A guide to payment optimization

Competitive merchants know that payments are a key revenue-driver in any modern business. If you’re taking payments via web, mobile, apps or digital marketplaces, you could be losing out on millions in revenue if your payments are not optimized. 

Nearly half of merchants report that up to 5% of their payments are wrongly declined as fraud, adding up to losses of around $50 billion. 

To cut through the business speak, “payment optimization” simply means earning the maximum amount of revenue from your various payment methods. When you've invested heavily in your product or service only for your user to find they cannot pay – you’re losing money. That's where payment optimization comes in.

What does payment optimization mean, and why does it matter?

Payments optimization is about three core things: improving acceptance rates, reducing fraud and delivering a delightful experience to customers. It achieves more revenue for your business, and fewer line items on the bill from your payment processor.

Optimization is a nuanced process that requires the latest tech, experienced human oversight, and carefully-chosen payment industry partnerships. In practice, it often means making technical improvements to the payload to improve the chances of authorization. It can also refer to intelligent payment routing, for example, sending the payment through a local acquirer.

This is the impact: a mere 1% increase in transactions that would otherwise have failed equals the same percentage in increased revenue for your business. At the same time, payment optimization involves reducing wasted costs, such as the fees for retrying a transaction multiple times that has no chance of succeeding. 

On top of financial gains, payment optimization offers a strategic advantage by focusing on positive customer experience. A smooth checkout journey – swift, secure, and adapted to local payment preferences – fosters trust and loyalty. You also ensure good fraud security and compliance standards – the bedrock of ongoing commercial success.

At Checkout, we believe there is no finish line. My engineering team is dedicated to daily improvement of our algorithms, decision engines, and routing mechanisms resulting in fewer payment errors. We also consistently look for new ways, features or products to get an advantage here. This work directly translates to more revenue, fewer customer service headaches, simplified compliance, and smoother operations. All of these fuel the continued growth and success of your business.

In the rest of this article, I’ll show you how to get there.

Map your payment strategy to your business model 

Part of the complexity is that a successful payments strategy isn't one-size-fits-all – it varies based on business model, industry, and region. You need to adapt your optimization approach in line with your business’s objectives. How, when, and from whom you take payments makes all the difference. That’s what makes the work so interesting: it’s a truly custom exercise that unlocks the hidden revenue potential in your existing payment flows. 

Subscription services: Safeguarding recurring revenue

Recurring payments are the lifeblood of subscription-based businesses. Yet we all know how easy it is for payments to stop because of a lost or expired payment card.

With Real-Time Account Updater, payment details are automatically updated on major card schemes at the moment the payment request is sent, ensuring uninterrupted recurring revenue. Indeed, we have seen merchants recover up to 30% of previously missing revenue due to account changes and lost, expired or stolen cards. 

Another way to ensure regular recurring revenue from repeat payments is to set up the first payment with Strong Authentication. This means you won’t need to authenticate the following payment requests, and they’re more likely to lead to successful revenue capture. 

Cross-border payments: Ensuring high conversion in international markets

You may not realize that your payments are the reason you’re struggling to break into new markets. Meeting regional scheme requirements, negotiating cross-border payment settlement, achieving the necessary licenses, and figuring out local payment methods are enough to give even the most capable finance manager a headache. That’s before we even get to currency exchange and foreign language payment collection methods.

For merchants with a multinational outlook, seeking region-specific support can speed the time to market for new revenue opportunities. Sadly, many don’t have access to this. A Checkout.com study revealed that 32% of merchants lack proper payments support, which they say is blocking them from entering new markets. 

Some examples of cross-border payment optimization include the use of local acquiring to improve the likelihood of payments going through – and key bonus: the fees are typically lower than acquiring services from international entities. 

What about factors that influence conversion? After you’ve spent millions on product development, logistics, operations, and marketing just to get your product in market, your downfall – the reason for that lost sale – could be a poor payment experience. Outages, downtime, too many clicks, the wrong payment method, unwanted redirects, or slow processing times can all push up that cart abandonment rate. 

Two in five consumers (42%) say they wouldn’t return to an app or website after one wrongly rejected payment. That shows how crucial it is to get the payment moment right; it truly can make or break your company’s finances.

A simple piece of custom code can display the payment methods, language, and currency that your customer expects to see. The familiarity this provides reassures your customer that your brand can be trusted to take a safe, secure payment.

Hunting down your payments data

You cannot undertake payments analytics without comprehensive data. Yet, a surprising number of merchants lack clear visibility into how their payments perform across the entire transaction journey. Checkout.com research shows that 45% of merchants are missing actionable payments analytics required to optimize payments – whether that’s raw response codes on failed payments, fraud or chargeback analysis data, or a detailed breakdown of payment costs. 

Understanding the root cause of transaction failures allows you to proactively address declined payments and improve authorization rates. Compare results with control groups to quantify the effectiveness of your overall payments strategy, and make adjustments where necessary. 

Beyond simply processing payments, a trusted partner should provide you with extensive data, as well as expert guidance to make sense of it. This includes granular transaction details, detailed cost breakdowns, visibility into fraud and chargebacks, and all optimizations applied for intelligently routed transactions. A dedicated team of payments specialists can empower you to interpret data and translate insights into actionable steps that drive tangible results. This allows you to gain complete visibility, uncover hidden opportunities, and unlock the full potential of your payments strategy.

