MBA1829 Why Do Payments Fail?

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Visit Dell.com deals. Hey oh. Welcome to the Hundred Dollar MBA show, the business podcast your business counts on every single day with our daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of Webinar Ninja, an independent software company I started with my co founder back in 2014. And in today's episode you will learn why do payments Fail? If you accept payments online with your business, especially if you run some sort of reoccurring subscription or service, you're going to deal with this problem. It's called involuntary churn. This is when your customer's credit card will get declined. Many business owners think that the reason why it declines is because there are no funds, or what it's called in credit card lingo, insufficient funds. But you might be surprised to hear that only 26% of the time that a charge will be declined is because of insufficient funds. The other 74% of the time is for a different reason, reasons you can control. Credit card payments may fail for various reasons and if you don't shore up these issues, if you don't tie up these loose ends, you're leaving a lot of money on the table. You're losing a lot of customers that may not be able to get their payment to go through or have their membership renewed and then they move on to another provider. Your competition. So in today's lesson, we're going to learn all the different reasons why credit card payments might fail and what you can do to fix it. So let's get into it. Let's get down to business.

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Today's lesson is all about explaining why payments fail. Why do banks decline a credit card charge that your customer is trying to make on your site? For your subscription, for your course, for your membership, for your whatever. I'm going to go through the five top reasons and then I'll wrap up today's episode showing you how you can fix all these problems for the most part and lower your involuntary churn as much as possible. So the number one reason I mentioned at the top of the episode and it's just simply the customer doesn't have enough credit on their credit card or funds in their debit card. They have what is called insufficient funds. According to Paddle's research, Paddle is a company that does payment processing. Only 26% of all failed payments is accredited to lack of funds or insufficient funds. This means the customer literally just needs to pay their bill or put some money in their account so that the credit card charge can go through. There's a fix for this by the and we'll mention the fix for it along with the fixes for all the other reasons why payments fail. The second reason credit cards may fail, banks sometimes will decline a credit card transaction that's not happening in person, that's not being swiped or tapped. A lot of banks will follow the policy of in doubt decline. Now the interesting thing is is that many, if not most online payments are done this way are done by customers keying in their credit card into the website or on the app. Banks are often hypersensitive to fraudulent charges so they will decline it. In fact, here's a statistic that will blow your mind. For every dollar that is actually fraudulent that banks decline, $25 of genuine online payments are trying to go through. So there are so many times this will be declined when it's just simply not fraud and the bank is just going through an algorithm, an automated system and just declining it to be safe. I know this sounds incredibly unfair as a merchant and you're probably dying to know how to fix it. We're going to get to it at the end of the show. A little hint. There are new technologies like Apple Pay and Google Pay that you can add to your website that is equivalent to somebody paying in person. So it wouldn't be declined. But more about that later. Another reason why a payment can be declined is simply because incorrect payment information and this can include the card is expired, they put in the wrong numbers. When you put the credit card on file, the name doesn't match a credit card or is not exactly on the credit card. Or maybe they put a zip code or postal code and it didn't match the postal code that's linked to the card. This is another big reason why cards fail. If any of these are not correct 100%, banks will often decline it. Worrying this could be fraud. This could somebody who has stolen somebody's credit card and is using other information that's not incorrect or in line or information that the actual credit card holder should know and is putting it incorrectly. So they just say, hey, no, we're not taking chances.

Fraud.

