Banks Rethink Fraud Controls as False Declines Rise

The payments industry is locked into a race toward speed. Faster rails, real-time settlement, one-click checkout, invisible authentication and more innovations are all pointed toward one assumption: that friction is the enemy, and technology’s job is to eliminate it.

But as the payments ecosystem matures, the next frontier is one of understanding where speed alone is no longer a differentiator.

“If you think about the payments industry and what we’ve been building for the last decade, it’s faster rails, smarter algorithms. But we hit a wall when those algorithms do not have the full picture,” Entersekt Chief Strategy Officer and Co-Founder Dewald Nolte told PYMNTS  during a conversation for the “What’s Next in Payments” series February edition, “Word of the Year.”

That wall is becoming more visible to banks, merchants and FinTech platforms grappling with a paradox: They have more data than ever, yet are often less certain about what it means. Fraudsters exploit that ambiguity, while legitimate customers are caught in the crossfire of overly cautious risk models.

“We are drowning in data, but we’re starving for wisdom,” Nolte said, noting that for 2026, his word of the year is “context.”

When Fraud Prevention Becomes a Customer Experience Problem

Historically, fraud prevention has been measured by how much bad activity gets blocked. But that metric obscures an uncomfortable truth that the same systems designed to stop criminals can frequently alienate loyal users.

“It’s almost an insult,” Nolte said of repeat customers forced through unnecessary verification. “It’s like, you should know me.”

Consider a high-value transaction flagged by traditional controls. A $5,000 payment to an online casino, for example, may automatically trigger alarms. Yet without historical insight into the user’s behavior, the system cannot distinguish between fraud and a known, affluent customer acting exactly as they always have.

“If you have the full context of this user, such as the fact that there’s been 10 transactions over the last six months with no issues, suddenly that changes from fraud to, ‘This is a VIP customer, and how can we enable that?’” Nolte said.

This is where context transforms from an analytical enhancement into a competitive necessity. Payments leaders are realizing that false declines, the legitimate transactions rejected by risk engines, can carry hidden costs around lost revenue, damaged trust and diminished brand loyalty.

One of the most visible outcomes of context-driven payments, Nolte predicted, may be the decline of blanket authentication challenges such as one-time passwords and step-up verification prompts applied indiscriminately.

“It’s going to be the death of the automatic step-up,” he explained.

Instead of treating every transaction as suspicious until proven otherwise, contextual systems can continuously interpret behavioral signals, device intelligence and historical patterns to determine when security should be visible, and when it should disappear entirely.

The Real Barrier Isn’t Technology. It’s Fragmentation.

Despite advances in machine learning, cloud infrastructure and real-time processing, the payments industry’s biggest constraint is not computational power. It’s fragmentation.

Data remains trapped inside institutional silos: Issuing banks guard transaction histories, merchants hold behavioral insights and identity signals are scattered across third-party providers. Each participant sees only a slice of the customer journey.

“If you’re only looking at your little silo, that’s not good enough anymore,” Nolte said, describing the emerging baseline capability as “orchestrated ingestion,” or the ability to gather signals from multiple sources in real time and synthesize them into a unified risk decision.

“Sometimes the biggest challenge is that we want to build our little kingdom,” he added. “But there’s someone out there who has a perspective that you don’t have, and you need it.”

The urgency for collaboration is amplified by the evolving sophistication of financial crime. Fraud networks already operate as highly coordinated information-sharing ecosystems, trading techniques and data in real time.

“The criminals do better than us in one area,” Nolte said. “They actually share data.”

To counter that threat, institutions should consider adopting what Nolte called “collective defense” by pooling intelligence across organizational boundaries.

“There is a regulatory recognition around making sure that the guardrails and mechanisms for sharing data in a responsible way are being addressed,” he said.

Evolving Trust From Transactions to Relationships

If the payments industry’s first digital era was defined by velocity, its next phase may be defined by interpretation. Context turns isolated transactions into continuous relationships, allowing systems to recognize intent rather than merely process inputs.

“You want to move from just the fraud rate of how much fraud did I block to the trust rate,” Nolte said.

The shift reframes security as a customer experience discipline as much as a risk function and means quantifying how effectively an institution approves legitimate activity while still maintaining high protection levels.

Nolte suggested the real benchmark is the reduction of false declines without sacrificing fraud prevention.

“If I can maintain 99.9% fraud prevention by slashing my false declines by 50%, that’s the measure,” he said. “How much can I reduce these false declines where I make my most loyal customers feel like strangers?”

At the end of the day, in 2026, the winners in payments may not be those who move money the fastest, but those who understand the moment best.