Online transactions have become many businesses’ lifeblood in recent years. And when the underlying technology works well, they can drive both revenue and customer loyalty.
But in any ecommerce transaction, there are many possible points of failure where something can go wrong, either from a technical point of view or in terms of a customer encountering enough friction to make them abandon their purchase. Consider the volume of online transactions, and it’s clear that the potential financial losses from even a small proportion of failed payments could end up having a significant impact on a company’s overall revenue.
Regularly monitoring transaction data can provide insights into potential issues or friction points
A single failed payment can mushroom into a lasting problem, too. According to research by BridgerPay, 62% of customers who experience payment failure during the course of a transaction won’t return to it – or the business. This not only leads to lost revenue, increased costs and reputational damage, but it will also count as bad debt in the business.
On average, B2C businesses will see 16%-20% of their failed payments turn into bad debt, while B2B companies see rates of 11%-15%, according to GoCardless.
These figures highlight the serious consequences failed payments can have on a business’s financial health, and the need to have systems in place to mitigate the impact. So, what’s causing failed payments, and what can businesses do about it?
Overzealous fraud prevention
Fraud prevention filters are crucial in online payments, safeguarding both businesses and customers. But the filters can be overly stringent, resulting in legitimate transactions being declined.
Multi-factor authentication (MFA) is a prime example of this. “MFA adds a layer of security to online transactions by requiring customers to provide additional information or complete an additional step during the authentication process,” explains Percy Grunwald, a technical developer and founder of TopTechSkills.com. “While it enhances security, it can also introduce friction and inconvenience for customers. To mitigate this, businesses can optimise their MFA process by offering user-friendly and seamless authentication methods, such as biometrics or one-time passcodes via SMS or email.” Striking a balance between security and user experience is crucial to ensure customer satisfaction, he adds.
This is also important when consumers diverge from typical spending patterns. For example, if a customer spends money abroad or spends more than usual, their bank may not authorise the transaction. This can be frustrating for customers who are trying to make legitimate payments.
Some authorisers will also choose to reject a transaction based on the merchant code. “Sometimes, an issuing bank may restrict a payment card to certain types of businesses or purchases. For example, in the US, you can’t use an HSA medical card at a movie theatre,” says Daniel Kroytor, founder and director of TailoredPay, a company which specialises in high-risk card processing services. “When a restricted card transaction is not approved because of an incompatible merchant category code (MCC), the payment processor returns an error message of 62. This is the restricted card code, also called the invalid service code, which you can do little about. However, if you see frequent occurrences from different customers, ensure the MCC associated with your merchant account is correct for your industry.”
Insufficient funds
One of the most common reasons for a failed transaction is that there are insufficient funds in a customer’s account. In this situation, when a customer tries to make a payment, the transaction is rejected by the bank, resulting in a failed payment or an error message. As a customer, it’s easy to take the simplicity of online payments for granted, and it may not be until the error has occurred that the customer becomes aware of the lack of funds in their account.
“When transactions are not approved due to insufficient funds, incorrect CVV, expired card, exceeding the card’s activity limit, or suspected fraud, there are limited options for troubleshooting other than prompting the customer to use another form of payment or asking them to contact their issuing bank,” says TailoredPay’s Kroytor.
When doing so, however, it’s important to ensure that your communications feel friendly and open and do not blame the customer for the error. Tell your buyer why their payment failed and what they can do to remedy the situation promptly. Where possible, provide links to more information and a contact number or email address if they need to get in touch.
The problem of insufficient funds in a customer’s account can also be prevented by giving them a variety of payment options. “We try to make it simple for customers to pay in a manner that suits them, whether it’s a physical credit or debit card onsite or an e-wallet,” says Nick Edwards, managing director of travel agency Snowfinders. “Some companies may even wish to accommodate cryptocurrency users.”
