Credit Card Decline Management
Credit card decline management is hugely important as declines are a massive threat to All Recurring Revenue Businesses.
Imagine you are a business owner with 500 customers that you bill $100 per month on a recurring basis. Your business runs and plans based on $50,000 per month coming in the door on a regular basis. It took a long time and a lot of work to get to the point where your business generates that amount of reliable predictable income. You pay salaries, rent, handle plan development, and manage marketing campaigns ALL around that recurring revenue.
Now imagine that 15% of that revenue, or $7,500 per month, goes uncollected — and not because your clients don’t want to pay you. The customer’s credit card can decline for various reasons.
Let’s use an example business owner with 500 customers billed $100 per month on a recurring basis. The business is run based on $50,000/month of recurring revenue. Salaries, rent, marketing campaigns and more ALL are tied to that recurring revenue.
Now imagine that 15% of that revenue or $7500/month goes uncollected and NOT because your clients don’t WANT to pay you.
The business now has to:
- Meet financial obligations. Revenue has dropped not financial obligation.
- Try and contact those customers for updated billing info [estimates are that 1st attempts to update billing info have a 5% success rate]
- Replace those customers lost due to non-payment
The business is losing on three fronts:
- Revenue shortfall of 15%
- Workflow issues created by manual attempts to update billing info
- Customer attrition: There will be need to replace lost clients to maintain same revenue levels
So what are credit card decline rates and the lack of a Credit Card Decline Management service really costing this business?
Certainly not just the $7500 per month or $90k per year. How many hours are spent trying to get new card information and re-bill and account for that loss?
How many customers do you lose because you couldn’t obtain new billing information OR they cancelled when you contacted them [reminded them] to please pay you? Without a Credit Card Decline Management System you will continue to have these issues and in all likelihood they will get worse.
These customers may have successfully paid you for 6 months in a row but then decline. So why do cards decline what can you do to improve credit card decline management?
First it’s important to understand the credit card ecosystem.
On one side there is the customer and their credit card issuing bank. So Chase issues Suzy Jones her SouthWest Airline reward credit card with an account number, expiration date and security code [ cvv number ]. Chase also provide monthly charge $ limit and monitors transactions for suspicious activity.
So the business attempts to debit Suzy’s credit card. A request is sent from Vantiv to Chase with Suzy’s known card information. Chase can either approve or decline this transaction and this happens very quickly. If approved a message is sent from Chase to Vantiv-”Suzy’s payment is good and we will send you the $ asap”. But the card can decline for MANY reasons.
Reasons why a credit card declines:
- That card number is no longer valid. The customer may have lost the card and been issued a new one. In some cases recurring payments may continue to successfully process even if a new card # has been issued as long as the issuer has seen these transactions before. Whether that happens is up to the issuing bank so you may find one customer is fine and another’s payment may decline. This is known as a “hard decline”. You would not have any success in retrying that card.
- Bad expiration date. The card may have expired. Again depending on issuing bank expired cards may continue to process successfully if a billing history is in place [again issuer specific].
- Over limit or NSF on card. Customer has gone over set limit. This is considered a soft decline” as you may retry the card a day later and find it good.
- Late payments. Depending on the issuer a customer’s card may be cut off if payment past a due date. Also a soft decline.
- Suspected fraud. Especially with customer’s first billing you may see declines from the issuer due to “unknown” biller.
- Large merchant hacked. Home Depot breached. MANY cards get reissued resulting new card #.
- In some cases you may even see customer card limits being “held’ by hotel or rental car agency. This can use up available credit.
Fraud, reissued cards, EMV (chipped) cards and lost or stolen cards all contribute to declines on recurring payments. Credit card decline rates and Credit Card Decline Management are increasingly becoming a massive challenge for subscription/recurring billing merchants
- On average, 15% of recurring credit card payments are declined (with some industries exceeding 30% decline rates)
- 30% of all credit cards are reissued each year
- 1.5 billion EMV chip cards were issued in 2015 and 2016
- There is just a 5% success rates in obtaining new information from customers on the first attempt after a card is declined
(*Information based on Visa | MasterCard publications and PLC)
Recurring monthly revenue based businesses have been around for many years. Alarm/security companies, cable, phone, and gyms are just some of those that depend on recurring or subscription billing.
Check out the video that details the struggles a small business faces in dealing with declines.
Credit Card Decline Management, Handling and Mitigation
Many businesses use a SaaS platform that manages multiple aspects of their business and has a payment collection and reconciliation component. Others may rely on specific billing platforms .
Subscription billing management is big business as companies demand the ability to provide multiple payment options to retain clients and maximize profitability. Prorating, metered billing, trial periods, anniversary billing and other options all contribute to the demand for subscription billing management businesses.
