Imagine you’re sitting at home after a long day of work, hungry, but not in the mood to cook anything. You decide to order food from a local restaurant via a food delivery app and forgo having to wash dishes tonight. You carefully select the items you’d like to include with your dish – sides, drinks, and even spoil yourself with a dessert option. You go to pay but your credit card keeps getting declined. Frustrated, you switch to another app to order the same meal using the same card to pay. Success!
So, what happened with the first app? Why were you declined? And what is the likelihood you’d return to the original app after your payment method failed?
Consumer expectations for online purchases are rapidly growing.This is only compounded by the fact that the payments ecosystem continues to grow more complicated for merchants to manage. As more consumers shift from brick and mortar to online channels, retailers must be able to optimize their global payment options and their digital experiences. This means abiding by new regulations, supporting new methods of payments, new vendors and players, and more. When unable to do so, merchants fail to provide their customers with a seamless experience, leaving them irritated and upset. This ultimately costs merchants valuable revenue on what are otherwise legitimate transactions. For leading enterprises selling products globally, a nimble system that can automatically route transactions through the path of least resistance while minimizing decline rates and maximizing revenue is required.
On average globally, 30% of 3DS transactions are lost through the usage of 3DS. In Europe, the number varies per country from 10% up to 35%.
The card payment process
In order to understand the manners by which card payments may fail, we must first understand the card payment process.
Credit card transactions occur when a person (in this case a card holder) wants to use his/her card to pay a merchant for goods or services. The goal is to move the money from the card holder, to the merchant. The issuing bank (the bank of the card holder) must agree to such a transaction for it to happen.
Although this sounds simple, there are an additional 4 players involved in this journey:
- A gateway is required, in order to pass the transaction from the merchant to the processor.
- A processor is required. This entity works with the merchant and provides the merchant their money at the end of the payment flow.
- An acquirer (the entity which collects the money for the merchant) is required as only the acquirer is able to move money on the card scheme (Visa/Mastercard/Discover/AMEX/JCB/etc.) rails.
- Card scheme / card network rails are used to move the funds from the card to the merchant.
Throughout the payment flow, there are multiple points where fraud or risk assessments are undertaken by each party. Because each of these players has their own specific mechanisms and requirements, the payment flow can often be interrupted by one of these steps in the process for each party to maintain low levels of risk and fraud. So, how is risk assessed and why might payments in this flow fail?
Reasons for payment failures
The payments ecosystem is complicated and failed transactions are a challenge for every online merchant. There are a number of reasons which can contribute to failed transactions and lost revenue for merchants.
- Failure for reasons of risk. This reason for payment failure typically occurs at either the acquirer or issuing bank. These financial institutions may refuse to process a payment if upon reviewing the attempted transaction they deem it to be “high-risk” or they are not convinced of the authenticity of the transaction.
- Failure for technical reasons. Failure for technical reasons is linked to a technical issue with one of the providers involved in the process (Gateway, Payment Service Provider (PSP), acquirer, card scheme / card network, 3DS providers, or the issuing bank).
- Failure for financial reasons or customer issues. This often occurs when there are “insufficient funds” in the customer’s bank account. If the transaction a customer attempts extends beyond the limit of their debit/credit card, the payment will be declined. Customers may also attempt to transaction by using a payment method that is not on the predetermined list of approved methods. Payments may also be declined if there is a mismatch between any data on file and the card holder’s credentials. A customer entering the wrong password or one time password could result in the banks choosing to decline the payment.
Good to Know:
Error Codes. When payments are rejected, “error codes” are issued by the financial institution who would not accept the payment. The intention of these error codes is to help merchants better understand the reason for the payment failure. However, given that the acquirer and issuing banks often have thin data files or do not provide a wealth of information, these error codes can prove unreliable.
How to solve for payment transaction failures
Merchants have a lot to lose – both financially and reputationally – should their customers’ payment transactions be continually interrupted or declined. In order to prevent and recover lost revenue and maximize their approval ratios, merchants need a more streamlined solution.
Many merchants partner with payment vendors that are not able to truly optimize their payment routing – which means they aren’t able to prevent legitimate transactions from being declined or to recover these declined transactions, for a number of reasons:
- Their vendor is not agnostic. Merchants partner with vendors that have financial incentives to route to a particular provider (e.g. when the processor has his own acquiring bank, they will choose to route to its own acquiring bank or via partnerships with financial incentives, etc.)
- They do not optimize the usage of 3-D Secure to increase their approval ratio. While 3DS can result in friction and checkout abandonment, there are cases where applying 3DS will help result in a successful transaction rather than a failed authorization.
- They do not leverage multiple processors. When merchants use multiple processors, they can route transactions to the optimal processor where the transaction is most likely to be successful.
- They don’t provide recommendations or capabilities for a merchant’s teams to easily route transactions to the most efficient route. For example, they might provide rules-based capabilities to route transactions, but this results in manual work and analysis on the merchant’s side to ultimately determine how to direct the payments.
- They do not provide efficient tools for recovering declined transactions.
In order to successfully ensure an optimal payment process, merchants should look for a solution that is able to optimize the entire checkout and payments flow. In this manner, they will be able to ensure that legitimate transactions are accepted and successful without sacrificing customer experience or risking compliance.