Subscription Management and the $443 Billion False Decline Problem with Payment Processing

December 5, 2022
min read
Payment Processing & the $443 Billion False Decline ProblemPayment Processing & the $443 Billion False Decline Problem

If you run a subscription-based business, you understand how important it is to manage your subscriber base. Keeping your subscribers happy and returning to your business each month is fundamental to your success. However, if you’re like most subscription merchants, you may be losing money and customers without realizing it.

How? By using ineffective subscription management payment platforms. If you’re not using the right platform, you’re probably suffering from an unnecessarily high rate of false declines, costing you money and increasing customer churn. Keep reading to learn what false declines are, what they mean for merchants like you, and how using the right subscription management payment processing solution can cut false declines for good.

What Are False Declines?

A false decline is just that: a decline of a credit card or digital wallet transaction that should have been approved. These declines occur for a variety of reasons, including:

  • Misidentification of a fraudulent transaction: All credit card agencies monitor users’ cards for potentially fraudulent transactions so they can block them. If the anti-fraud security system falsely determines a transaction is fraudulent, it will issue a hard decline. A hard decline occurs when the issuer doesn’t approve the payment, which means it can’t be fixed by trying again.
  • Payment gateway failures: Sometimes, technical problems cause a card to be declined, such as data mapping errors or incorrect data formats. 
  • Card balance errors: A card may get soft declined if there isn’t a large enough credit limit available to cover a transaction. If a customer’s most recent payment on their card hasn’t gone through, this might lead to a soft false decline.

The most common reason for false declines is fraud misidentification. Financial institutions err on the side of caution when it comes to fraud to avoid being on the hook for fraudulent transactions. As a result, they rely on overly sensitive issue processors to check transactions for fraud.

Issuing processors are responsible for analyzing every transaction and telling banks or card issues what to do. However, there are so many card transactions every minute that most issue processors handle this automatically. They use a series of rules to rank the likelihood that a given transaction is fraudulent, and these rules often throw up false positives.

For instance, most issuing processors rank an out-of-state transaction with a merchant as a higher fraud risk. They also rank late-night purchases as riskier. Issue processors may also consider factors like the amount of the charge, how much credit the customer has available, and the number of transactions a merchant has charged at once to develop a risk score.

Many benign circumstances cause the risk score to increase, this can lead to a perfectly legitimate subscription charge being flagged as fraud for no reason. This is a problem for merchants like you because false declines lose sellers billions of dollars annually.

Statistics You Need To Know About False Declines

What makes false declines such a big problem? Let’s break it down with some statistics. First, 67% of current payment processing declines are actually false declines. As a result, two out of every three times a customer’s card is declined, it’s a false decline — but it still costs you the merchant money to both your payment platform and processor.

As of 2018, it was estimated that as much as 94% of all “fraudulent” transactions detected by payment processing systems were valid and should have approved. Credit card issuers with overly sensitive fraud detection systems are actively hurting merchants like you by declining transactions.

That’s because these declined transactions lose you revenue that you’ve already earned. Even though the sale is complete, you’re not realizing the revenue because the customer is barred from paying you by a false decline. According to a study by Aite Group using Visa statistics from 2019, this is projected to lead to a revenue loss of $443 billion worldwide annually.

The majority of declines you receive are false, partly because credit card issuers are overly cautious in preventing fraud. As a result, merchants around the world are losing nearly half a trillion dollars in revenue every year just because card issuers and banks are too careful.

Problems Caused by False Credit Card Declines

While these statistics are jarring, they can be a little abstract. As a subscription merchant, a false decline can harm your business in concrete ways by costing you money and customers. Here’s how.

False Declines Cost Merchants Money

The most obvious way that false declines hurt your business is by cutting the number of sales you can make. According to recent research, poor payment processing systems that lead to false declines can drive away as many as 40% of your new customers.

As a subscription business, this is particularly painful. New customers are significantly more likely to become consistent revenue streams for subscription-based merchants than other types of commerce. As such, false declines can dramatically reduce your revenue going forward.

False Declines Encourage Customer Churn

Furthermore, false declines are responsible for a significant amount of customer churn.  This scenario is typically called ‘involuntary churn’. Consumers don’t want to have to re-enter their payment information just to make a purchase. In any industry, false declines push customers away and may even send them to your competition.

