In a turbulent year, retailers have faced both famine (with retail stores closing) and feast (with the spike in online shopping) as they adapted to the restrictions and opportunities created by Covid-19. Our research shows that in the past 12 months the number of first-time online shoppers has doubled. However, while these new users represent a significant opportunity, many retailers are missing out because they’re simply not able to tell whether these potential customers are legitimate or uncomfortable transacting with customers they do not recognise, or cannot trust.
As a result, these new users are five to seven more times likely to be declined at the point of transaction leading to immediate lost revenue and longer term, lifetime value.
At Forter we call this phenomenon New User: Missed Opportunity (NUMO), and it is costing retailers a fortune. So how does NUMO happen and how can retailers change the way they think about fraud prevention to overcome it?
The missing millions – what’s the scale and frequency of NUMO?
A customer’s first experience of buying from a brand is critical. The process needs to be as welcoming, easy and friction-free as possible. When a customer has decided to try out a new supplier and gone to the trouble of selecting their item and entering their personal details, the last thing they want is for that effort to go to waste if the order is declined.
The extent of the damage this causes is highlighted by research that found 40% of those declined customers will take their business elsewhere and are unlikely to return. The opportunity to build a long-term relationship with that customer is lost forever. In their bid to stop fraud, the retailer is forgoing genuine custom and the numbers suggest that, on balance, they are losing out financially.
To get a sense of the scale of lost revenue, we analysed insights from our global merchant network, which processes over $200B in transactions annually and protects almost a billion identities globally, to assess the monetary value of a new customer decline in different retail sectors.
As part of the methodology, we reviewed the seller’s total processing volume, their customer decline rate, the additional likelihood they would decline new users, the average rate of new users, the likely return rate of a declined new user and the frequency of user purchasing on the website.
Based on this analysis we found that every new declined customer – where a customer visiting a merchant for the first time is prevented from completing a transaction – represented £684 missed lifetime value in apparel, £589 in the home furnishings and garden industry, and £781 in food and beverage.
This is a lot of repeat revenue to turn away, just to stop fraud. AITE Group estimates that merchants may lose up to 75x more in false customer declines than they lose to actual eCommerce fraud. When we consider the pandemic boost to UK online retail sales in 2020 – up 36% year-on-year – the sheer scale of missed revenues is startling.
Why are new users declined?
So why are these new customers being turned away instead of being welcomed with open arms? The answer lies in the limitations of legacy fraud prevention tools that struggle to make robust decisions about a user’s authenticity when presented with limited data. In an ideal world, the data within a fraud prevention tool needs to include what customers have bought in the past, linking online and in-store transactions, how often coupons are used and the frequency of product returns. This is all in the name of establishing the customer’s integrity.
Unfortunately, many merchants’ fraud prevention tools are based on manual reviews and rules. These provide limited visibility of the wider eCommerce ecosystem. This means, in the absence of the information it requires to establish merchant-customer trust, the reviewers and tools are not dynamic enough to keep up with the increased volume or changing behavior, resulting in false declines and frustrated users.
Of course, trust is a two-way street. It is not only the merchant that can have suspicions about authenticity. Customers, especially first-time online shoppers or those trying an unfamiliar brand, can be nervous of providing a lot of personal information to the site and can abandon their purchase when pressed for extra information. Recent research by Baymard found that 24% of users abandoned their carts because the merchant wanted them to create a customer account, while 18% did so because the checkout process was too long or complicated. 17% decided they didn’t trust the site with their payment information.
So, while the merchant is aiming to qualify the customer by getting the information to satisfy anti-fraud tools, the customer is being dissuaded from continuing. This extra friction contributes to NUMO.
Flipping the fraud prevention mindset
It’s natural for retailers to want to stop fraudsters from robbing them of revenue, but if the tools they’re using are actually compromising genuine customer relationships, they’re contributing to a very false economy. In an environment where the new customer opportunity is there for the taking, the potential losses are even greater.
Rather than viewing fraud prevention as an exercise in averting the risk of accepting bad customers – and accepting a high attrition rate of good customers along the way – retailers need to approach it in terms of generating growth by maximising the acceptance of new customers wherever possible. Once this hurdle has been cleared, the way is open to building on that relationship and maximising customer lifetime value.
The key is accessing that all-important behavioural data that gives the merchant confidence in the integrity of the customer without adding friction. By investing in advanced tools that access a huge dataset across enterprises, banks, payment providers and industries, merchants get a better picture of what “good” customers look like, meaning fewer are declined. It also means that merchants can expand their service offerings to include flexible pick up and return options without fear of increasing fraud risk.
It’s an investment that – when you consider the size of the NUMO phenomenon – is easily justified. It positions fraud as a risk to be proactively managed, meaning the tools that achieve it are part of the organisation’s growth strategy, not just a cost of doing business. Ultimately, it avoids leaving new customer revenues on the table and makes for a more successful, sustainable business.
By Aaron Begner, EMEA GM, Forter