By Yohanna Andom, Forter
There’s a scenario that happens all year, but that is perhaps incrementally painful in the holiday shopping season. A legitimate customer fills their online shopping cart, hits purchase and … is falsely declined. And according to research, 30% of those would-be customers will immediately go to a competitor to complete their transaction.
It is critical that we first understand the credit card payment process, if we hope to understand the ways that card payments can fail.
To start, a credit card transaction is actually made by a third party - the issuer of the credit card which is usually a bank or credit union. The issuer profits from account fees, interest charges and/or payment processing fees charged to merchants. Such purchasing payments must be approved by the card issuer and may be declined for reasons such as non-payment.
While this sounds simple and rather routine today, there are an additional four players involved in this journey:
- A gateway - in order to pass the transaction from the merchant to the processor.
- A processor - 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 (i.e., Visa, MasterCard, Discover, AMEX, JCB, etc.) rails.
- Card scheme - card network rails are used to move the funds from the card to the merchant.
Fraud or risk assessments are undertaken by each party throughout this payment flow. Because each of these players has their own specific mechanisms and requirements, the payment flow can be interrupted as each party works to maintain low levels of risk and fraud. So, how is risk assessed and why might payments in this flow fail?
Why Payments Fail
The payments ecosystem is complicated and failed transactions pose a challenge for virtually all online merchants. There are numerous reasons which can lead 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.
When payments are rejected, “error codes” are issued by the financial institution that 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, and raise more questions than they answer.
How To Overcome Payment Transaction Failures
Businesses/retailers have a great deal to lose – both financially and reputationally – should their customers’ payment transactions be interrupted or declined. To prevent and recover lost revenue and maximize approval ratios, merchants require a more streamlined solution.
Many merchants align with payment solutions providers that are unable to truly optimize their payment routing. This 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 align with solutions providers that have financial incentives to route to a particular provider (i.e., when the processor has their own acquiring bank, they will choose to route here or via partnerships with financial incentives, etc.)
- They do not optimize the usage of 3DS to increase their approval ratio. While 3DS can result in friction and checkout abandonment, there are cases where applying 3DS will help drive 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.
However there is an answer. 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.
When choosing such a solution, merchants can use the following as a features check-off list to streamline and assure the success of their evaluation process:
- Access to an established and ever-growing network of issuers improves authorization rates without the need for incremental technology builds.
- Access to an established and ever-growing network of merchants ensures the most accurate view of legitimate consumer behaviors and interactions. This means more approvals, higher customer lifetime value, and a dramatic decrease in false declines.
- Deployed outside the network-based authorization flow and requires no additional action from consumers assures legitimate transactions are seamlessly approved without any latency or customer impact.
- A single API - delivers a seamless integration experience across a business/retailers technologically heterogeneous environment.
Bottom line: less false declines + boosted authorization rates = which means more dollars in the merchant’s pockets today, tomorrow and into the future.
About The Author
Yohanna Andom is a Sr. Product Marketer at Forter, where she focuses on multiple product areas and competitive research. Prior to joining, she worked as a product marketer for global players in the software, AdTech, and networking industries.