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Payment Insights

How improving payment recovery reinforces your financial health

The Butter Team

December 4, 2023

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Larger businesses often view payment failure as a minor operating cost, but it’s much bigger than most merchants realize. The costs in fees and lost business is estimated at $443B – an astronomical amount that continues to grow. Most companies can expect failed payments to make up more than 10% of ARR.

Building broader awareness of your organization’s financial health is the first step to recovering more failed payments. But recovering that lost revenue is impossible if your retry strategy can’t adapt to fit your needs. 

Whether you know what type of errors cause you the most grief, or only just realized you have a failed payments problem, let’s explore how investing in payment recovery cuts unnecessary costs and boosts revenue.

Key takeaways:

- The difference between “hard errors” and “soft errors”

- 3 connected challenges of solving failed payments

- How proactive strategies improve financial health

Focusing on “soft errors” leads to compounding challenges

When a payment fails, it falls into one of two categories: hard errors and soft errors. 

- Hard errors are failed payments that should never be retried — such as a stolen credit card or confirmed fraud.

- Soft errors include failures that can be recovered, like processor errors or downtime with the payment service provider (PSP).

Because up to 90% of payment failures are due to soft errors, companies instinctively retry payments without considering the financial impact of failed retries. And thanks to new penalties for excessive retries, PSPs like Stripe automatically block retries after 15 unsuccessful attempts.

To best address soft errors, you need to understand what their error codes mean — which is not an easy feat. Dozens of issuer error codes from individual issuing banks get combined into one type of error code by the PSP. These consolidated PSP “roll ups” classify about 10% as “generic failures,” but some will be retriable (due to configuration error), and others may be genuine fraud. Without a better solution, parsing between the two requires you to know the rules of each card issuer or bank.

But even with all of that knowledge at your disposal, you’re still facing three interconnected challenges with failed payments:

Challenge #1: Metadata differences between banks create unnecessary errors

Even manually providing payment data may not work because each bank formats this data differently.

Each payment has as many as 128 data elements within each authorization attempt. But even with a simple element like a zip code, you might not know whether to format it in five digits or five plus four. Despite being such a small piece of data, that might be the difference between a failed transaction and a successful one.

Challenge #2: Poor retry timing leads to even more payment failures

Another issue created by failed payments: excessively retrying payments is an easy way for PSPs to block future charges once you reach their designated limit. And that doesn’t include the fees you pay your PSP every time you attempt a payment. Successful transactions carry a higher fee (on average) than failed ones, but even failed attempts ensure a higher ROI for PSPs. So they’ll keep trying, even if the odds of success are low.

Choosing to automatically retry or stick with the same time of day doesn’t guarantee success like a diligent, hands-on approach. To strategically time your retries, you need to know exactly when to run a failed transaction to maximize the likelihood of confirmed payment. 

Challenge #3: Transaction authorization rate affects the likelihood of retry success

Each failed payment also impacts your transaction authorization rate (TAR) — the percentage of transactions that are accepted by the customer’s bank. Banks and PSPs view a TAR below 80% as an indicator of potential fraud or shady business practices, leading to more failed payments.

This is particularly significant because as high-value customers experience a decline, they are less likely to buy from you in the future and may opt for a competitor instead.

When your TAR goes down, new users are more likely to have their payments fail, which leads to lower top-line ARR since those customers are unable to enter the funnel. To make matters worse, current users are more likely to have their payments fail as well, leading to — you guessed it — more accidental churn

By attempting to solve payment failures with repeated retries, merchants inevitably push customers away.

Proactive retry strategies improve financial health

A strategy that targets all three of these interconnected challenges will increase your ability to recover payments and could save you millions in annual fees. 

Understanding the difference between error types makes you aware of payments that slip through the cracks for a good reason, such as hard errors due to lost credit cards. It also makes it easier to identify failed payments due to soft errors, like insufficient funds — the ones you can recover.

Being proactive about your organization’s financial health unlocks new growth areas. From a high level, reducing PSP fees from failed payments directly boosts ARR. But on a customer-by-customer basis, not all recovered payments increase LTV – making a targeted strategy particularly crucial.

Your perfect strategy needs a platform that can identify the trends in your unique transactional data. That’s where Butter can help.

Butter reduces accidental churn caused by failed payments

Turning around a high volume of failed payments is an enormous task. But with Butter, you can recover more payments faster and boost the health of your business.

Butter uses a proprietary machine learning model to identify the cases that will have the biggest impact on revenue and simplifies the recovery process. Our algorithm targets payments that are:

  • Meant to be recovered (unintentional soft errors for a standard purchase)
  • From customers with higher LTV and likelihood of recurring payments

Instead of attempting to recover payments from customers likely to churn, you focus on increasing TAR. You’ll keep your PSP fees low and bring in more charges from the top of the funnel, stopping failures before they happen. With a lower number of chargebacks and refunds, banks will recognize your company’s financial health and maturity, which means easier and more consistent payments for all customers.

Since 2020, we’ve built a patent-pending solution that returns 5% or more of top-line ARR to our clients by recovering failed payments. Customers like care.com partnered with us to simplify the road to financial health.

See exactly what Butter can do for your business with a free payment health assessment. Contact us today to get started!

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