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April 08th 2021

Credit Card Rejections During Pandemic Mean Frustration for Consumers, Missed Sales for Retailers

As more shopping moves online during the pandemic, consumers are likely seeing their credit cards turned down more often than they would in stores because of efforts to prevent fraud, consulting firm CMSPI said today. But, fraud rules set by banks and card processors reject far more transactions than they should and are costing retailers tens of billions of dollars in lost sales.


“Consumers are accustomed to using their cards in stores without a problem, but the more they shop online, the more likely they are to see the same cards rejected,” CMSPI Head of Ecommerce, Toby McFarlane said. “Online spending has higher security risks than in-store spending. But rather than addressing the complexities and nuances of fraud prevention and properly fixing its broken system, the card industry often tosses out perfectly good transactions along with the bad without anyone realizing it. Consumers are left frustrated, and merchants end up bearing the burden both in lost sales and the cost of actual fraud that slips by in the meantime. The card industry needs to take a more sophisticated approach to fraud rather than merely shifting the burden.”

On average, 97 percent of transactions are approved by bank and card industry algorithms when consumers use a card in a store, where the card must be present and EMV chips make it difficult to create a counterfeit, according to CMSPI data. But only 85 percent are approved when cards are used online, where fraud rates are more than twice as high because a name and card numbers – not a physical card – are sufficient to initiate a transaction. That amounts to 15 out of 100 online payments turned down – because of fraud, insufficient funds, technical glitches, errors or other reasons – compared with only three out of 100 for in-store transactions.

U.S. online spending increased by $193.7 billion in 2020 over 2019, according to the Census Bureau. Based on that number, retailers missed out on nearly $30 billion in sales in 2020 because of lower approval rates online. To put that in context, a small business with $1 million in sales that move online could see $150,000 rejected because of lower online approval rather than $30,000 in-store.

While online rejections help prevent fraud, CMSPI data indicates that one out of every five is a false positive – meaning good customers are wrongly turned away – and that more than half of those customers turn to a competitor.

Payment card fraud averages 0.08 percent of in-person transactions, but 0.18 percent online, according to the Nilson Report. That means the higher fraud rate costs retailers $1.8 million for every $1 billion of sales that move online, compared with $800,000 for the same amount of in-store sales. And unlike in-person transactions where banks often pick up fraud cost if an EMV card turns out to be counterfeit or the chip is circumvented, retailers usually bear the full burden for online fraud.

In house quote

Online transactions should be rejected when actual fraud has been detected, but sometimes

rejections are the result of an error by the bank or card processor or rules that emphasize protecting their interests over merchants and consumers. Retailers can work with card processors and card issuers to address these problems, but the process is complicated and smaller retailers often don’t have the necessary in-house expertise. Lack of transparency from the card industry makes this issue challenging even for experts.

Toby McFarlane

Head of Ecommerce