5 reasons why card payments are declined and how to fight back

Why do card payments fail? And what can you do to prevent legitimate transactions failing and losing your customer's business?

Various studies put the level of declined card payments anywhere between 5-10%. For recurring payments — think subscriptions, installments, monthly bills — this tends to be higher, and even higher again for cross-border transactions.

It’s not all bad news, of course. Declines can benefit merchants, preventing fraudulent payments being the obvious example. But declines also represent lost revenue, the marketing cost of creating the sales opportunity again, and the admin cost of chasing overdue payments.

The first step to improve your payment success rate is to understand why payments are declined. In this article, we look at some of the main reasons why a card payment may fail — and offer some advice on what you can do about each. 

Problem #1: lack of funds

It seems rather obvious, but if your customer doesn’t have enough funds in their bank account, or has reached their credit limit, then there’s no money available to transfer. Whereas merchants can’t be responsible for their customers’ spending habits, there are steps you can take to wrestle more control. 

Solutions: failed payment notifications and alternative payment options

Speed of communication is critical. Triggering a message to your customer in real-time while they’re still in purchasing mode makes them more likely to retry straight away. Another idea is to provide customers the ability to spread out the cost of their payment using Buy-Now-Pay-Later (BNPL) options like that offered by Klarna. In the UK, over 9.5 million consumers say they'll avoid buying from retailers that don’t provide BNPL as a payment method.

But what about a recurring payment, where the customer is not aware — though they have given permission — that a payment is being attempted? The answer here is to use data to ‘learn’ the optimum time to schedule the payment for success. Patterns in income and spending can reveal this — for example, it may be wise to avoid the day before a salary lands or after a mortgage payment.

Problem 2#: unverified customer

Merchants should see customer authentication as a positive. It helps ensure fraudsters aren’t using a card illegally, with the chargeback penalties to a merchant that can ensue. But authentication can also generate false positives — that is to say, the system fails to identify a genuine payer. With the introduction of Strong Customer Authentication (SCA) in Europe and harsher penalties for non-compliance, merchants are increasingly erring on the side of caution and the presumption of fraud.

Solution: 3DS2

The emergence of 3D Secure 2.0 brings a level of automation and accuracy to the payer authentication process. The new protocols allow for the exchange of over 100 data points between the merchant and the payer’s card issuer to assess the probability that the payer is genuine. 

One-time passwords (OTP), biometric authentication such as fingerprints or facial recognition, and QR codes for mobile applications bring a further level of relatively frictionless authentication. Adopting 3DS2 shifts the burden of proof to the strong probability of fraud and so facilitates more genuine payments that may have otherwise been stopped.

Problem #3: fraud triggers

It’s not just an unauthenticated customer that can stop a payment in its tracks. Fraud alerts can also be triggered by suspicious activity, such as anomalies in purchasing patterns, bulk buying, or transacting from an unfamiliar device or IP address. Banks carry the risk and so tend to be over-cautious — for every $1 in fraudulent online payments, $25 of genuine online payments are falsely declined. But merchants are not entirely without influence in these decisions. 

Solution: business prioritization

Bank fraud algorithms are complex, but they basically boil down to probability. The two key factors they look at are the volume of transactions and the percentage of payment success. So the key is to improve payment acceptance over time while increasing transaction volumes. The latter is largely a function of sales and marketing. But your payment strategy should have a say. Counter-intuitively, it may be that your business is better off generating fewer transactions (for a period) and concentrate instead on ensuring more of them go through successfully.

Working with a payment provider that gives you a granular level of payments data can help identify those issuers declining payments most often. Your PSP can then reach out to those issuers, either directly or through the schemes, to uncover the reasons those payments are getting declined and resolve the problem.

Problem #4: canceled and expired card 

The problem of payments being declined because of ‘old’ cards is a particular issue for businesses with a recurring revenue model. Often the customer inputs their card details once and then gives the merchant permission to take future payments using the same card. Success relies on that specific card being in use; or the customer remembering to update their payment details with the merchant.  

Solution: tokenization

Not so long ago, prompting customers that their card was soon to expire, or had expired, was the only way for merchants to tackle the challenge of old cards. The arrival of ‘tokenization’ has changed that. 

In tokenization, the customer's card is replaced with a series of randomly-generated numbers — the “token” —  supplied by the card issuer. Unlike cards, tokens have no expiry date, and therefore eradicate the risk of involuntary churn. The higher security level with tokens also serves to combat fraud and improves payment success rates.

Some payment providers leverage the card scheme's automatic account updaters, which sync card updates to the customer’s merchant account. Visa Account Updater and MasterCard Automatic Billing Updater are two examples.

Problem #5: cross-border transactions 

Businesses with international ambitions will find that the banking ecosystem is not as orderly as they may like. Often ‘middle’ banks need to become involved between the acquiring and issuing banks; currency exchange may add yet another party to the chain, and a dislocated landscape of different systems, regulations and fraud rules needs to be overcome. All of this adds extra steps and pitfalls to the smooth processing of a payment.

Solution: intelligent payment routing

Transacting locally will go some way to shortening the chain and lowering the hurdles. But opening a business bank account in every country you trade in comes at a cost. Most governments will require you to have a legal entity in the country, which can be an arduous exercise. One answer is to work with a platform that does all the compliance and regulatory leg work for you.

But increasingly, merchants are adopting intelligent routing instead. Traditionally the flow of money between banks follows a 9-digit number associated with the banks. Think of it as a postal zip code. But when that route becomes congested by different banking systems, regulations and fraud triggers, as examples, the transaction needs an alternative way through. Intelligent routing works by ‘routing’ the payment request through a third-party platform with access to a broader network of banks. The platform identifies the most efficient route between all the available banks, and crucially the most likely to accept the transaction. If it gets it wrong, the payment is submitted to the next likely bank in the list until the payment request is accepted and processed. 

Of course, intelligent routing is not just a fix for cross-border transactions. Anywhere there is the potential for a payment to be declined, an intelligent routing solution can benefit.

The role of payments data

In every case, data is the key. Firstly, data can tell you how many payments are ending in failure and segment this picture by geography, sales channel, product line and other filters, so you know where to pinpoint your efforts. More data will tell you the reason for a payment failure, and therefore the appropriate remedy. As we have previously looked at, data is increasingly part of the solution too, be it to drive smart algorithms, validate identification, or trigger customer alerts. 

Once you accept the importance of fighting payment declines and the role of data in that strategy, the next question is how. This is all highly complex stuff, and going it alone can end up sucking more budget than if you had just sat back and accepted the costs of failed payments. Equally important is understanding the trade-offs at play; improved authentication measures may create more friction in the payment experience, for example. 

For many businesses, the answer is to work with a recognized Payment Service Provider (PSP) that is large enough to address payment success within your broader payments ecosystem. 

Keep up-to-date with all things payments

We process your personal data in accordance with Checkout.com's privacy policy. By subscribing, you consent to us sharing updates with you.

Keep up-to-date with all things payments

The Checkout.com team

Written on Feb 22, 2021 by

Moshe Winegarten

SVP Sales, Checkout.com

Keep up-to-date with all things payments

We process your personal data in accordance with Checkout.com's privacy policy. By subscribing, you consent to us sharing updates with you.

Keep up-to-date with all things payments

The Checkout.com team