Issuer Declined Transactions: An Overview

This year, roughly $145 billion dollars worth of eCommerce purchases made with a customer’s credit card will be declined by the issuing bank (that is, by the customer’s credit card issuer) when the attempted sale is authorized. That’s according to a new report by Ethoca.

Declined Transactions Cost Businesses Money

Issuer declined transactions represent a huge source of lost sales to businesses, as only 25% of those customers pull out an alternative card and complete the transaction, whereas 39% abandon the sale altogether. As a consequence, there is an obvious desire by businesses to understand why customer credit cards are declined, and what steps they can take, if any, to mitigate the negative impact to their business.

Rate of Declines Vary Significantly by Product Type

The first step to understanding declines is to understand that the percentage of attempted transactions which are declined by the card issuer varies significantly by the type of good sold. For example, domestic physical goods sales typically see decline rates in the 3-4% range, whereas domestic digital goods / services sales see decline rates at roughly 5x the rate (or 15%).

Put another way, 1 in every 25 times a physical good is purchased online the credit card is declined, and the card is declined roughly 1 in 6 times for digital goods or services.

1 in 25 #eCommerce sales of products results in a credit card decline, 1 in 6 for digital goods. Click To Tweet

The difference is explained by the study in two ways:

  1. Digital goods are subject to higher rates of attempted fraud, and
  2. Most surprisingly, customers attempting to purchase digital goods will often reattempt the purchase several more times before abandoning the shopping cart, thus skewing the ratio of declined transactions up significantly. (The hypothesis for this is that digital goods and services are often not available with an alternative vendor, unlike physical goods, thus the customer attempts to repurchase over and over again, as opposed to just finding the good from another retailer.

Why Do Transaction Declines Occur

#CreditCards: Only 9.4% of declined purchases were for suspected fraud, 44.4% insufficient funds. Click To Tweet

Source: Ethoca

Source: Ethoca

The popular perception among most merchants is that transaction declines are overwhelmingly due to an overzealous fraud protection system by the issuer or due to stolen cards being attempted by the customer. And because most merchants are familiar with basic card decline statistics which show that for every 13 transactions declined due to suspected fraud, only 1 was actually fraud.

The reality, as uncovered by this recent report by Ethoca, however, is a bit more complicated. It reveals that only 9.4% of declines were actually due to issuer fraud suspicion, and only 10.4% were due to a card being previously reported as lost or stolen. Surprisingly, by far the largest reason for issuer declines, 44.4%, was due to insufficient funds on the customer’s card.

Why All The Confusion

The reason there is so much misinformation on the part of merchants as to why their customers’ transactions are being declined is that card issuers intentionally provide vague information as to why a credit or debit card was declined back to the merchant. More often than not, the merchant simply sees a “Do Not Honor” or “Declined” response code back, which provides the merchant with very little information about what is actually causing the decline. Moreover, because these response codes actually bundle together a number of actual underlying reasons, merchants often misattribute all similar decline response codes to one potential explanation (e.g. believing that all “Do Not Honor” codes indicate a stolen credit card, when the vast majority are actually insufficient funds). The reason that issuers provide vague responses, however, is two-fold:

  • To protect the privacy of cardholder (e.g. credit card companies don’t want to publicly reveal that a particular customer is behind on their bill)
  • The additional information might give true fraudsters intel on how the fraud detection decline system works so they can better evade it.

Potential Merchant Solutions

Merchants have a few potential solutions to dealing with issuer declined transactions, none of which, unfortunately, offer a perfect cost-free answer to the problem of excessive issuer declines.

  1. Send Specific Error Codes:
    Many eCommerce shopping carts are pre-configured to generate only generic error codes when a transaction is declined (e.g. “Transaction Error: Please check your card details and try again”). Consider providing more specific details based on the specific error code received, and / or provide more helpful solutions to the card holder (e.g. “Please use an alternative credit or debit card to complete this purchase, or alternatively call our 24 hour customer service line.”)

  1. Offer More Alternative Payment Methods:
    If a customer is declined for insufficient funds or credit on their card, offering alternative payment methods such as ACH, PayPal, BitCoin, or an integrated payment plan method can significantly reduce shopping cart abandonment.
  2. Issuer Voice Authorization:
    Consider having your customer call their credit card issuer to manually authorize the charge over the phone. More specifically, upon decline, if you have the human resources capability, consider having the customer call into your call center, and explain that the transaction has been declined by the card issuer and that they can contact their card issuer to manually authorize the charge. And, with the customer’s permission, schedule the charge to run again in an hour which will provide the customer with sufficient time to pre-authorize the charge.
  3. 3D Secure After 2nd Declined Authorization:
    When configuring your shopping cart checkout, consider reverting to 3D Secure Transactions after you’ve received a second declined authorization attempt by the customer’s issuing bank. Not only does this help limit your business’ exposure to a Distributed Guessing Attack but it also provides the ability to send a more secured transaction to the issuing bank in the hopes that it will be approved.
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Bradley Martin
Bradley Martin
Chief Marketing Officer at Soar Payments
Brad Martin, editor of the ‘High Risk’ Blog, is a payments industry expert with a particular focus on writing about high risk merchant services industries and the challenges that high risk businesses face. Previously, Brad managed business development for a US based low risk credit card processor.