5 Reasons Why Card Payments are Declined and How to Fight Back

According to various studies, the percentage of declined card payments ranges between 5 and 10%. This is typically higher for recurring payments — think subscriptions, installments, and monthly bills — and even higher for cross-border transactions.

Of course, it's not all bad news. Declines can benefit merchants in a variety of ways, the most obvious being the prevention of fraudulent payments through the best payment gateway. However, declines represent lost revenue, the marketing cost of re-creating the sales opportunity, and the administrative cost of chasing down overdue payments.

Understanding why payments are declined is the first step toward increasing your payment success rate. In this article, we'll look at some of the most common reasons why a card payment might fail — and what you can do about it.

Problem #1: Lack of Funds

It may seem obvious, but if your customer does not have sufficient funds in their bank account or has reached their credit limit, there is no money available to transfer. While merchants cannot be held accountable for their customers' spending habits, there are steps you can take to gain more control.

Solutions: failed payment notifications and alternative payment options

Communication speed is critical. When you send a message to your customer in real-time while they are still in the purchasing mode, they are more likely to retry right away. Another idea is to allow customers to spread out the cost of their payment by offering Buy-Now-Pay-Later (BNPL) options.

But what about a recurring payment, where the customer is unaware that a payment through an online payment gateway is being attempted despite having given permission? The solution, in this case, is to use data to 'learn' the best time to schedule the payment for success. Income and spending patterns can reveal this; for example, it may be prudent to avoid the day before or after a salary or mortgage payment.

Problem 2#: Unverified Customer

Customer authentication should be viewed positively by merchants. It helps to ensure that fraudsters aren't using a card illegally, which can result in chargeback penalties for a merchant. However, authentication can result in false positives, which occur when the system fails to identify a genuine payer. With the implementation of Strong Customer Authentication (SCA) in Europe and harsher penalties for noncompliance, merchants are increasingly erring on the side of caution and assuming fraud.

Solution: 3DS2

The introduction of 3D Secure 2.0 adds a level of automation and precision to the payer authentication process. The new protocols enable the exchange of over 100 data points between the merchant and the payer's card issuer in order to determine the likelihood that the payer is genuine.

One-time passwords (OTP), biometric authentication such as fingerprints or facial recognition, and QR codes for mobile applications all contribute to a relatively frictionless authentication experience. Adopting 3DS2 shifts the burden of proof to the high probability of fraud, allowing more genuine payments that would otherwise have been stopped.

Problem #3: Fraud Triggers

Payment can be halted by anyone, not just an unauthenticated customer. Suspicious activity, such as anomalies in purchasing patterns, bulk purchasing, or transacting from an unfamiliar device or IP address, can also trigger fraud alerts. Banks bear the risk and, as a result, are overly cautious — for every $1 in fraudulent online payments, $25 in legitimate online payments are declined. However, merchants do have some say in these decisions.

Solution: business prioritization

Bank fraud algorithms are complex, but they are essentially based on probability. The volume of transactions and the percentage of payment success are the two most important factors they consider. So the key is to gradually improve payment acceptance while increasing transaction volumes. The latter is primarily the responsibility of sales and marketing. However, your payment strategy should have a say in the matter. Contrary to popular belief, your company may be better off generating fewer transactions (for a while) and focusing on ensuring that more of them are successful.

Working with an online payment gateway that provides granular payment data can assist you in identifying the issuers who decline payments the most frequently. Your PSP can then contact those issuers, either directly or through the schemes, to determine why the payments are being declined and resolve the issue.

Problem #4: Canceled and Expired Card 

Payments being declined due to 'old' cards is a particular problem for businesses with a recurring revenue model. Frequently, the customer enters their credit card information once and then grants the merchant permission to accept future payments using the same card. Success is dependent on that specific card being used, or the customer remembering to update their payment information with the merchant.

Solution: tokenization

Until recently, the only way for merchants to deal with the problem of expired cards was to notify customers that their card was about to expire or had already expired. That has changed since the advent of 'tokenization.'

The customer's card is replaced with a series of randomly generated numbers — the "token" — supplied by the card issuer during tokenization. Tokens, unlike cards, have no expiration date and thus eliminate the risk of involuntary churn. The increased security provided by tokens also helps to combat fraud and improves payment success rates.

Some payment providers use automatic account updaters provided by card schemes to sync card updates to the customer's merchant account. Two examples are Visa Account Updater and MasterCard Automatic Billing Updater.

Problem #5: Cross-Border Transactions 

Businesses with global ambitions will discover that the banking ecosystem is not as well-organized as they would like. Between the acquiring and issuing banks,' middle' banks are frequently required; currency exchange may add another party to the chain, and a disjointed landscape of different systems, regulations, and fraud rules must be navigated. All of this adds extra steps and pitfalls to the payment's smooth processing.

Solution: intelligent payment routing

Local transactions will help to shorten the chain and lower the barriers. However, opening a business bank account in each country where you trade comes at a cost. Most governments will require you to establish a legal entity in the country, which can be a difficult process. One solution is to use a platform that handles all of the compliance and regulatory work for you.

However, intelligent routing is becoming more popular among merchants. Traditionally, the flow of money between banks is governed by a 9-digit number assigned to each bank. Consider it as a postal zip code. However, when that route becomes congested due to various banking systems, regulations, and fraud triggers, for example, the transaction requires an alternate path through. Intelligent routing operates by 'routing' the payment request through a third-party platform that has access to a larger network of banks. The platform determines the most efficient route between all available banks, as well as which ones are most likely to accept the transaction. If it makes a mistake, the payment is routed to the next most likely bank on the list until the payment request is accepted and processed.

Of course, intelligent routing is more than just a solution for international transactions. An intelligent routing solution can benefit anywhere there is the possibility of a payment being declined.

The role of payments data

In every case, data is the most important factor. To begin, data can tell you how many payments fail and segment this picture by geography, sales channel, product line, and other filters, allowing you to focus your efforts where they are most effective. More information will reveal the cause of a payment failure and, as a result, the appropriate remedy. As previously discussed, data is increasingly becoming a part of the solution, whether it is used to drive smart algorithms, validate identification, or trigger customer alerts.

Once you recognize the significance of combating payment declines and the role of data in that strategy, the next question is how. This is all very complicated stuff, and going it alone may end up costing you more money than if you simply sat back and accepted the costs of failed payments. Understanding the trade-offs at play is also critical; improved authentication measures, for example, may cause more friction in the payment experience.

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