Matching issuer expectations every time 

As a quick reminder of how card payment processing works, various parties must verify that a payment is legitimate before the funds are captured. One of these is the card issuer, which is the bank or financial institution that gave your customer their payment card. 

There is not just one issuer – there are thousands, and each one has unique preferences for which payments to validate, a unique schedule for implementing technical updates, and a unique risk appetite. This adds yet another layer of nuance to the payments process, and is one of the major reasons why payments are so complex. Figuring out which changes are taking place requires a lot of dedicated relationship-building, plus machine learning.

Consider, for example, network tokens. These payment instruments are widely mandated by card schemes, and can improve authorization rates by 2% or more. Unfortunately, not all issuers are set up to accept tokenized payments yet. However, you couldn’t possibly know in advance which issuers are more likely to approve tokenized versus non-tokenized transactions. That makes it hard to design a universal token strategy for maximum issuer acceptance. To tackle this challenge, you’d need to run experiments to measure acceptance rates by tokenization status – as well as having high enough traffic for each issuer.

Tokens aside, issuers also have specific preferences for payment request data submission. Even minor formatting errors in data fields can lead to rejections. At the same time, including optional data points like IP address and device ID can signal to the issuer that the transaction is likely to be legitimate, improving the chances of authorization. Again, you can’t guess what these preferences are because there is no handbook. Preferences also change over time, so even if you did manage to make a list, it would need constantly updating.

With thousands of issuing institutions around the world, you can’t possibly keep track of each one’s specific preferences for transaction validation. Checkout.com uses a complex set of algorithms known as a multi-armed bandit to programmatically detect the payment configuration most likely to lead to revenue for the merchant (unless it seems fraudulent, in which case, it’s blocked). The powerful payments engine known as Intelligent Acceptance constantly updates and improves its decision-making, routing transactions based on issuer preferences. It reduces costs, keeps payment traffic fully compliant, and improves acceptance rates by an average of 3.8% for our merchants.

Fight fraud to improve revenue, security and reputation

In many markets, a majority of declined payments are flagged as fraudulent. While some of these are correct, there’s usually a proportion of payments marked incorrectly as fraud. Have you looked into how much revenue your business is losing because of wrongful fraud flags? Fighting fraud is critical to payment optimization: managing how fraud risk is assessed can make the difference between profitable online sales and going under. I’ll explain why.

Incorrect fraud filtering is the main cause of failed payment attempts. It’s obvious why that leads to reduced income for your business – the customer is frustrated, and 45% will not retry the payment. On top of that, you need a strong fraud strategy to stay out of scheme monitoring programs, and to reduce the volume of customers claiming costly chargebacks. Your goal is to accurately identify risky transactions while preventing false declines – as well as ensuring you resolve payment disputes quickly. Sound simple? It’s not. But a capable payments partner can help you stay on top of the latest payment fraud trends and prevent revenue loss.

There are multiple ways to maximize revenue through fraud strategy:

1. Communicating with the banks to correctly assess fraud risk can bring down the volume of false declines. 
2. Fighting fraud at its source reduces losses from chargebacks, refunds, and bad actors – as well as bringing down operational costs of handling each fraud incident.
3. Protecting your customers from stressful fraud incidents can keep customer satisfaction up, encourage repeat purchases, and preserve brand reputation. 

Here are the strategies to reclaim revenue losses from fraud:

• Use machine learning to calculate risk: As AI becomes more powerful and easy to access, scammers are carrying out sophisticated payment fraud at scale. To keep up, you should look to a fraud engine powered by machine learning for the most accurate risk assessment. This can help you stop fraudulent payments coming through your business, preserving your standing with banks, schemes, and customers – as well as protecting your funds. 
• Investigate your authentication strategy: Examine the parameters you’ve set for 3DS challenge, and adjust these to reflect your business’s risk appetite. It may be that you choose to bypass additional authentication based on Transaction Risk Analysis (in Europe and the UK), which could have a positive impact on your acceptance rates – as well as provide a smooth checkout experience for the customer.
• Collect transaction data to fight disputes: Telltale clues from the moment of payment could prove a customer payment was legitimate in the event of a payment dispute. While 3DS is a reliable way to shift fraud liability to the issuer (thus protecting you from financial loss in the event that the payment is fraudulent), it may not be the right fit for your business. Instead, you can collect data such as the IP address of the purchaser at the date and time of the transaction to help you win payment disputes.
• Work with a partner who can proactively flag to issuers that transactions are safe: It’s resource-intensive to maintain a team of issuer relationship experts who dedicate time to resolving specific decline challenges with individual issuers. However, it can lead to millions in increased revenue at scale. A smart way to access the additional revenue from this type of payment optimization would be to collaborate with a PSP that’s already doing it.

How Checkout.com can help you optimize your payments

Figuring out authorization strategies isn’t easy – but it is fascinating. If you don’t have the resources to figure out how you can regain revenue from false declines, then we’re here to help you out. We support the payments community with access to education courses, and regularly share our expertise at industry events. 

Our payments experts can help you devise the optimal payments strategy, tailored to your business goals. Follow our latest blogs on payment optimization to keep up to date.