There are few things more annoying and troubling for merchants than declined transactions.
According to MasterCard, decline rates for recurring card billings average 25-30% – that’s a huge amount of revenue being lost. The cost of acquiring a new customer is 5 to 10 times more expensive than retaining an existing one, so this activity has a significant impact on your long-term revenue streams.
Sometimes online payments are declined because the customer is on vacation in another country and tried to perform a transaction, which appears fraudulent. Other times, a transaction is declined because the customer attempted to make too many purchases within a short amount of time. There are many risk algorithms that issuer banks and payment service providers utilize in order to minimize fraud, and sometimes a perfectly valid transaction can appear suspicious due to these algorithms.
See this blog post for more information on understanding online fraud.
How to deal with declined transactions
The best response to a (falsely) declined transaction is to contact the customer directly – by phone or email - to manually finalize the payment and not lose the sale.
It is important to note that declines are not the same as gateway rejections. Declined transactions are blocked by the customer's bank, while gateway rejections are blocked by your gateway settings.
Sometimes you can tell why it was declined by reading the response code, but only the customer's bank can confirm the specific reason.
Possible reasons for declined transactions
Insufficient funds: In some cases, the cardholder may have been spending more freely than he had realized, and the card balance may simply be over its limit. A discussion with the customer will sort this out quickly.
Expired card: If the card is expired, the card issuer will probably decline the transaction. However, it is worth noting that a card issuer can still approve a credit card with an expiry date that has elapsed. Discussing this with the customer and asking him to contact his bank to verify the expiry date, or to ask for approval until their new card arrives, is a good option for turning this into an approved transaction.
International purchases: If a credit card is never or rarely used for purchases outside of a base geographic region and then suddenly is used somewhere else for the first time, it could be an indicator of a stolen card. But it could also be that the card-holder is on vacation or a business trip. In such a case, it may be difficult to contact the card-holder, but people usually travel with cell phones, so even an SMS or WhatsApp message could be used to contact the cardholder to confirm the transaction and make it go through.
Online purchases: A couple of the most effective online risk algorithms are based on geolocation: One algorithm checks that the IP address where the online transaction originates from matches the country of the issuing bank and the address of the cardholder. If the cardholder makes a purchase where 2 of these elements do not add up, then the transaction could be declined. There is another algorithm similar to that which checks the location of the IP address where the purchase is being made and compares it to the billing address of the cardholder. If those don’t match up, then it could result in a declined transaction and another reason to contact the customer to clear up the issue.
Transaction size limits: If a cardholder does not usually use a credit card for big-ticket purchases, especially multiple ones, and then does so for the first time, it could be an indicator of a stolen card. It is a good idea to contact the cardholder to check it out, as it is possible that the transactions are legitimate and you could recover that lost revenue, easily, with one phone call.
Turn that (declined transaction) frown upside down
Transaction declines are inevitable. Online risk management dictates that some businesses are higher risk and therefore become more prone to declined transactions than others; for example, if you sell very expensive products or services, or if you sell to a high percentage of foreign customers, you will see more declines than if you were selling an inexpensive product to local customers.
Even if your business does happen to be prone to declined payments, understanding the reasons why declines happen will help you develop processes to catch them when they occur. With a knowledgeable and well-trained customer service staff, and using reliable payment service providers with good tracking systems in place, you can quickly reach out to your customers to reverse the declined transactions and transform them into profitable sales.