Understanding the Challenge of Failed Payments
Failed payments are a common obstacle for businesses across various sectors, but the issue is particularly critical for subscription-based models. Two main reasons contribute to the severity of this problem for subscription businesses:
High Failure Rates: Subscription transactions experience the highest rates of failed payments among all types of card transactions, with an average failure rate of 24%.
Customer Loss: When a subscription payment fails and remains unrecovered, it often leads to the termination of the customer's subscription. This not only results in immediate revenue loss but also the forfeiture of all potential future payments that would have been made had the subscription continued.
In fact, failed payments are the leading cause of customer churn for subscription businesses, accounting for up to 48% of customer losses. To effectively address this issue, subscription businesses must first thoroughly understand the nature of the problem and identify the most effective technological solutions. A good starting point is exploring Payment Authorization Management, a category of technology specifically designed to tackle failed payments.
The Root Causes of Failed Payments
Failed payments are a widespread issue that transcends individual businesses and is not typically due to fraud, credit issues on the customer's part, or faults within the subscription businesses themselves. Instead, the problem of declined payments—often referred to as "false declines"—is a systemic issue within the payments industry.
False declines are predominantly driven by the banks that issue credit cards to consumers. These issuing banks are responsible for making authorization decisions on payment requests submitted by merchants. In an effort to minimize fraud, these banks often overcompensate by declining legitimate transactions, leading to false declines.
Subscription businesses, on their own, cannot entirely eliminate the issue of failed payments. While they can implement incremental improvements, solving the problem at its core requires advanced, purpose-built technology.
Crafting an Effective Recovery Strategy
When dealing with failed payments, the primary objective should be to recover as many customers as possible with minimal attempts. Unrecovered payments typically lead to customer churn, making it crucial for businesses to approach this issue with the same urgency they apply to reducing voluntary churn caused by customers canceling their subscriptions.
Since the goal is to retain customers rather than merely recover transactions, it’s essential to use methods that ensure the longest possible uninterrupted customer lifecycle after recovery. Strategies that force customers to reconsider their subscription should be avoided, as this can increase churn.
Ideally, the recovery process should require the fewest possible interactions with the customer, with zero interactions being the optimal scenario. This is because there is a direct correlation between the number of payment resubmissions and the likelihood of further failures. Excessive attempts can damage a merchant's account reputation, leading to increased scrutiny by banks, higher fees, and a greater likelihood of payment failures.
Harnessing the Power of Artificial Intelligence
Artificial Intelligence (AI) emerges as the most effective tool to address the complex challenge of failed payments. AI has the capability to analyze a transaction against the multitude of potential reasons for failure and operate discreetly in the background, ensuring that customers are unaware of any payment issues. Traditional approaches, such as rules-based systems and customer service interventions, simply cannot match the efficiency and effectiveness of AI in this context.
In North America alone, there are over 8,000 card-issuing banks, each with its own unique algorithms for determining which payment transactions are approved or declined. Additionally, there are hundreds of possible reasons why a payment might fail, as indicated by the numerous reason codes returned with failed payments. Different types of cards, including corporate, rewards, and ATM cards, are all subject to distinct approval criteria. This creates billions of permutations that must be considered when crafting recovery strategies for failed payments.
Given this complexity, rules-based systems are insufficient for managing failed payments effectively. Unfortunately, companies that rely on such systems often experience high churn rates, unaware that nearly half of their customer losses are due to failed payments.
Not All AI Is Created Equal
While AI and machine learning (ML) have the potential to revolutionize the recovery of failed payments, their effectiveness is contingent on the quality of the algorithms and the data they are trained on. AI must be trained by industry experts with deep knowledge of the systems involved, using vast, high-quality datasets.
The success of machine learning hinges on access to the right data, which is the most significant challenge in adopting this technology. Data scientists must collaborate closely with SMEs and other stakeholders to develop well-trained and effective AI solutions. Applying AI to a poorly executed model can lead to inaccurate results and unintended consequences. The old adage "garbage in, garbage out" is particularly relevant in this context.
Conclusion
Artificial intelligence, when properly trained and implemented, holds the key to overcoming the pervasive problem of failed payments in subscription businesses. However, the success of AI-driven solutions depends on the quality of the data used to train them. By partnering with experts and leveraging robust datasets, businesses can deploy AI to significantly reduce customer churn, recover lost revenue, and enhance overall customer satisfaction.
Is your business experiencing failed recurring payments? Contact us today to explore solutions that will recover up to 80% of your failed recurring payments, increasing your cash flow and profitability.