Credit card issuers have mechanisms in place to protect themselves from transactions they classify as high-risk — and they are certainly justified in doing so. The intention is certainly not to embarrass or frustrate the customer with a credit card decline; indeed, doing this too many times will not only eliminate the revenue from the specific transaction, but can potentially push the customer to another credit card for the medium or long term.
Due to the massive quantity and pace of transaction requests arriving from around the world, analysis and accept/decline decisions must be executed automatically and algorithmically. The system has to be somewhat conservative and will take the best guess at where to draw the line between accepting and declining the transaction.
Let's take a look at the three reasons that a legitimate transaction may be rejected.
Each bank may have its own preference — based on best practice, its own pattern analysis, or actuarial risk calculations — for specific types of transactions. Even without a complex algorithm, certain red flags can trigger a decline. Some banks become suspicious when a purchase is made overseas, and some take extra precautions for purchases over a large amount, even if it is within the customer's credit limit. These red flags are unique to each bank and are not made public — as a result, there can be a surprise when a customer suffers the repercussions of raising one.
If we consider a credit card purchase as essentially a short-term loan, we understand that the bank has the right to run a “credit check.” And as they have access to the balance of your bank account, it's easy enough for them to determine that you represent a risk of default on a particular payment.
If only it were that simple.
Using a credit limit or snapshot of today's balance does not take into account that the customer may have other sources of funds like an expected bonus, a loan from a relative, a sale of stock, or even simply the readiness to pay the interest on payment over a few months. The customer may even have bonds to sell, an inheritance, or funds stored in a savings account in another bank.
Often, unusual purchases are needed in order to fund major life events like a birth, wedding, purchase of a new home, and more. The customer often has a plan to repay the outlay, but, alas, the bank has no way to know.
Technically, it's possible to call the bank's credit department and ask for a short-term adjustment to a credit limit, but this can be a lengthy and frustrating process, and many customers instead prefer shifting to a Buy Now Pay Later scheme offered by merchants who are asking for payments over time — without extra fees or interest — rather than everything up front.
One cannot forget that the merchant may have plenty of supporting data to indicate that they are dealing with a reliable customer who pays their bills regularly. But the bank does not have this information; their perspective is restricted to the dollar amount you have at this moment.
It's never a pleasant feeling being told by a bank (especially when you've been a customer for years) that they simply don't trust you. It's hard not to take it personally, but the reality is that it is frequently a kind of benign fluke: there is a mismatch between your shipping and billing addresses, a device ID is unfamiliar, certain types of products are being ordered in bulk or from overseas, etc.
Let’s accept for a moment that fraud systems deployed by credit card companies do need to be conservative and determine how significant the red flags are; the problem is that they do not have all that much data to work with — they only access purchase history on their own card. They don't know about a customer's reliability using other cards or consistent purchases through this (or any other) merchant. They don't even know if this particular purchase is unusually large for a particular customer, except by comparing it to other purchases made using this card in particular.
In the event that the customer pulls out a competitor’s card and the transaction does go through due to a more relaxed set of algorithmic rules, the original credit card issuer may lose that client and associated revenues.
As we hope is becoming clear, the source of many of these declines is the limited data set on which banks make the assessment. There are two parties involved, and while the bank can only create a partial profile of this customer, the merchant has a much richer source of information that can be reassuring — a tool to reduce the sense of risk for a given transaction.
All that's needed is a platform like Kipp that creates this opportunity for collaboration on each transaction just before it's going to be declined; in the gray area where the bank's algorithm can truly only make a best guess, the supporting data from the merchant can push the decision past the threshold and allow the transaction to go through.
Remember that the merchant has a real motive to participate in this exchange, because typically, they have invested in significant acquisition costs in order to attract, attain, and keep the loyal customer. They are also usually looking at a profit margin many times the low single-digit credit card commission. In short, they are eager to make this sale.
In fact, not only can collaboration allow for the exchange of background information, but Kipp also creates a bidding relationship in which the bank can tell the merchant how much of a paid premium it would need — usually a couple of percentage points — to accept the transaction because it is now sharing the risk with the merchant. When the two parties can come up, automatically and in real-time, with the figure they are both comfortable with, everybody wins: the bank, the merchant, and of course, the customer.
Without the Kipp platform, many legitimate credit card transactions will continue to be needlessly declined by issuing banks.
For answers to more payments-related questions, continue reading the Justt blog.
This was article was contributed by Kipp, a Fintech SaaS provider that enables card issuing banks and eCommerce merchants to collaborate in real time to approve legitimate transactions.