The problem is even worse for subscription businesses. The elegance of a subscription model is unmistakable: a customer signs up once and then continues to receive your monthly offerings in exchange for a payment. When things are working normally, all you need to do to retain that customer is continue to satisfy their needs, so they don’t decide to cancel their subscription.

However, when things go wrong, that system breaks down. That’s why false declines are responsible for nearly half of all customer churn for subscription-based businesses and they effectively increase your cost of customer acquisition. Customers who may have been content to remain subscribed to your business indefinitely may not care enough to address the declined charge and resubscribe. As a result, every declined transaction could lose you a subscriber for good.  

Some False Decline Remedies Charge Extra Fees

With false declines costing merchants so much money, it’s natural that services have arisen to try to help. These companies offer “decline remedies,” which attempt to overcome the most common issues that lead to false declines. The specifics of how they do this vary by company, but the consistent goal is to reduce the number of false declines merchants face.

The problem is that most businesses that offer these services charge per remedy attempt. When a card is declined, the service will make several attempts to fix the decline in different ways and charge for each one.

However, there’s no guarantee that any of these attempts will be successful. If these services fail, they don’t merely lose you the sale. They also cost you more money on top of the lost revenue.

Subscription Management and Customer Churn: What’s the Problem?

False declines are bad for business because they cost you money and increase customer churn. It’s obvious why the first issue is bad, but it may not be as clear why churn is a problem. Churn is the most expensive problem a subscription merchant can face in the grand scheme of things.

But what is churn? The churn definition is simple. For subscription businesses, churn is the number of canceled subscriptions in a month divided by the total number of subscriptions you had at the start of the month multiplied by 100%. For instance, if you start the month with 2,000 subscribers and 100 of them cancel that month, you get:

(100 canceled subscriptions /2,000 monthly subscribers) x 100% = 5% churn rate

Ideally, your churn rate would be zero, but that’s not realistic. Instead, good subscription management aims to maintain a single-digit percentage in churn.

This is the goal because customer acquisition is expensive compared to retention, particularly for subscription services. The cost of customer acquisition is the amount you spend on marketing divided by the number of new clients you win. If you spend $5,000 on marketing per month to bring in 100 new customers, every new customer costs you $50. Meanwhile, the cost of customer retention is the amount you spend to keep customers returning, which is equivalent to the cost of doing business for subscription businesses.

High churn rates mean you’re constantly fighting to bring in new customers just to stay where you are. On the other hand, low churn rates allow you to grow your business instead of struggling to maintain revenue. That’s why false declines are such a problem. By eliminating false declines, you may be able to cut your churn rate in half.

Reducing False Declines for Good

So, what’s the solution to false declines? Solving declines after the fact isn’t a good option. These post-decline solutions cost money, delay purchases, and may not work in the first place.

The best solution is to prevent false declines from happening in the first place. Properly optimizing your payment processing system can reduce the likelihood that an issuer processor falsely flags something as fraudulent.

That’s where Revolv3 comes in. Revolv3 has built the only first pass AI payment processing platform that only charges the merchant for approved payments. With Revolv3’s powerful payment data optimization tools, you can minimize the number of false declines you experience up front. There’s reduced need to try to fix declines after the fact because Revolv3 helps prevent the issuer processor from denying valid transactions in the first place. When a decline occurs after the first pass, Revolv3 has retry logic that covers the full spectrum of potential declines while maintaining best data, security, and network regulation practices.

Revolv3 also offers intelligent routing, allowing you to accept various payments with multiple processor/MID support. Combined with debit network routing and account range level payment optimization, this intelligent routing system helps keep your subscription billing on track without triggering fraud alerts.

If you like to be a little more hands-on with your payment processing, Revolv3 is a developer-friendly platform. We provide convenient APIs and a portal that makes it easy to customize your payment processing as your business grows. You can use these tools to monitor security and choose between tokenization or encrypted PAN. Combined with hosting through Microsoft Azure that provides 99.9% uptime, this helps keep technical errors from leading to declines, too.

Most importantly, Revolv3 will only charge you for the payments that go through. Unlike other subscription management payment processing services that charge you for attempted transactions and recoveries, you’ll only pay Revolv3 for the transactions that succeed. That means you minimize the cost of genuine declines, too. In combination, Revolv3’s unique toolset can help subscription merchants like you avoid the costs of false declines and keep your business running smoothly from month to month.

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