He warns, however, that the cost and logistical considerations will be multiplied exponentially if businesses opt to use different vendors for different payment methods. Consider using integrated platforms that offer multi-channel payments, so you don’t have to depend on different suppliers or pay multiple sets of setup and maintenance fees.
Third-party tech issues
Stripe, a $50bn (£42bn) software and payment infrastructure company which helps businesses accept payments online, experienced a major outage in July 2019. Its services were offline for a total of almost two hours over the course of a day, meaning that firms relying on the payment processor were unable to accept orders during that time.
“Technology is an integral part of daily life, but with its convenience comes a host of potential problems,” says Tom Mercer, commercial director for Manchester and London-based business growth consultancy Gain Line. “Network issues, software glitches, hardware malfunctions and security breaches are examples of the challenges that can arise. These can cause delays, errors and data loss – all of which significantly impact the customer experience.” And that will result in a loss of revenue for the business.
Ideally, online payment processing should be available around the clock. In reality, this isn’t always the case. Payment processors can encounter unforeseen downtime or may temporarily shut down their systems for maintenance. What’s more, a single payment can involve three or more parties, including the payment gateway, the payment processor, the acquiring bank, the issuing bank and the customer themselves. If even one of these parties experiences an error or downtime, the payment can fail.
To prevent technological failures, businesses would do well to establish a robust monitoring and adaptation process, says Shanal Aggarwal, chief commercial officer at app developer TechAhead. “Regularly monitoring transaction data, such as purchase success rates and customer feedback, can provide insights into potential issues or friction points,” he says. “With the right analytics, businesses can identify trends and take proactive measures to address emerging problems promptly. This might involve updating payment systems, improving website performance or refining security protocols.”
Aggarwal also advises staying up to date with best practice, regulatory changes and emerging technologies in order to maintain a secure ecommerce environment.
One final option might be to upgrade to smart payment routing. This is a new kind of solution which automatically directs each payment through the route which optimises its chances of success. That means the system chooses the bank, the card issuer or the payment gateway that’s most likely to approve and authorise the transaction.
Invalid card information
“When a transaction is processed, the issuing bank and the payment gateway must approve it,” says Kroytor. “But anything from a simple typo to credit card fraud can cause that transaction to be declined. The payment processor will then return an error message with a two-digit decline code. Businesses can avoid declined transactions by understanding what these codes mean and ensuring that all information is correct before processing a transaction.”
The process of letting customers know that their payment has failed and asking them to pay is called dunning. Many ecommerce businesses fail to send dunning emails, and this can result in a needless loss for the business, since customers are often unaware that their payment has failed or that their service was interrupted.
Sending dunning emails is an art, however, as you want to hit the right mix of friendliness and urgency. Experts recommend including a call to action, such as a link that will direct customers to a page where they can fix any issues. A helpful tone is crucial here. While it’s important to let customers know that their account could be cancelled or late fees instituted if they don’t update their information, make sure you’re giving them sufficient time to do so.
And to prevent failed payments before they happen, retailers may want to consider sending a pre-dunning email – that is, a notification to remind customers that a payment method is about to expire and urging them to update their details.
Processing problems
Processing-related errors can also cause payment failures, usually during the authorisation stage. This can happen if communication lines go down or if the authoriser doesn’t respond to the payment request within a certain timeframe.
To deal with this error, you need to make sure your system is set up to retry the failed card. Research from GoCardless shows that a single payment retry can recover up to 32% of failed payments. The average business could recoup as much as $1.2m in revenue this way each year.
Ultimately, failed payments are a part of business, and minimising them requires retailers to stay on top of technological issues and communicate clearly with customers.
“Provide clear and transparent information about your payments processes upfront, including your terms and conditions, cancellation policies, and customers’ ability to manage any recurring subscriptions,” advises Grunwald. “Offering them some self-service options, such as online portals or mobile apps, will also empower customers to have greater control over their payments, minimising their frustration and the likelihood of cart abandonment.”
