client to implement a “best-fit” fraud provider and an optimized cost and approval strategy that led to a nearly $50 million net annual benefit – representing hundreds of thousands of potential customers who weren’t receiving false declines at the checkout page (Figure 1).

For this merchant, we utilized granular data to initiate and evaluate a fraud provider Request For Proposal (RFP) process. Beyond choosing the right provider, it was essential for the merchant to monitor that provider’s performance given the rapid changes in its fraud threats. The RFP process, approval rate intervention, and the monitoring of performance led to a drastic reduction in fraud and an increase
in sales.

Figure 1. Annual benefit of holistically approach fraud, cost, and approvals

The key takeaway from this example is that choosing the right fraud provider is not always sufficient for merchants trying to maximize cost reductions, approval rate improvements, and fraud minimization efforts. Each of these pillars will interact and influence the others, potentially creating benefits beyond isolated optimization.

2. Negotiated rates aren’t worth much if you’re losing customers

All payment providers – from APMs to card networks – have a similar priority: to maximize their share of spending and number of transactions. This involves ensuring that consumers are using their solutions and merchants are steering transaction volume in their favor.

Given the appetite for transaction volume, merchants steering transactions can strategically establish volume-based arrangements with payment providers or networks, allowing their business to negotiate costs per transaction well below published rates. Merchants who establish these negotiated rates will want to ensure the maximum amount of volume is going through that payment method, potentially resulting in huge savings.

The ultimate benefit of negotiated rates, however, will depend on the approval and chargeback rates of the preferred payment method. As merchants steer customers to their preferred payment method, they may be missing out on the benefits of negotiated rates because the preferred payment method isn’t optimized on approval and chargeback rates. As a result, the reductions in cost may be offset by higher chargeback rates or lost sales. With this in mind, it’s essential to optimize across every payments pillar, otherwise merchants may be insulating themselves from the full benefits a comprehensive optimization strategy can deliver.

3. “Am I really being charged extra fees for declines and false declines?”

Yes. It’s crazy but it’s true. Many merchants may not realize that there are significant fees for each declined transaction. As a result, merchants incurring high rates of false declines are unnecessarily losing loyal customers AND getting charged for it.

Table 1 lays out a sample of new or increased network fees by the global brands that apply to authorizations and/or declines.

Visa and Mastercard Network Fee Increases or Introductions (2020-2022)

Table 1: Visa and Mastercard network fee increases or introductions (2020-2022), highlighting those applying to both authorizations and declines

While all businesses find lost sales and false declines frustrating, most are apoplectic when it comes to incurring fees for lost sales. To avoid unnecessary decline-related fees, it’s essential merchants communicate with all members of their supply chain, from their fraud provider to some of the largest issuers, ensuring that each step of the transaction is flowing smoothly and avoiding costly false declines.

How can CMSPI help?

Optimization requires a holistic approach, otherwise merchants may be paying more to their payments partners for missed sales and false declines, increasing your costs while reducing your top-line. Each lost customer is costing your business MORE per transaction, and a poor checkout experience for your customer could lose your business a lifetime buyer.

When you marry up cost, approvals, and fraud data, the leakages become clear. But with limited time and resources, your business may not be able to take advantage of the benefits greater visibility can offer.

Through data, transparency, and collaboration, CMSPI can support your business in achieving more sales for less cost. Our in-house data and payments experts will identify significant inefficiencies across your portfolio, focusing not only on your cost of processing but also your approval rate and fraud performance. We’ll holistically fix your payments issues by partnering up and integrating our army of experts to your team.