A failed card payment at the point of sale is obvious to the consumer: a credit card has been maxed out, a card number has been entered incorrectly, or something else within the customer’s control has occurred. When it happens in person, the customer has the option to provide an alternative payment method in real-time.
But a once-successful payment method that fails months later with a subscription can be trickier to correct. For businesses, those failed payments can add up and cost the company in more ways than just money.
It’s critical to have an overall strategy to recover failed payments for subscriptions. Relying heavily on customer interactions has been a common tactic of the past, but this creates a negative experience for customers and reflects poorly on the brand.
There is more opportunity to recover failed payments when companies use technology like automation and machine learning. With these solutions, businesses are able to retain control as they’re not dependent on the customer to correct the problem.
Reasons Recurring Payments Fail
Payments that may have previously worked may suddenly fail, leaving payments teams struggling to address the processing issues. Cards can expire or have their limits maxed out, but other reasons, both technical and nuanced, can exist behind the scenes and cause a payment to fail. These can include:
- The transaction does not include the necessary data points
- Global regulations and privacy laws change
- The account may have insufficient funds
- A payment may fail due to the timing of when it is processed
What Is the Dunning Cycle?
Dunning comes from the 17th-century word “dun” meaning the demand of a debt payment. In modern times, dunning refers to the process of asking customers for money owed. It includes all forms of communication with delinquent accounts, from letters notifying the customer that the account is past due to an automated email that a payment has failed. The process can escalate to demand letters, phone calls, or legal action. For subscriptions, the impacts are immediately felt when the customer no longer has access to the product or service.
While these more severe actions work for some businesses, subscription-based companies have to approach dunning more gently. After all, the last thing you want is a customer that outright churns rather than attempt to correct the failed payment.
During your dunning cycle, you may apply a series of tactics (which we’ll discuss below) to reduce your failed — and now overdue — payments. Many of the tactics can be automated. While you may need to deem the subscription uncollectible at some point, you’ll follow all of the steps outlined in your dunning strategy before reaching that point.
Your strategy is critical, as is the speed with which you apply different tactics. In a tight economy, cash is essential to business operations. Legitimate payments that fail for the reasons mentioned previously can lead to involuntary churn, costing your company around 5% ARR or more, on average.
The Impact of Payments Recovery on a Business
A well-managed dunning cycle can have a significant impact on the business as a whole. If you can collect on the failed payments and past due accounts, you can increase your customer retention and the associated MRR. If the customer churns — which some will — it should be because they decided to cancel the subscription and not due to a payment processing failure.
An ineffective payments recovery process is leaving money on the table. The more you automate your recovery tactics, the less you’ll need to rely on internal resources, which, by extension, will lead to lower operational costs.
Subscription payment interruptions can also cause issues for companies shipping physical products that may have to delay until payment is collected. The more efficient you are at payments recovery, the more you’ll avoid inventory delays or other backlogs in your operations.
4 Tactics for Recurring Payments Recovery
Due to the variety of customers within your base and the wide number of reasons payments can fail, it might make sense to apply different tactics within your dunning cycle. Some will have a greater impact than others, so you’ll want to closely monitor the success of each and double down on what’s most effective.
1. Customer Account Updates and Engagement
A common way to recover a failed payment is to notify the customer, which often works if the payment failed due to something within the customer’s control, such as an expired payment method. With Account Updater from some of the major credit card companies like Visa and MasterCard, the card information is automatically updated, though participation in this program comes at a cost to the merchant.
Automation can simplify the messaging process since you’re not reaching out to customers individually. Companies tend to over-invest in automated communication because it’s easy, but direct customer messaging isn’t always the best approach since customers can simply ignore the message or might miss it. Repeated messages might also start to annoy the customer, reducing the effectiveness of this tactic.
Even if a text or email brings the issue to the customer’s attention, it’s still an inconvenience to the customer. They expect the subscription experience to be seamless and now their day is interrupted to update payment information.
2. Internal Payments Team
Most companies don’t want to spend their time and resources improving payments infrastructure when they can make their core product better. For example, Spotify strives to improve their UI and expand their catalog of music and Netflix wants to spend their time working on their recommendation algorithm.
However, even companies with the most motivated teams struggle to “fix” failed payments because the problem is dynamic - constantly evolving with thousands of error codes, hundreds of issuing banks and dozens of payment processors. An internal payment recovery team would need to rely on data scientists, engineers, and product managers to play catch up and adapt to the multi faceted reasons payments fail. Smaller, growing companies may not be able to afford such resources and larger companies could pay millions to create and deploy what end up being basic rules-based recovery tactics.
3. External Vendors/Tools for Payment Retries
Companies can opt to partner with a vendor or third party for payment retries, removing the burden on internal teams. In addition, payment gateways like Stripe and Paypal offer built-in recovery solutions.
With both these partnership options, you will most likely be recovering payments using basic time-based, batch retries. Essentially, vendors will re-try a batch of failed payments at the same time at set time intervals (e.g. retry every 2 days at 11 am). This approach is not optimized for revenue recovery as each payment failed for a specific reason that can include timing, data or regulations and using a one size fits all will cause many of them to fail again. For example, you might want to time a retry on a specific day of the month that you know is a typical payday if the payment was returned due to insufficient funds. The day will vary by region and could even be impacted by time zones within a country.
Furthermore, timed, batched approaches are by definition devoid of flexibility and customization. Businesses that need quick recovery, such as those with fresh, perishable goods, can suffer the consequences of waiting for retries to “begin” after the set time frame has transpired.
To truly maximize recovery, the strategy should be dynamically optimized for the individual transaction, not for batches.
4. Artificial Intelligence and Machine Learning
The most effective method for payment recovery will optimize for all factors: data, regulations, and timing. These external partners rely on artificial intelligence to spot trends and machine learning to identify the best way to collect at an account level.
Rather than applying tactics across the board, vendors using AI/ML technology will identify the necessary data or specific payment retry timing, processing unlimited transactions individually.
Such technology solves the issues with other tactics for payments recovery. The customer isn’t involved, you don’t have to rely on internal resources, and more payments can be recovered than relying on batch payment re-processing. You’ll recover subscription revenue more quickly and with fewer payment retries.
It’s the difference between a static approach and a dynamic one. Static approaches (automated messages, addressing specific errors as they’re uncovered, timed retries) will always be limited by a linear set of “rules.” AI and ML don’t have the same constraints, since each transaction is handled uniquely and in the context of a large dataset that informs the technology. Each new payment challenge can be identified and addressed, without additional human intervention.
The Role of AI/ML in Automated Payments Recovery
AI and ML technologies have gained momentum over the years because they can do what humans can’t: process enormous volumes of data, glean insights, and improve upon their own capabilities. The best data scientists on the most well-resourced teams in the world will still be limited by scalability. As the company grows, so will the number of failed payments and, by proxy, the number of reasons payments fail.
AI and ML payment recovery technology can solve these problems, leading to quicker resolution of failed payments and a reduction in involuntary churn.
To see how involuntary churn affects your business today, contact us for a free Payment Health Analysis.