Dispelling 5 common payment recovery myths

Myth 1

Involuntary churn is not a significant revenue opportunity

Involuntary churn, also known as accidental churn or passive churn, occurs when a legitimate payment transaction fails and the subscriber’s recurring order is canceled, despite their intention to remain subscribed.

The impact of involuntary churn can’t be overstated. In my experience, subscription-focused businesses can lose between 10% and 20% in annual revenue to involuntary churn. In other words, a company with $100 million in recurring revenue could be losing between $10 million and $20 million from failed payment transactions.

Myth 2

Payment service providers have already solved involuntary churn

Payment service providers (PSPs) are companies that enable businesses to accept electronic payments by connecting them to broader financial infrastructure. While it’s true that most PSPs have some form of payment recovery solution, they’re typically less sophisticated than providers that focus solely on payment recovery. In most cases, PSPs employ a “woodpecker” approach—running a failed transaction repeatedly until it is successful.

This strategy has two major problems. First, I’ve found that failed payments recovered this way are more likely to be reported as fraudulent. Second, it increases costs and reduces profits when PSPs charge a processing fee each time a card is run. For example, consider transactions that fail due to insufficient funds. With a woodpecker approach, you would retry a card multiple times with almost no chance of recovering the payment (because there is no money in the account) while racking up processing fees.

A more effective strategy is to employ a tailored approach for each category of failed payments and to run a card only when there is a high probability that the transaction will be successful. For example, consider estimating when the subscriber is likely to be paid and retrying after that date.

Myth 3

In-house recovery solutions are easy to create

While developing an in-house recovery solution is achievable, it’s far from easy and often requires a significant amount of money and time. As a result, it’s more common for large organizations to build an in-house solution.

Here are two things to keep in mind when considering this approach:

1. You need the right hires.

The world of payments is complicated. For instance, there are typically 128 or more data elements associated with every payment transaction that can cause a payment to fail. You’ll need experts in payment, data science, and machine learning to study these elements and implement the findings.

Having worked with multiple payments teams, I recommend putting together an eight-person team that consists of:

• One Head of Payments
• Two Data Scientists
• One Data Analyst
• Two Data Engineers
• Two Machine-Learning Engineers

2. You need patience.

Hiring a team and developing a solution takes time and effort. It can take between 1.5 and 2 years to build an in-house solution, which includes hiring, planning, development, and launching the product. From a business perspective, this wait can be challenging, and you may not see a return on investment for months or even years. Evaluate this option carefully before starting in order to determine if it will be the best long-term approach for your company.

Myth 4

Payment failures are the responsibility of your customers

While customers are responsible for ensuring their payment information is correct and for having enough funds to cover a charge, it’s not accurate to say that fixing payment failures is solely their responsibility. Companies are responsible for the user experience, charge times, and technology glitches within their payments stack, as well as staying up to date with standards and security protocols.

For instance, consider a video game company in Seattle, Washington, that offers digital subscriptions to users worldwide and processes payments daily at 2 p.m. While the payment timing makes sense for the video game company, it appears suspicious in regions with significantly different time zones. In this case, 2 p.m. in Seattle is 2:30 a.m. in parts of India.

In our hypothetical example, the payment is more likely to be flagged as fraudulent and fail because it was initiated from a different country in the middle of the night. The solution in this case would be to run payments during business hours in your subscribers’ local time zones—not to assume the subscriber made an error.

Myth 5

Recovered subscribers will churn anyway

When discussing payment recovery with subscription companies, I’m frequently asked why a business should invest time, effort, and resources in recovery when recovered subscribers will churn anyway.

It’s a valid question, and there is a kernel of truth to the myth. Some subscribers actively choose to let their payments fail instead of canceling. As a result, this category of subscriber is more likely to “officially” cancel their recurring order when their payment is recovered. However, I have found that many subscribers want to continue receiving the product or service they signed up for, but don’t know how to resolve the payment issue or don’t realize there has been a disruption.

Embrace facts over myths.

Payment recovery can be challenging at the best of times, but reducing failed payments will not only boost retention but also increase profits. The challenge is cutting through the maze of myths and taking an intelligent approach to recovery. In my experience, brute-force methods like the woodpecker strategy are inefficient and increase churn; instead, consider a more strategic approach. Remember that complexity often creates opportunity.