A catalyst for growth: how to align payments with the business strategy
Payments processing KPIs that matter
Payment metrics are your window into the performance of your business. Metrics refine the everyday data that your business generates and turn it into a valuable resource that can be used to assess performance and take action at all levels of your organization.
Without data to inform your decision making, there’s no way to measure the effectiveness of your strategies against your KPIs.
But to get the best results, you need to understand which metrics are worth tracking and how best to use them.
In this article, we explain how to formulate payment processing KPIs and which metrics are most useful for payments businesses.
What are payment metrics?
Payment metrics encompass any data that businesses can use to measure the performance of their payments system. These metrics can be used to track a variety of aspects of the payment process and uncover actionable insights. By measuring and analyzing these metrics, you can gain a holistic picture of operational performance, identify areas of weakness, and develop targeted strategies to make improvements.
Some common and useful payment metrics for businesses to track include conversion rate, authorization rate, and fraud rate.
How to formulate payment processing KPIs
Key performance indicators (KPIs) are universally used across businesses in every vertical as a measurable value that demonstrates how effectively a business or organization progresses towards an intended result.
When used as intended, they’re extremely valuable and can:
- Foster communication and accountability
- Focus attention through visibility
- Provide actionable insights
- Help build better performing teams and businesses
- Highlight opportunities to celebrate small victories
However, some organizations fall into the trap of building KPIs that fail to reflect their business's nuances and goals. This is a mistake and erodes the strategic value that KPIs can deliver. So make sure that you build bespoke KPIs with your organization’s key business objectives.
To do this, start with the basics. Ask what your organizational objectives are? How do you plan to accomplish or achieve those objectives? Who can act on the insights?
This should be an iterative process that involves contribution from your team, your key stakeholders and leadership. As you analyze this information, you’ll understand which business processes need to be measured and who to share that information with.
Additional considerations when developing your KPIs include:
- Definitions: Ensure that you and your target audience are aligned in the definition of the KPIs. What are the data points? How do you calculate the KPI?
- Actionability: Talk about the importance of sizing and prioritizing opportunities based on costs/benefits and avoiding the trap of “analysis paralysis.“ Define who is responsible for the business outcomes and how you and your team can influence the outcome.
- Timing: Many payment professionals are unsure how often to check the KPIS. I’ve spoken with before ask me how often I check my KPIs. And it’s a hard question to answer, as there is no ‘right answer’ – it’s very dependent on the objectives of your payment organization and wider business. But I’ve found that a monthly deep dive into specific payment metrics, followed by a more holistic quarterly review, is a good way to spot trends and evaluate the effectiveness of the changes you make.
- Benchmarking: Internal and external benchmarking is a critical job to understand whether you're tracking the right KPIs and understanding whether your targets are realistic.
- Communication: Develop an effective strategy to communicate and evangelize the KPIs you’ve set amongst your team and the wider organization. And be selective when speaking to those outside of payment. Present only the measurements that matter to them and frame them contextually to support that stakeholder’s objectives and the wider business.
- Relevance: Periodically assess the significance of the metrics you're tracking, review performance targets and communicate any changes to your audience.
What are the requirements metrics of a payment system
There are countless payment metrics that your business could track to assess performance. But which metrics should you track? Trying to measure and understand every possible data point can be unmanageable and lead to unfocused, ineffective decision-making. With that in mind, here are the five key payment metrics that should form the backbone of your strategy:
Cost of payments
This metric measures your overall payment performance. It should include all costs associated with your payments’ operations, including:
- Transactional and non-transactional costs, such as account and wire fees
- Fraud and chargeback losses
- Solution provider and people costs
It’s also worth highlighting that definition alignment is essential with this KPI. You must ensure that people understand fully what ‘cost of payment’ means and how you’re calculating the number.
For merchants with subscriptions or recurring sales, measuring, monitoring and mitigating churn is critical. For a subscription-based merchant, it’s most often expressed as the percentage of subscribers who cancel or fail to renew their subscription over a specific period. Churn can be voluntary – when a customer chooses to cancel or allows their payment method to lapse. Or involuntary – when customer’s payment fails through no fault of their own. Effectively reducing churn includes evaluating voluntary versus involuntary churn and customer engagement or usage, customer satisfaction, payment errors, refunds and chargebacks. This will provide a holistic view and enable successful churn reduction initiatives to be identified and executed.
Chargebacks result in the loss of the sale and the cost of the good or service. Then there are solution provider fees, scheme fees and possibly fines and penalties. Brand reputation is also at risk. Closely monitoring chargeback rates by count and dollar value is critical to prevention and provides necessary insight into protecting your business against the associated costs and risks. I learned that It’s most effective to evaluate chargebacks both from the chargeback receipt date and the date of the original transaction. That way, it’s easier to spot trends and anomalies.
Similar to chargeback rates, monitoring fraud losses is critical. The same costs and risks are present. With fraud, it’s also essential to evaluate the type of fraud. Is it true, friendly or chargeback? And don’t forget to review fraud prevented with false positives to balance friction with your business’ risk appetite to maximize sales and minimize losses.
Purchase success rate
Whether you call or define it as purchase success rate, approval rate, acceptance rate or generally a payment optimization, the same foundation for this KPI exists. It’s the number and or dollar of successful payments as a ratio to all those attempted. You might choose to measure these at a transactional or order level or both – it depends on your business model. Payment organizations can be a crucial contributor to merchant revenue growth by monitoring these rates and implementing optimization strategies.
Get smart with smarter KPIs
The trick with payment processing KPIs is to always dig beneath the surface. Too many organizations settle on just tracking those top-line numbers and then wonder why nothing. Top-level churn, chargeback, fraud, and purchase success rates give you a good overview of what’s happening. But they often stop short of telling you why things are happening.
So you need to go deeper. Look at reason codes, payment methods, region/country, currency, BIN, ATV and so forth. And use this analysis to find root causes and develop solutions for optimization, mitigation and prevention.
That’s how you really unlock the full potential of your performance metrics. It’s how you drive meaningful positive change that improves the performance of your payments organization and elevates its status within the organization.
SHARE THIS POST
Most recent articles
Return to Home
September 12, 2023
Merchant Category Codes (MCC): what are they and why they’re important
September 12, 2023
Save now, buy later: what it is, how it works, and how it benefits merchants