Handling Failed Payments

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Subscription-based services have become a mainstay in the global business ecosystem. With consistent revenue, improved customer retention, and a predictable business model, these services offer immense benefits. However, they also pose their unique challenges. Among them, failed payments stand as one of the most substantial hurdles subscription merchants face.

Failure to manage these situations effectively can lead to a significant impact on revenue and customer relationships. In this article, we’ll discuss best practices for handling failed payments and how merchants can prevent them from occurring in the first place.

The Consequences of Failed Payments

While a single failed payment might not seem concerning, over time, these instances can accumulate and result in substantial revenue losses. A failed payment often leads to a lost customer, and losing even a small percentage of customers to this kind of involuntary churn can have a substantial impact on business growth over time. It can also lead to a decline in customer satisfaction, brand loyalty, and reputation.

Reducing involuntary churn is pivotal for subscription merchants to maintain a predictable and sustainable revenue flow. By addressing the root causes of failed payments, businesses can improve customer retention rates and enhance overall profitability.

Effective Customer Communication

Effective customer communication is crucial for handling failed payments and preventing customer dissatisfaction. When a payment fails, promptly notify the customer about the issue and provide clear instructions on how to resolve it. These notifications should be personalized, reassuring, and offer easy steps to update payment information.

In addition to automated reminders and notifications, consider reaching out to customers directly through customer support channels.

Personalized interactions can demonstrate your commitment to customer satisfaction and increase the likelihood of successful payment updates.

Interpreting Decline Codes

When a payment fails, the issuing bank provides a decline code, which indicates the reason for the transaction's rejection. It is essential for subscription merchants to understand these codes to diagnose the problem accurately and take appropriate action. The most common decline codes include:

  • Insufficient Funds (Code 51): The customer's account does not have enough funds to cover the transaction.
  • Expired Card (Code 54): The payment method has reached its expiration date.
  • Do Not Honor (Code 05): The issuing bank refuses the transaction, possibly due to suspicious activity or a risk assessment.

Take a look at our previous article on the subject for the complete list of credit card decline codes.

Some decline codes, such as those indicating a lost or stolen card, should never be retried. Others, such as those indicating an error in data transmission, can be safely retried almost immediately. For many decline codes, however, determining whether to retry the transaction can be a bit more difficult.

When to Retry

A key strategy in handling failed payments is knowing when to retry the charge. A single failed attempt doesn't necessarily mean the end of the road. The timing and strategy of a retry depend on the decline code.

Manage Chargeback In-House Or OutshoreFor instance, if a payment fails due to 'insufficient funds', retrying the payment after a couple of days might be successful as the customer might have received their salary or addressed the issue. However, if the decline is due to an 'expired card', retrying won't help until the customer provides updated card details.

Hence, understanding the reason behind the decline is crucial for determining the retry strategy. Employing an intelligent retry system that takes these factors into account can significantly improve the chances of successful payments without alienating customers.

Grace Periods

A grace period is an essential mechanism in a well-rounded failed payment recovery strategy. Essentially, it is a set duration of time that you allow the customer to resolve their payment issue before any action such as service disruption or cancellation is taken. It acts as a buffer between the initial payment failure and the eventual subscription cancellation.

A grace period gives your customers some breathing room to fix the payment issue. It helps avoid instant disruption in service, which could be a source of frustration and dissatisfaction.

By allowing customers extra time to rectify the problem, you can significantly improve your chances of recovering the failed payment.

Instant cancellations can lead to permanent loss of customers. On the other hand, grace periods can help retain those customers who intend to continue the service but are temporarily unable to make the payment.

While the concept of grace periods is relatively straightforward, implementing them in the most effective manner requires careful consideration. The length of the grace period can vary based on your business model, the nature of your product or service, and your customer base. It could range from a few days to several weeks. However, it should strike a balance between giving customers enough time to resolve the issue and minimizing revenue leakage from extended periods of unpaid service.

Utilizing Payment Analytics

Implementing a robust payment analytics system can provide valuable insights into payment trends, customer behavior, and churn patterns. Analyzing data related to failed payments can help subscription merchants identify recurring issues, segment customers based on their payment behavior, and optimize their payment processes.

Payment analytics can also aid in identifying trends and changes in payment success rates over time. By understanding these trends, businesses can proactively adjust their strategies and reduce the occurrence of failed payments.

Preventing Failed Payments

While effective retry strategies are vital, preventing failed payments in the first place should be the primary focus for subscription merchants. Here are some best practices to mitigate the occurrence of failed payments:

Make Updating Payment Info Simple

Offer an easy-to-use customer portal for subscribers to update their payment information. Ensure that customers receive notifications well in advance of their payment method's expiration date to avoid involuntary churn.

Use an Account Updater

BNPL E-GuidePartner with payment processors that offer an automated account updater service to obtain updated card details. This service automatically updates card information when a new card is issued or when the existing card's expiration date changes.

Send Payment Reminders

Send automated payment reminders before the due date to ensure customers have sufficient funds in their accounts.

These reminders can be sent via email, SMS, or in-app notifications, depending on the customer's preferred communication channel.

Use Alternative Payment Methods

Some methods of payment, such as ACH, are much less likely to fail than credit card payments. If customers can be convinced to use these alternatives, you may be able to reduce the number of failed payments you face.

Continuous Improvement

Managing failed payments is an ongoing process that requires constant evaluation and improvement. Regularly review your payment processes, retry strategies, and customer communication to optimize results. Stay informed about industry trends and innovations in payment technology to stay ahead of the curve.

Despite its challenges, the subscription model's benefits far outweigh its downsides. A proactive, strategic approach to managing failed payments can help ensure that your subscription business remains profitable and continues to deliver value to your customers. After all, in the world of subscriptions, ensuring consistent, uninterrupted service is the key to customer loyalty and long-term success.

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