Your Holiday Fraud Rules May Be Turning Away Your Best New Customers
Many merchants tighten fraud prevention during the holiday season, inadvertently turning away legitimate customers while trying to reduce fraud attempts.
Every fall, merchants prepare for the holidays by tightening fraud prevention measures, adjusting rules, lowering decline thresholds, and adding verification steps at checkout. While this approach aims to prevent fraud, many legitimate customers get caught in these tightened nets, resulting in lost sales and damaged customer relationships.
The instinct to increase security makes commercial sense, especially since chargebacks from holiday sales don't appear until January and February when returns come in and sales slow. Merchants want to avoid starting the new year with financial hangovers from fraudulent transactions.
Fraud Rate vs. Raw Numbers
According to Wayne Hamilton, CEO and co-founder of pmtbox, holiday fraud looks different when measured as a rate rather than raw numbers. While more fraud attempts occur during peak season, legitimate transaction volume grows much faster, meaning fraud typically represents a smaller share of total transactions.
TransUnion's analysis of the 2023 holiday period found that 2.4% of U.S. e-commerce transactions from Thanksgiving through Cyber Monday were suspected fraud, compared with 4% for the rest of that year.
False Decline Costs
A false positive, or false decline, occurs when a legitimate order gets rejected because it appears risky. These rejected customers rarely return, yet many merchants don't track false decline rates with the same attention they give to fraud rates.
Datos Insights estimates the industry average false decline rate at 1.51% of annual sales based on its survey of U.S. e-commerce merchants. This represents significant revenue loss that many businesses fail to recognize.
Seasonal Shopper Impact
The holiday season attracts customers who don't resemble regular buyers—many are first-time purchasers or one-time annual shoppers. These gift buyers often ship to addresses that don't match billing information or place larger orders, triggering fraud detection systems designed to catch suspicious activity.
These tightened rules disproportionately affect the new and seasonal customers that merchants actively target with marketing budgets, creating a counterproductive cycle where security measures drive away the very customers businesses want to attract.
Long-term Customer Value
A successful holiday season should build customer relationships that extend beyond December. When first-time customers get declined, merchants lose not just that initial order but likely future business as well. This impacts customer lifetime value and creates a financial drag that carries into the new year.
Before the holiday rush begins, merchants should compare last year's holiday fraud rate against the rest of the year before changing any rules. Setting a target approval rate for the season and reviewing it weekly, similar to how chargebacks are monitored, can help balance security with sales.
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