Every subscription business shares one enormous problem: failed payments. Failed payments are decline decisions on credit card authorization requests. But even though the problem is common, many businesses need help understanding declines and failed payments. According to Visa’s own data, an average of 24% of subscription credit card payments are declined by the card authorization systems, two-thirds of which are incorrect decline decisions on legitimate cards. So why are there so many faulty decline decisions? The reason may come as a surprise: many declined credit card transactions are caused by problems in the card payments system.
How the Payments System Works
The existing payments system is an old solution designed for single-purchase, in-person transactions. It simply wasn’t built for card-not-present, recurring payments from subscription customers. This system is very cautious and views recurring card payments as high fraud-risk transactions. Therefore, it over-compensates for this perceived risk by choosing to decline legitimate transactions from good customers instead of approving truly fraudulent transactions.
The fact that the system would rather be safe than sorry is the core reason why failed payments occur and why the problem hits subscription businesses so hard. With that little tidbit in mind, understanding declines and failed payments is much easier.
According to Visa, an average of 24% of subscription credit card payments are declined by the card authorization systems, two-thirds of which are incorrect decline decisions on legitimate cards.
Understanding Declines and Failed Payments
The payments authorization ecosystem has two clear objectives:
1. To approve all legitimate payment transactions.
2. To decline fraudulent and other undesirable payment requests.
The payments system has milliseconds to make accurate payment authorization decisions for billions of payment requests. There just isn’t time to consider each transaction perfectly and sometimes mistakes are made. Banks have seen huge fraud losses— an estimated $28.6B in 2020 — which have caused them to bias the algorithms in their fraud detection systems to avoid losses. Simply put, it’s less expensive for them to decline a legitimate transaction than it is to approve a fraudulent one. These false-positive responses are called false declines.
How False Declines Hurt Your Business
False declines hurt your business in two ways:
• An average of 24% of recurring payment requests made by subscription businesses are declined, which means huge revenue losses.
• A false decline on a subscription that can’t be resolved ends the subscription relationship prematurely and eliminates any opportunities to upsell.
This leaves you in a tough spot. If you want to successfully manage churn, you’ve got to understand the different types of churn, measure them separately, and have programs and technology in place to reduce each source. And managing churn is part of understanding declines and failed payments. It’s something you’ve got to do if you want to be successful.
Two Types of Churn
Customer losses can be described in two ways: voluntary churn and involuntary churn.
Voluntary churn happens when customers choose to end their subscription. Your subscriber doesn’t want your product or service any longer and has decided to cancel their subscription. You probably spent a lot of time and money improving your customer experience to keep this number as low as possible.
Involuntary churn happens when payment-related issues prevent legitimate recurring payments from going through successfully. You might not realize that involuntary churn can be identified, managed, and reduced, but it can.
Using Data and Reporting for Analysis
How do you know if failed payments are affecting your company? It all begins with data. You should be able to easily gather the necessary facts and numbers with the business tools you already have in place, although you might need some additional data and reporting in some cases. Pulling together a small team of people from your finance, technology, and reporting departments who can help collect the information and create reports for analysis is a great place to start.
Measuring the Cost of Involuntary Churn
To measure how much involuntary churn there is in your business, you need to collect three key bits of information: the number of all churned customers; a list of all the customers who had a failed payment; and the length of your average customer lifespan in billing cycles. With this information in hand, you can then calculate the total cost of these lost customers.
The Value of a Recovered Customer
There’s another important factor you also need to understand: the value of a recovered customer. A recovered customer will be a happy subscriber for many billing periods after recovery. This means the true value of a recovered customer is the amount of revenue they’ll bring in month after month as they fulfill the length of their subscription. It’s never just one month’s payment you’re getting back when you recover a customer— it’s their lifetime value.
Your subscription business has an involuntary churn problem, whether you realize it or not. Fortunately, understanding declines and failed payments is the first step towards improving your customer retention and LTV. Implementing a failed payment recovery strategy is the next logical step. Reach out to one of our failed payment recovery experts to learn how using FlexPay can give you a competitive advantage for years to come.