Picture this: A customer is ready to purchase the product you’ve been promoting. They input their credit card details, hit ‘Buy Now,’ and wait for confirmation. But instead of a smooth transaction, they’re met with an error message—the payment didn’t go through.
Now, you have a frustrated customer and a potential lost sale.
Unfortunately, payment failures are more common than we’d like. But what causes them, and what can merchants do to minimize the risk?
In this blog, we’ll break down the essentials of payment failures. We’ll cover the reasons behind them, their impact on businesses and customers, and when and why they happen.
A payment failure occurs when a transaction does not complete successfully. This means that the transaction does not go through from the customer’s account to the merchant. It can happen due to various reasons, including insufficient funds, technical errors, fraud prevention measures, or incorrect purchase details.
Failed transactions can occur in different scenarios:
After entering the payment gateway, the transaction process goes through several additional steps before reaching the merchant.
There are multiple reasons why a payment might fail. These can be broadly categorized into technical, financial, security, and regulatory issues.
If a customer doesn’t have enough money in their bank account or their credit card is maxed out, the operation will be declined.
A common reason for transaction failures is outdated or incorrect information. If a card has expired, or been canceled, or if a customer enters incorrect billing details, the purchase cannot be processed.
Banks and payment processors use fraud detection algorithms to prevent unauthorized transactions. If an operation appears suspicious—such as being processed in an unusual location or exceeding spending limits—it may be blocked.
Failures can also happen due to system outages, slow internet connections, or errors within a payment gateway, bank server, or third-party payment provider.
Different regions have strict regulatory requirements. Some transactions may be blocked due to anti-money laundering (AML) laws, sanctions, or missing verification steps such as Strong Customer Authentication (SCA) in Europe.
The terms payment failure and payment decline are often used interchangeably in the industry. However, there is a subtle yet significant distinction between the two.
A payment decline is a specific type of failed transaction in which the card issuer actively rejects the payment. This typically happens due to reasons such as insufficient funds, an expired card, or fraud prevention measures.
In short, while every declined transaction is a failed payment, not all failed transactions result from a decline. Recognizing this difference is essential for accurately diagnosing issues and implementing the right corrective measures.
Failures are an unavoidable aspect of processing online transactions, but their consequences can be far-reaching. Beyond the immediate frustration of a declined transaction, they can negatively affect customer relationships, revenue streams, and operational efficiency. Let’s explore these impacts in more detail.
For customers, a failed payment means they can’t complete their purchase when they need to, leading to immediate frustration. This inconvenience may prompt them to abandon their transaction altogether. If issues persist, trust in the brand erodes, pushing customers toward competitors with more seamless transaction processes. In a crowded market, even one poor experience can turn a loyal buyer into a lost customer.
One of the most significant consequences of transaction failures is lost revenue. When customer-initiated transactions (CITs) fail, there’s a high risk of purchase abandonment. For subscription-based businesses handling merchant-initiated transactions (MITs), failed transactions can result in involuntary churn, where customers lose access to services due to issues. This not only leads to immediate revenue loss but also reduces customer lifetime value (CLTV), impacting long-term business growth.
Each failed payment often requires intervention from customer support teams, increasing operational expenses. Businesses must dedicate additional resources to handling payment disputes, assisting frustrated customers, and investigating transaction failures. These added costs divert attention from growth initiatives and other strategic priorities.
Beyond missed revenue opportunities, failed transactions come with financial penalties. Merchants may face fees for declined transactions, incur penalties from processors, or experience higher transaction costs when retrying transactions through alternative methods. Over time, these expenses add up, further squeezing profit margins.
According to GoCardless, B2C businesses typically experience 16%-20% of failed payments becoming bad debt, whereas B2B companies face rates ranging from 11% to 15%.
These statistics emphasize the significant financial risks that failed payments pose to businesses, underlining the importance of having effective systems to reduce their impact. So, what steps can businesses take to address this issue?
Ensure that customers have access to an easy way to update their payment details. This includes card expiration dates, billing addresses, and even adding or updating alternative methods. Implement automated notifications to remind customers of upcoming failures due to expired cards or outdated billing information. This helps reduce declines and enhances customer satisfaction by offering a seamless transaction experience.
Invest in advanced fraud prevention systems that incorporate machine learning algorithms, AI-based transaction monitoring, and robust authentication measures. These tools can identify potentially fraudulent transactions and help ensure that legitimate payments are not mistakenly flagged. In addition, make use of 3D Secure or other multi-factor authentication (MFA) technologies to mitigate the risk of fraud.
Ensure that your payment gateway and servers are fast, reliable, and well-maintained. Perform regular tests to identify potential issues before they affect customers. It's also essential to have a reliable backup payment processor in place in case of an outage. This way, you can minimize downtime and ensure that transactions go through smoothly.
Implement digital wallets like PayPal, Apple Pay, or Google Pay, and consider accepting alternative methods such as bank transfers, cryptocurrency, or regional payment systems. Offering diverse options gives customers more flexibility and can increase the chances of a successful transaction.
Use a retry system that automatically re-attempts transactions after a short period. Some payment gateways offer features that allow businesses to retry transactions a few times before marking them as failed. Be sure to notify customers about the retries, allowing them to update their transaction details if necessary. This can significantly improve recovery rates for failed payments.
Your business should follow all applicable payment regulations, such as the EU’s Strong Customer Authentication (SCA) requirements, anti-money laundering (AML) laws, and other local financial regulations. Failing to comply with these regulations can result in transaction rejections or legal complications. Stay informed about the latest regulatory changes to avoid these pitfalls.
Dealing with failures may seem like a matter of fixing issues as they arise. But in our experience, it’s not just about addressing each failure individually. There’s a lot more to it, and it requires a comprehensive strategy.
So what should you do? Prioritize your customers’ experience. Understand the underlying causes of transaction issues and take proactive steps to prevent them, combining these insights with the best practices I’ve shared here. This will not only reduce failures but also enhance trust and satisfaction.
The bottom line? This isn’t something you can solve once and forget. As your business grows and the payment landscape evolves, your strategy should evolve with it.