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Retailers Are Set to Lose Over $18bn this Holiday Period: A Short Guide to Stop Losing Customers

While most customers may be content to wait for a chill in the air and twinkling lights to make an appearance before putting together their holiday shopping lists, we know – with around $18.6bn of revenue lost to false declines on U.S. Ecommerce transactions last year – that merchants can’t afford to delay any preparations for the holiday shopping season.¹

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Under economic pressure, it’s more important than ever to capture customers and meet revenue targets.

Drawing on our unique data and payments experience, CMSPI works with clients to achieve approval rate optimization, which helps to prevent retailers from losing customers. As you’re setting inventory expectations and designing eye-catching ads for Black Friday and Cyber Monday sales, it’s critical to make sure your payments acceptance strategy is well-positioned to handle the holiday rush. So, how can you prevent revenue losses in 2022?

Consider how your checkout process – and the decision-making behind it – can approve as many good customers as possible.

Ultimately, efforts to draw in good customers may be diminished if they arrive at the checkout, have sufficient funds to make their purchase, input their payment details, and then see a ‘declined transaction’ message pop up. Once that decline message appears, the overall customer experience takes a direct hit, and the chance that a customer returns plummets. In that case, what can you do to optimize your approval rate and ensure your business realizes that revenue?

The first step is to consider how your approval and fraud rates are performing currently. Not only is it important to consider your own goals for approval rates and revenue, it is important to confirm that your business is performing above expectations. Correcting any sub-optimal markers now, before the holiday rush, is critical. Waiting too long to adjust your fraud rules or decision-making frameworks may mean that full implementation throughout your payments supply chain is not achievable before peak activity.

 

Pay close attention to seasonal fraud rules.

Holiday shopping often deviates from typical consumer behavior, as customers tend to spend more money in shorter time frames on products and services that they might not purchase at other times of the year. Anticipating this influx in sales and shift in consumer trends over the next few months, there are several areas where you can adjust your fraud rules and payments logic to better suit the season. A few examples of logistics-based considerations include:

  • Address mismatches
  • Atypical transaction value(s)
  • Order frequency
  • Shipping or order pick-up details

While location- and logistics-based rules may work well for your business in most months, it is worth asking yourself if this remains true during the holidays. Are your customers likely to place more frequent orders than normal, or to place orders while traveling longer distances to visit friends and family? Or, should your logistics-focused rules remain in place? If you know your customers’ behavior is unlikely to be impacted by seasonal changes, and those rules have historically worked well for your fraud management strategy, then it may be best to maintain the status quo.

Finding an effective, dynamic balance in your fraud rules is critical, especially as the most prevalent types of fraud evolve.

Just as certain fraud rules may be out of sync with holiday shopping patterns, CMSPI also anticipates that specific types of fraud are likely to spike around the holidays. There are four types of fraud that may be particularly relevant to the holidays: account takeovers, friendly fraud, returns abuse, and promotions abuse.

Looking at promotions abuse as an example, after your business has worked hard to cater sales and advertisements toward customers’ wish lists, you don’t want to realize during the first week of December that fraudsters found a loophole on Black Friday. By allowing fraudulent, significantly discounted transactions through, your profit margins may decline. If those fraudsters raise chargebacks following the promotion, your fraud rate gets pushed higher.

Types of Fraud

What does this mean for your top line, and doesn’t the impact diminish in January?

Unfortunately, the impacts to your top line can be severe, particularly as your approval rate – the percentage of attempted transactions that are successfully authorized – is constantly changing and may be reactive to fraud trends, even in the case of nonfraudulent transactions. The graph below is an aggregated example of the relationship that CMSPI has observed between approval and fraud rates for Ecommerce merchants during the 2021 holiday season.

Estimated Approval Rate to Fraud Ratio Over Time

Typically, around 30 days after the onset of the holiday shopping period, a merchant sees most of the related disputes filed. The increased number of chargebacks then causes the merchant’s fraud rate to spike in December and January. As the merchant’s fraud rate increases, card issuers may become more risk-averse, which feeds into their decisions about future transaction approval. If your approval rate declines as a response to increased fraud, as indicated in the graph, future months’ revenue is reduced due to additional falsely declined transactions.

The decision-making framework we just unpacked, with issuers limiting approved transactions following a higher number of chargebacks, speaks to how reactive and sometimes irrational this system can be. It also demonstrates the need for you to actively monitor your approval rate and work with your payments partners to further optimize. If you don’t, you may find that your business and revenue streams are penalized for the payments system’s broader inefficiencies.

What steps can you take today?

Less predictable holiday shopping trends complicate your decision-making process – you have more customers and more potential revenue than any other time of the year, so the stakes are high. The good news is, you’ve started planning early. You understand that the accept-or-reject frameworks that you and your payments partners outline today should be designed to capture as much potential revenue as possible, while giving you protection from known areas of risk during holiday sales. You can begin to reassess your existing fraud rules: are you turning away good customers due to fraud rules that are out of sync with holiday shopping trends? Are there any areas of your fraud management framework that may leave you vulnerable to fraudsters on Black Friday and Cyber Monday?

CMSPI understands that striking the correct balance between sales and fraud strategies is incredibly difficult. Our analytics tools and industry insights help CMSPI to identify where areas of improvement in your approval rate may exist, due to our wide client base and benchmarks. We understand how tricky it is to ensure all steps are performed correctly for a transaction to be approved, and our insights can help you to better achieve payments optimization to stop losing customers. Evaluating each area of concern with your business profile and customers in mind will help you strike the correct, careful balance between your sales and approval strategies and set you up for success in the holiday shopping season.

Sources:

[1] CMSPI estimates and analysis