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Is your list of new business customers falling short due to issues with their rejected credit approvals? New User Missed Opportunity or “NUMO” is a growing problem for e-commerce vendors. It is caused by false payment declines based on a lack of access to current consumer data by the rating agencies. But you can fix this problem.
False declines and the NUMO phenomenon have been occurring for years. Today’s volume of new online shoppers is two times greater than pre-COVID levels. Turning these new users into repeat buyers presents tremendous lifetime value for merchants, according to Alon Shemesh, cofounder and chief analyst of Forter.
The challenge is new users are five-to-seven times more likely to get declined than repeat customers due to a lack of data. One false decline often ends the relationship — causing NUMO. Data shows that 40 percent of declined new users will not try again on that merchant’s site, he noted.
“The fact that the number of new shoppers has doubled compared to pre-COVID-19 levels makes this an urgent issue for most merchants. Their current approach to fraud prevention is curbing their potential business revenue and growth,” Shemesh told the E-Commerce Times.
Given that new users or new shoppers are new to e-commerce vendors, merchants have access to less data on new customers than their existing customers. This makes it more difficult to get accurate approve/decline fraud decisions.
This influx of new users has put an increased strain on fraud prevention systems that rely on a rules-based approach and manual review to decision transactions. As a result, many merchants relying on legacy fraud solutions have struggled to identify legitimate, first time users, Shemesh explained. This has resulted in a spike in false declines and unhappy customers.
The metrics during the pandemic have made an existing problem even worse. In fact, merchants can lose up to 75 times more revenue to false declines than they do to fraud, according to Aite Group. This impact has just been magnified with the influx of new digital users prompted by the pandemic, noted Shemesh.
Outdated Data Flags Rejection
Several reasons can cause merchants to falsely decline a new user, observed Shemesh. One is simply using outdated rules-based technology.
“If a user does something that falls outside of ‘normal’ consumer behavior, or the merchant simply does not have enough identity data on the user, they might be falsely declined or flagged for a manual review,” he explained.
The influx of new users also puts additional strain on the teams manually reviewing transactions. That can lead to delays and errors.
Merchants need to change their focus on approval criteria for new customer credit applications, suggested Angela Whiteford, chief marketing officer at Forter.
For example, rather than considering more or different factors, merchants are better served by understanding whether the customer is who they say they are. Merchants should also consider the new customer’s trustworthiness.
“The concept of trustworthiness is difficult for most merchants to achieve, especially when talking about new users that haven’t been seen before,” she told the E-Commerce Times.
However, the companies winning new users and building long-term relationships of trust are partnering with vendors to leverage robust global merchant networks that rely on behavioral and transactional data from hundreds of millions of users. Trustworthiness is incredibly hard to achieve with only internal merchant data alone.
“A more comprehensive view of identities and user interactions spanning geographies, markets, industries, and businesses must be tapped into,” added Whiteford.
Wide Gap to Close
Customers who are falsely declined will purchase from the competition instead. That is nearly half of a merchant’s lost revenue going straight to competitors’ pockets, according to a Forter report from global network processing of more than $200 billion in online transactions from 800 million users.
“This is a significant finding that merchants should care about and will significantly impact them if they do not change their approach,” cautioned Shemesh.
The disparity between the cost of fraud and NUMO is vast. What is interesting is that merchants typically do not know how many of their declines are false versus legitimate, Whiteford added.
“They often believe their approval rates could be higher but don’t understand the extent to which they are declining legitimate buyers and more importantly, how to solve this problem,” she said.
Bleak Financial Outlook
Forter’s NUMO report quantifies the missed annual revenue per customer in categories including:
» Apparel & Accessories: $930 per customer / per year» Home & Garden: $798 per customer / per year» Food & Beverage: $1,062 per customer / per year» Beauty & Health: $243 per customer / per year
To put this in context, Aite Group estimates that losses due to false declines will grow to $443 billion this year, up from $331 billion in 2018. Considering that e-commerce fraud cost merchants $4.4 billion in 2018, this means merchants lose 75 times more revenue to false declines than they do to fraud.
The bottom line is that merchants are losing hundreds of dollars per customer each year when they falsely decline a new user that could have become a loyal customer, noted Shemesh.
“As these falsely declined users are unlikely to return, we can further extrapolate that the lifetime value loss per customer has a significant impact on revenue potential for each merchant,” he said.
Global Network Needed
A global merchant data network is needed to accurately identify the trustworthiness of digital identities, Whiteford recommended. That data, based on the user identity, would provide a variety of interactions spanning merchants, engagements, and more dynamic factors.
“A global data network of hundreds of millions of users offers a more comprehensive view of each digital identity, rather than basing a decision on a set of rules or factors meant to represent an individual or a sole transaction,” she explained.
Expert analysts using the latest artificial intelligence and machine learning would consider more expansive data points. That approach would automate the decision-making process in real time. False declines can be virtually eliminated, and approval rates increased, she added.
What It Takes
The solution for a working global network of customer data already exists. But it needs to be more widely available.
Automation and global merchant networks are two elements required to have a viable e-commerce fraud prevention solution. The bigger question is how e-commerce merchants can get access to these solutions, according to Whiteford.
By working with many of the world’s leading merchants, Forter has built an accurate, real-time fraud prevention solution that combines industry-leading technology and a global data network of more than 850 million users with a team of expert analysts.
“We have continually expanded our network to include more players in the broader e-commerce ecosystem (merchants, banks, payment providers, etc.) who are part of the payment cycle as well. Today, we process over $200 billion in online commerce transactions and are protecting close to a billion consumers globally,” she said.
Otherwise, New Balance Needed
Few other potential options are available to help merchants mitigate or remedy the NUMO phenomenon. Merchants not using global networks and automation need to balance the new user customer experience against the risk of fraudulent transactions.
“It is possible to loosen the reins on fraud prevention efforts so as not to block new user transactions. It is just a matter of how much risk and potential loss you are willing to take,” suggested Whiteford.
Merchants need to reexamine their approach to risk management. Rather than looking from a mitigation perspective, merchants need to consider how risk management can be used as a tool to power and grow their business, she offered.
Forter expects NUMO to be a persistent issue even when things do return to normal after the pandemic. Consumers have been forced to adopt e-commerce habits and are unlikely to abandon the flexibility and enhanced shopping experience they are afforded online.
As a result, the omnichannel shopping experience — across direct, wholesale and online — is also something that merchants are embracing to attract and retain customers, noted Whiteford.
“This has led to new services such as curbside pickup, BOPIS (buy online pick-up in store) and more flexible policies (loyalty, returns, etc.) The merchants who are ultimately going to win out are those that embrace technology to allow them to quickly adapt to the new reality, concluded Whiteford.
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