Unlock higher payment approval rates: a guide for online growth

In the competitive world of e-commerce, lost sales due to declined payments can be a significant obstacle to growth. Every declined transaction represents not just lost revenue, but also a potential loss of customer trust and future business.

That's why achieving and maintaining high payment approval rates is a critical factor for online businesses looking to scale and succeed. This is what separates the successful e-commerce businesses from the ones that fail. Optimizing approval rates should be a primary concern. For many businesses, increasing approval rates is a matter of survival, and every percentage point can result in massive revenue gains.

This guide provides a roadmap for businesses seeking to understand the intricacies of payment approvals and implement strategies to maximize their success rates. It is also important to realize that not all payment platforms are created equal.

While one platform may be right for one business, a different platform will be right for another. Many can't handle the throughput that is required, and rely on outdated legacy payment software.

Understanding the payment approval process

The journey of a payment transaction from initiation to approval is a complex process involving multiple players and checkpoints. Understanding this process is fundamental to identifying potential bottlenecks and implementing strategies to improve approval rates. While it may seem instantaneous to the customer, there are many different factors that go into each and every payment.

A typical online payment transaction begins when a customer initiates a purchase on a merchant's website. The payment information, often encrypted or tokenized, is then transmitted to the merchant's payment gateway. From there, the transaction details are routed to the acquiring bank, which is the merchant's bank, and then to the card network, such as Visa or Mastercard.

The card network, in turn, forwards the transaction information to the issuing bank, which is the customer's bank. There are many different factors that determine whether a transaction will ultimately be approved or declined.

The role of issuing banks

The issuing bank plays a crucial role in the approval process, as it is responsible for verifying the customer's identity, checking the availability of funds or credit, and assessing the risk associated with the transaction. Issuing banks employ sophisticated fraud detection systems that analyze various data points, such as the transaction amount, location, and the customer's spending patterns, to determine the likelihood of fraud. This is why some transactions may go through, while others will not, even from the same merchant.

If the issuing bank deems the transaction to be legitimate and the customer has sufficient funds or credit, it will approve the transaction and send an authorization code back through the network to the merchant. However, if the issuing bank suspects fraud, detects insufficient funds, or identifies any other issues, it will decline the transaction. The merchant may have some recourse, depending on the specific circumstances, or they may simply have to take the loss.

Common reasons for declines

Payment declines can occur for a variety of reasons, ranging from simple errors to suspected fraud. Some of the most common reasons for declines include insufficient funds, incorrect card details, expired cards, and suspected fraudulent activity. Many times, a customer may have no idea why a transaction was declined.

In some cases, declines may be due to technical issues, such as network outages or problems with the payment gateway. While these types of declines are often temporary and can be resolved by retrying the transaction, they can still negatively impact the customer experience and potentially lead to lost sales. In other cases, declines are not errors at all, and are made by the issuer to protect the customer, and the merchant. The goal is to minimize declines that are occurring in error.

Understanding the specific reasons for declines is crucial for implementing effective strategies to improve approval rates. The latest trends and challenges in digital payments are always evolving, with new payment types, such as BNPL and crypto, becoming more prevalent.

The impact of false declines

While declining fraudulent transactions is essential for protecting both businesses and consumers, legitimate transactions can sometimes be mistakenly flagged as fraudulent, resulting in what are known as "false declines." False declines can have a significant negative impact on businesses, leading to lost revenue, increased customer frustration, and potential damage to brand reputation. There are also many downstream effects to these declines, as customers will lose faith in the merchant, and may avoid shopping there again. The merchant may lose all future revenues from that potential customer.

Studies have shown that a significant percentage of online transactions are declined, and a substantial portion of these declines are believed to be false positives. This represents a significant opportunity for businesses to recover lost revenue by implementing strategies to reduce false declines and improve overall approval rates. The importance of maximizing approval rates cannot be overstated, as they can make or break an online business.

The customer experience

From a customer perspective, encountering a false decline can be a frustrating and embarrassing experience. Customers may abandon their purchase altogether, switch to a competitor, or contact customer support, increasing operational costs for the business. In some cases, customers may even perceive the decline as a reflection of their own creditworthiness, leading to negative emotions and a reluctance to engage with the brand in the future. It may take a long time for a merchant to regain a customer's trust after an experience like this.

