Understanding the Reality of Card Payment Systems
While it's often assumed that the card payment system operates flawlessly, the truth is far more complicated. The landscape of digital payments is fraught with challenges, primarily driven by the rigorous fraud prevention measures banks have put in place. These measures, although essential, lead to a significant number of legitimate transactions being falsely declined. Banks, wary of fraud-related losses that they must absorb, tend to err on the side of caution, resulting in a substantial number of transactions being flagged as fraudulent even when they aren't.
This issue is particularly pronounced for businesses that rely on recurring payments, such as subscription services. Data from Visa indicates that approximately 25% of recurring transactions are mistakenly declined, leading to a staggering $455 billion in lost revenue annually for merchants worldwide. The fallout from these false declines extends beyond immediate revenue loss, contributing significantly to customer churn. Our team’s research underscores this impact, revealing that up to 48% of customer churn can be attributed to failed payments. These are not customers who wish to cancel their subscriptions; they are simply unable to continue due to payment issues that could have been avoided.
UP TO 48% OF ALL INVOLUNTARY CHURN IS CAUSED BY FAILED PAYMENTS
Soft Declines vs. Hard Declines: What’s the Difference?
Failed payments fall into two main categories: soft declines and hard declines, each requiring different approaches for resolution.
- Soft Declines are typically temporary issues that can often be resolved without customer involvement. Common reasons for soft declines include insufficient funds, exceeding credit limits, or the bank’s refusal to honor the transaction. Since these issues can frequently be resolved by interacting directly with the payment system, it's advisable to avoid involving the customer when addressing them. Contacting the customer can inadvertently create a "moment of truth," where they might reconsider their subscription, increasing the risk of churn.
- Hard Declines, on the other hand, are more serious and generally require customer intervention. These include scenarios where the credit card has been reported lost or stolen, the card has expired, or the card number is invalid. In such cases, engaging the customer becomes necessary to update their payment information. However, this engagement must be handled delicately to ensure that the customer feels valued and not pressured, which could otherwise lead to them deciding to end the subscription.
Common Reasons for Payment Declines
A closer look at the reasons for payment declines reveals some key trends:
- Soft Declines:
- Bank Decline: 31%
- Insufficient Funds: 22%
- Refer to Card Issuer: 9%
- Do Not Honor: 6%
- Hard Declines:
- Invalid Card Number: 9%
- Transaction Not Permitted: 7%
- Expired Card: 6%
Understanding these statistics is crucial for businesses aiming to reduce payment failures and improve customer retention.
Best Practices for Recovering Failed Payments
Given the expectations customers have for seamless experiences, how you recover failed payments is crucial. Ideally, the resolution of a failed payment should be invisible to the customer. If this isn't possible, any required customer interaction should be as positive as possible.
A study by PYMNTS highlights the risks associated with customer involvement in payment recovery. It found that 27% of customers churned after being notified of a failed payment, even though they had no prior intention of leaving. This statistic underscores the importance of using the right recovery strategy to minimize customer churn.
Leveraging Technology to Recover Payments
When dealing with failed payments, the initial approach should always involve technology that operates without customer involvement. The best solutions are powered by AI and machine learning, drawing on vast datasets of transactions and years of payment processing experience to optimize recovery strategies.
With over 8,000 card-issuing banks in North America alone, each employing unique algorithms to approve or decline transactions, the complexity of payment recovery becomes apparent. These banks consider hundreds of factors, resulting in billions of potential scenarios that can lead to a payment being declined. Simple, rules-based recovery systems are insufficient to navigate this complexity, making advanced technology solutions essential for maximizing recovery rates.
Even if your organization has a dedicated collections team or contracts with third-party services, direct customer contact should be a last resort. Customers typically aren’t aware of payment issues unless informed, and involving them could prompt them to reconsider their subscription.
However, when customer engagement is unavoidable, such as in cases of hard declines, it should be done thoughtfully. Personalized outreach, tailored to the customer’s communication preferences and delivered at the right time, can significantly improve recovery rates. Messages should be empathetic, taking into account the customer’s demographics and financial situation, and offering options to resolve the issue in a way that feels supportive rather than punitive.
Conclusion: Optimizing Payment Recovery and Retaining Customers
The payments ecosystem's tendency to block legitimate recurring transactions in an effort to reduce fraud presents a significant challenge for subscription businesses. To mitigate the resulting revenue losses and customer churn, businesses must employ the most effective methods for recovering failed payments. This process should prioritize techniques that minimize customer involvement, reserving direct engagement for situations where it's absolutely necessary. When customer contact is required, it must be managed in a way that preserves the customer relationship and reduces the risk of churn.
By adopting these best practices and leveraging advanced technology solutions, businesses can significantly improve their payment recovery rates, ultimately driving higher customer retention and long-term revenue growth.
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.