Churn is always a threat and declines can happen at any timenot just when customers are up for renewal.
Merchants became painfully aware of this after last years retail mega-breaches compromised millions of payment cards, resulting in a large number of declines from account information that hadnt been updated.
Churncalculated as the proportion of customers who leave a business during a given time periodposes a problem for any company with a recurring billing model where profitability relies on receiving timely, recurring payments. A change of 1% can mean a difference in millions of dollars to the bottom line, according to Donna Fluss, president of DMG Consulting in New York.
Cards get declined for three primary reasons, all of which can be prevented: Expired card accounts have not been updated; there are problems with the timing of the authorization; and processing errors stemming from billing logic and available intelligence.
Merchant service providers and independent sales organizations that understand card declines and their impact on customer retention can teach their merchant customers how unnecessary churn can affect their business. Merchants can take steps to minimize declines, maximize retention and improve revenue.
Most payment card brands, including Visa and MasterCard, offer tools to improve authorizations, prevent declines and protect card not present (CNP) revenue.
These tools include account updaters. Both Visa and MasterCard offer this tool to help merchants avoid declined transactions or interruptions to recurring billing due to invalid customer data by enabling issuers, acquirers and merchants to exchange the most up-to-date customer data.
Cards decline for a variety of reasons, including communication errors, merchant errors, fraud prevention declines, soft declines and hard declines. Soft and hard declines occur frequently, and by following correct procedure merchants can optimize authorizations.
Most hard declines require action on behalf of the issuing bank or cardholder before the outstanding issue will be resolved, making subsequent authorization attempts unlikely to succeed. Reasons for hard declines include card stolen, invalid card or account closed.
Soft declines are transactions that may be successful with a subsequent attempt. Reasons for soft declines include insufficient funds, processor declined, or voice authorization required. A common practice has been to resubmit one to four times over a period of weeks.
Hard declines should not be retried because the reason for the decline is not temporary as in a soft decline; this type of decline is not likely to be successful with subsequent retries. Understanding the types of declines and the different implications between them allows merchants to operate within an acceptable decline ratio.
Authorization decline response codes should come from a payment gateway and may offer insight into why a transaction was declined. Payment gateways should provide an error code along with a directory of error codes for merchants to reference as a supplemental information to error responses. Those insights can provide the basis for modifying sales materials to boost authorizations. Also, hard and soft declines occur frequently and may require a merchant to ask the customer for an alternative form of payments.
Maximizing credit card acceptance for a card-not-present merchant is vital to profitability and longevity of the customer relationship, especially in recurring models. Negative churn can cost a merchant millions of dollars. The most forward-thinking marketing and customer service tactics are useless if ISOs and agents are not minimizing erroneous and unnecessary declines.
According to Gartner Group, just 20% of customers are responsible for 80% of future profits. CNP merchants with recurring payment business models see higher frequency of declined transactions-up to 25-30% more, says MasterCard-and many merchants find their current decline recovery process is not up to the challenge.
Sometimes, a comprehensive process for decline recovery requires expertise or in-depth intelligence that may not be available in-house. In-house processes can be limited because merchants base them only on the insights derived from their own data. They can also fall short or become too time-consuming for merchants to handle alone. The reality for card-not-present merchants is that declines happen; however, they are manageable and using the best tools can aid in preventing lost revenue as well as freeing up time and resources and streamlining the billing process.
Matthew Katz is CEO at Verifi.