Furthermore, false declines can damage customer loyalty and reduce the likelihood of repeat purchases. Customers who experience a false decline may be less likely to trust the merchant's payment process in the future, leading them to abandon their shopping carts or seek alternative payment methods. This is why it's so crucial for merchants to optimize their payment processes. By implementing strategies to reduce false declines, businesses can improve the customer experience, build trust, and foster long-term loyalty.

Strategies for improving approval rates

Improving payment approval rates requires a multifaceted approach that addresses both technical and operational aspects of the payment process. By implementing best practices and leveraging advanced technologies, businesses can minimize declines, reduce false positives, and ultimately improve their bottom line.

One key strategy is to optimize the payment gateway and ensure that it is properly configured to handle various transaction types and card networks. This may involve working closely with the payment gateway provider to fine-tune settings, implement fraud prevention tools, and ensure that the gateway is up-to-date with the latest industry standards. Sometimes, however, it is better to simply switch to a new gateway. This will help to avoid the issues caused by payment system outages.

Data quality and accuracy

Ensuring the accuracy and completeness of transaction data is another crucial factor in improving approval rates. By providing detailed and accurate information to the issuing bank, businesses can increase the likelihood of the transaction being approved. This includes providing accurate billing and shipping addresses, customer contact information, and detailed product descriptions. A large portion of declines can be traced back to data entry errors.

In addition, businesses should implement data validation checks at the point of entry to catch common errors, such as incorrect card numbers or expiration dates, before they are submitted for authorization. By ensuring that the data is accurate and complete, businesses can reduce the likelihood of declines due to data quality issues.

Fraud prevention tools

Leveraging advanced fraud prevention tools can also help to improve approval rates by reducing the number of legitimate transactions that are flagged as potentially fraudulent. These tools may include device fingerprinting, behavioral analytics, and machine learning algorithms that can identify patterns and anomalies indicative of fraud. There are many different types of fraud prevention tools, and not all will be appropriate for every business.

By implementing these tools and fine-tuning their settings, businesses can reduce the likelihood of false declines while still maintaining a high level of security. It's important to strike a balance between fraud prevention and customer experience, as overly aggressive fraud filters can lead to excessive false declines and customer frustration.

A/B testing and optimization

Continuously monitoring and optimizing the payment process is essential for maintaining high approval rates over time. This involves analyzing transaction data to identify patterns and trends, conducting A/B tests to evaluate different strategies, and making adjustments as needed to optimize performance. Improving payment authorization rates is an ongoing process, and requires constant vigilance.

For example, businesses may find that certain transaction types or customer segments have higher decline rates than others. By identifying these patterns, businesses can implement targeted strategies to address the underlying issues and improve approval rates for those specific cases.

Similarly, businesses can experiment with different fraud prevention settings or payment gateway configurations to find the optimal balance between security and customer experience. There are also operational concerns, such as whether to use an internal team, or to outsource this work to a third party.

The role of tokenization and account updaters

Tokenization, as discussed in the previous article, can also play a significant role in improving approval rates. By replacing sensitive card data with tokens, businesses can reduce the risk of fraud and increase the likelihood of transactions being approved. This is particularly relevant for recurring payments or subscriptions, where card details are stored on file and used for multiple transactions over time. This can also help to improve authorization rates, particularly when dealing with repeat customers.

Account updates are another valuable tool for improving approval rates, particularly for businesses that rely on recurring payments. Account updates automatically update card details when a customer's card is reissued or replaced, reducing the likelihood of declines due to outdated card information. Account updates can be implemented on most major card networks, and can result in huge revenue gains for merchants.

Leveraging network tokens

Network tokens, provided by card networks such as Visa and Mastercard, offer an additional layer of security and can further improve approval rates. Nework tokens are unique to a specific merchant and device, making them even less valuable to fraudsters and reducing the likelihood of false declines. They are also dynamic, and can change over time, making it even more difficult for fraudsters to exploit them.