There's a fix to it as well and we'll get to it as well. But this is very common. Customers will make mistakes. They're typing on their phone, they're small kind of screens or buttons and they can't really maybe see or maybe they didn't notice they put in the wrong information and therefore when it's time to charge them, it'll be declined and they'll just have a decline code. And they don't really tell you what happened. Especially if your own website or your own UI doesn't pick it up and say, hey, by the way, this is what's wrong with your payment information. The next reason. Reason number four, currency conversion. Let's say, for example, you are charging in US Dollars. The prices of your products are US Dollars and the customer that is buying this product or service, the currency they're using in their bank or in their bank account or their credit card is Euros. This is kind of seen as a flag by banks. Usually banks have no problem with you charging your card in the same currency. But once you start changing currency, you're charging your card on a different currency. Some banks will decline it thinking your card got stolen. You don't live in that country. Why are you buying things from that country? It's kind of old school, but those systems are still in place. Anytime a bank has to do any kind of currency conversion, this is another factor, another reason why they might see it as fraud. This is less of an issue for people who charge in US dollars because it's sort of a universal currency. But it's more of an issue if you are charging in other currencies, euros, Australian dollars, yen. But either way, there is a solution for this and for the last reason, Reason number five, why payments may be declined and there are other reasons, but these are the top five is financial compliance. Online payments are becoming more and more regulated. The way you implement your checkout and payment process needs to be up to standards. One of the latest standards in Europe is sca Strong Customer Authentication. We needed to implement it in our software business recently, about six months ago to make sure that we comply with this regulation. This means that people might have to do a couple extra steps in Europe to verify their identity where they get an SMS and then they put the SMS code and it verifies, yes, they are the cardholder and is a way our system talks with the bank. But that's just one example. There are many examples. There are political reasons. There are sanctions in countries like Iran where they're cut out from payment networks and therefore those customers are not able to buy from certain merchants. So now that we established that around 74% of all declined payments are not insufficient funds, how do we take care of this? How do we solve these problems, including insufficient funds? Well, you can take care of them individually by trying to attack them yourself. Build systems, build software, or you can use what's called a dunning tool. There are several different kinds of dunning tools. There's stuff like Stunning Barometrics has a dunning tool that you can buy. But the one that I would recommend that we're using now is Profitwell's Retain tool. And what this does is that it actually helps solve all these problems. Emailing your customers when information is incorrect, emailing your customers when it's been declined for any reason, or notifying within app, retrying the card at specific times that they know will go through because of what they've seen from other customers. They have a special algorithm and basically all these issues that we covered today can be solved with one of these tools we chose, Retain. But you could do your homework and check it out. Of course these tools are not free. They will charge you a percentage of how much revenue they retain or they actually recover from your delinquent churn. But for many people, they just think that this is all gravy. It's worth them getting a percentage because you're covering so much money. I've actually seen it in action and it's actually pretty, pretty clever and it actually solves a lot of your problems without you doing much work. As a business owner, I want to focus on my product, my customers, my service, this kind of stuff. I just need somebody to take care of it so that it doesn't happen. All those issues are solved. And that's why I recommend you use one of these tools. You can solve these yourselves, hire an expert, build your own kind of software to do it. But it's going to be costly to maintain. It's going to be costly to build. That's why I recommend just to outsource this type of work, this type of solution to one of these solutions.

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Wrap up today's episode. You know, when I went deep to do some research on this topic, I was so surprised about how many reasons your card can be declined from a merchant and how little that piece of the pie, 26%, is insufficient funds. And by the way, if somebody has a card that is declined for insufficient funds, these dunning tools really recover a lot of those failed payments by simply just nudging them, giving them an email, letting them know, sending them an sms, saying hey, we weren't able to charge your card. And more often than not they're like, oh man, I gotta change my card. I gotta use another form of payment. Let me take care of that. Then of course you're gonna have a number of customers that just simply won't update their card and simply would just let the transaction fail. But what you're trying to do is minimize it to only people that don't want your product or service. Everybody else who wants it should be able to be able to pay it. And I think it's probably above 80% of the payments that fail are people that actually want your product and just need a way to pay for it. I hope today's episode was helpful, useful and practical. If you thought so, leave us an Apple Podcast rating and review. We'd love to hear what you think of the show. We love reviews. We read every single one. It helps us keep on going and learn what you love about the podcast. Before I go, I want to leave you with this One of the things you learn in business books or business school is that one of the most critical points in a business is your point of sale, the cash register, where you actually charge the customer. That has to go flawlessly because you don't want any friction here. The customer has already gotten to the point where they're ready to buy. They have the product in their hand. Figuratively, they have their money in their hand or credit card. You need to make this as smooth and easy as possible with zero friction. This should be the easy part. So having these tools in place in the background to help you make sure that these transactions go through with no hiccups is going to help you close more sales. Sales that you worked hard to get, customers you worked hard to market to and attract to your site. Let's not lose all those investments. All right, thank you so much for listening and I'll check you in tomorrow's episode Q and A Wednesday. I'll see you then. Take care.

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