In both cases the ability to mitigate credit card declines and develop a comprehensive credit card decline management solution is vital to the businesses success.
Fifteen percent of a business’ monthly revenue going uncollected is a big problem. Especially when coupled with the effort required to acquire new information that will allow that business to again bill their client. On top of that, these business owners are losing a percentage of clients every month that they now must replace. Client acquisition costs are a massive expense for any business — losing customers simply because you can’t bill them only adds insult to injury.
So how can you address this problem and ensure your customers stick with your service or product rather than a competitor’s?
Here are a few strategies:
- Use the Recurring Indicator when sending transactions. Use of this indicator can improve decline rates and even reduce processing rates in certain locations. Your billing provider or payment gateway should be sending this “regular payment” messaging to the issuing bank. It essentially calms their “decline machine”.
- Use Updater programs from MasterCard and Visa, which allow for the automated updating of expired and reissued cards. Your Payment Gateway provider sends all of your customer credit card data to the Updater programs [MasterCard, Visa have separate programs]. Cards that have changes eg new card number or expiration date are returned and your gateway provider should provide some insight into these changes. Even if the customer was issued a new card you are able to continue processing without need to contact that customer. There is typically a per successful update fee. There are payment gateway providers and billing platforms that offer an updater program. The issue tends to be this is the only tool being used to combat card declines. One problem with this is that not all credit card issuers send new cardholder data to the updater programs. The second issue is your declines are made up of two broad categories: soft and hard. Soft declines occur when the card number and exp date are good but there is a temporary reason why you can’t get the customer’s money. So you can retry this card. Hard declines like bad card # have no recourse. The Updater program will not help with soft declines.
- Proactive customer outreach reach out to users whose card is approaching expiration rather than waiting until it’s already expired. Again depending on what system you are using you will have different options. In almost every case you should be able to run reports for this clients whose card is set to expire. Create a campaign using email, calls etc to obtain new card information. You may even be able to direct them to update the new card info online without manual involvement. The closer they get to their expiration date the more effort should be put into obtaining new card info. Remind them of the valuable benefits they will be missing out one by not having your product or service.
- Reactive outreach for clients whose card has expired. Send a series of email with clear instructions on how to update info AND the benefits they stand to lose by not being able to leverage your product or service. Call, send snail mail whatever you can to keep that customer. They are very valuable. Conduct a “We want you back campaign”.
- Strategically resubmit declined cards due to soft decline codes such as NSF. Your software provider or payment gateway partner may offer a way to “bucket” your soft declines. This may allow you to retry transactions that decline in batch mode. Some providers even allow programmatic logic that auto retries card declines based on decline code. Using this type of service you can automate much of the manual involvement in attempting to recollect.
- For expiration date related declines, resubmit the card with strategic expiration date logic. Your payments partner should be able to provide insight into retry best practices. There are regulations about how many times a card may be retried. One example may be to add three years to the current expiration date and retry. If that fails add 4 years. Again look for input from your payments partner on best practices.
- Consider adding an ACH Payment option — which will significantly reduce decline rates. ACH Processing typically has decline rates in the .5-3% range. People change bank accounts much less frequently than credit card numbers. In addition to fewer declines your transaction processing fees are typically 80%+ less expensive than credit cards.
- Identify pre-paid cards when onboarding a new client. You can use online BIN lookups eg https://binlist.net/ to identify a card is prepaid. Your payment gateway partner may allow for programmatic blocking of prepaid cardsas a payment acceptance vehicle. This allows for controlling the customer onboarding process. Eliminating costly commission payouts, non converting trials and workflow issues resulting from failed billings all help the end merchant be more profitable andefficient. If they are using your SAAS solution that helps payment collection they are a more satisfied, more likely to refer client
- Last chance or “given up on” transactions. Depending on your payments partner you may be able to use this service to capture potentially lost income [and customers]. Using this strategy a “sale” is forced on the issuer.
Subscription and recurring payment based businesses are facing a challenge that can’t be solved simply by using an updater program. A strategic multi-pronged plan must be put in place to mitigate the revenue and customer loss that credit card decline rates pose.
Acquiring a new customer is typically one of the most difficult and expensive aspects of any business. To then lose one of these customers due to billing issues is both frustrating and expensive.
Integrating the steps above into your payment collection process will give you a competitive advantage by helping you limit or eliminate that 15 percent revenue cut. If you are a billing platform then educating your current users and prospects about your credit card decline handling program will also help you to win more business and achieve better retention rates. By implement a Credit Card Decline Management system you protect both your revenue stream a well as your hard won customers.
If you would like more information get our 7 Step BluePrint to Maximizing Approval Rates HERE