By implementing network tokens in conjunction with merchant-specific tokens, businesses can create a layered security approach that maximizes protection against fraud while minimizing the impact on legitimate transactions. This can be particularly beneficial for businesses that operate across multiple channels or have a high volume of repeat customers. There is constant discussion and commentary on the impact of new technologies, including through publications, and the evolving role of organizations such as the U.S. Payments Forum.

The importance of industry collaboration

Improving payment approval rates is not just a challenge for individual businesses, but also for the payments industry as a whole. Collaboration between merchants, payment processors, card networks, and issuing banks is essential for developing and implementing effective strategies to reduce fraud and minimize false declines. There are many different organizations that are dedicated to facilitating this collaboration, such as the U.S. Payments Forum.

Industry forums provide a platform for stakeholders to share best practices, discuss emerging trends, and collaborate on solutions to common challenges. These forums often produce valuable resources, such as white papers, case studies, and guidelines, that can help businesses navigate the complexities of the payments landscape. The importance of these forums is growing, and they are receiving attention from publications.

The role of regulators

Regulators also have an important role to play in shaping the payments landscape and promoting best practices for fraud prevention and payment optimization. Regulatory bodies can provide guidance on data security standards, consumer protection requirements, and best practices for handling payment disputes.

In addition, regulators can help to facilitate industry collaboration and information sharing by convening working groups, issuing requests for information, and promoting dialogue between stakeholders. By working closely with industry and consumer groups, regulators can help to create a more secure and efficient payments ecosystem that benefits all participants. The importance of these groups is highlighted in publications, which discusses the impact that regulation can have on payments.

The future of payment approvals

As the payments landscape continues to evolve, new technologies and trends are emerging that have the potential to further improve payment approval rates and enhance the customer experience. These innovations offer new opportunities for businesses to optimize their payment processes and reduce friction at the checkout. This is particularly crucial in emerging markets.

One such trend is the increasing adoption of Strong Customer Authentication (SCA) requirements, particularly in Europe under the Payment Services Directive 2 (PSD2). SCA mandates the use of multi-factor authentication for online transactions, adding an extra layer of security and reducing the likelihood of fraud. There are many different types of SCA tools and platforms.

The rise of alternative payment methods

Alternative payment methods, such as digital wallets and account-to-account payments, are also gaining popularity and have the potential to impact approval rates. Digital wallets, such as Apple Pay and Google Pay, often use tokenization and biometric authentication to secure transactions, reducing the risk of fraud and potentially improving approval rates. There are many companies that are competing in this space.

Account-to-account payments, which allow customers to pay directly from their bank accounts without the need for a card, are also gaining traction, particularly in Europe. These methods can offer lower transaction costs and faster settlement times, while also potentially reducing the risk of declines due to card-related issues. These types of payments can improve customer loyalty, and increase acceptance rates.

The role of artificial intelligence

Artificial intelligence (AI) and machine learning are also poised to play an increasingly important role in payment approvals. By analyzing vast amounts of transaction data in real-time, AI-powered systems can identify patterns and anomalies that may indicate fraud, while also learning to distinguish between legitimate and fraudulent transactions more accurately over time.

These technologies can help businesses to fine-tune their fraud prevention strategies, reduce false declines, and improve overall approval rates. In addition, AI can be used to personalize the payment experience for customers, offering tailored recommendations and optimizing the checkout process based on individual preferences and behaviors. AI is also discussed heavily in publications, which analyzes trends in payment technology.

Conclusion

Unlocking higher payment approval rates is a critical imperative for online businesses seeking to maximize revenue, enhance the customer experience, and foster long-term growth. By understanding the intricacies of the payment approval process, implementing best practices, and leveraging advanced technologies, businesses can significantly improve their approval rates and reduce the impact of false declines.

However, achieving optimal approval rates is not a one-time effort, but rather an ongoing process that requires continuous monitoring, analysis, and optimization. As the payments landscape continues to evolve and new threats emerge, businesses must remain vigilant and adapt their strategies accordingly.

By embracing a proactive, data-driven approach to payment optimization and collaborating with industry partners and regulators, businesses can build a more secure, efficient, and customer-friendly payments ecosystem. In doing so, they can unlock new opportunities for growth, build stronger customer relationships, and thrive in the increasingly competitive world of online commerce.