Revenue recovery guide to resolve failed credit card transactions for subscription and recurring revenue businesses

Revenue recovery is a payments strategy that businesses operating on a subscription or recurring revenue business model use to recover money from failed or declined credit and debit card payment transactions. When a card payment is declined, the recurring revenue business loses the revenue not only from the failed transaction but also future recurring revenue. Revenue recovery is an important strategy to improve average customer lifetime value (ACLV).

To be successful and ensure ongoing revenue flow, subscription and other recurring revenue businesses must employ robust revenue recovery strategies and best practices. Businesses need to ensure that failed credit card payments are resolved before the customer loses access to the subscription product or service, and therefore may decide to leave the subscription service. Revenue recovery is a key component of successful customer retention management.

With credit or debit cards, consumers assign a card to their account to automatically charge their subscription fee each time it comes up for renewal. Subscription businesses rely on credit cards as a reliable, safe, long-term method of payment. However, a failed card transaction can disrupt the flow of recurring revenue.

Credit card declines happen for any number of reasons: expired cards, temporary lack of funds, a simple error when entering payment details, just to name a few. When a card is declined, it interrupts the connection and trust between the business and the consumer, giving them an opening to explore other options that are available in the market. If the subscriber is disconnected due to a simple payment error, then a lot of effort and resources must be expended in order to attempt to reactivate them.

Credit card declines are not only a financial problem, but also a branding problem. Customer experience is at the core of brand loyalty. Subscription customers want frictionless digital experiences. They do not want to think about payments, especially failed ones that cause disconnection and headaches. They might worry about possible impacts on credit reporting and their credit score. If they encounter such problems or obstacles, they just might leave the subscription service.

Consumers expect satisfying e-commerce experiences that not only offer a good ROI on their investment, but also help them feel safe, appreciated, and heard. Consumers want digital transactions that are seamless, smooth, and trustworthy.

Card transactions fail for a myriad of reasons. Below are the top five causes of failed credit or debit card transactions which can lead to revenue loss and customer churn:

1. Outdated credit card: Occasionally, banks update credit card numbers, sending a new card in the mail. This may be a routine action by the bank, or through a request from the customer. However, customers may sometimes forget to update the card on all their subscription services – until they suddenly notice with frustration that a service has been cut off right when they need it the most. That means the recurring revenue you were depending on has suddenly disappeared.
2. Insufficient funds: When your service attempts to charge a credit or debit card and you are met with an insufficient funds message, it may prevent you from keeping the customer’s subscription up and running. Insufficient funds can be due to a customer not having enough money in their account, having their direct deposit routed to another account or switching banks. It’s not necessarily a sign that they are no longer able to afford your subscription service.
3. Improper credit card details: This is often a problem when it comes to free trials. Customers may sign up for the trial but make a mistake entering a digit in their card number or entering their billing address. A mere zip code error can have a lasting impact. This translates to them getting the free trial and using it, but your business is then unable to charge their card at the end of the trial.
4. Card canceled or not activated: Due to reasons such as theft, fraud, delinquency, missed payments, or inactivity, your customer’s card may have been canceled. Another reason may be a non-activated card. When a new credit card is issued, it will bear a sticker telling the user to activate it by calling or visiting a website. If they skip this step, the transaction may be declined.
5. The purchase appears suspicious: Card issuers are always on the lookout for fraudulent activity. Not only do they want to mitigate fraud as customer service, but issuers are often the ones liable for fraudulent charges. Several types of activity can trigger fraud monitoring, including purchases made outside of the normal geographic area, numerous transactions in a short period of time, abnormally expensive purchases, or large purchases made soon after small ones, since thieves often use this tactic to test a stolen card.

Every credit or debit card transaction is touched by several parties as data is passed from one entity to another. The key players in the credit card approval ecosystem are:

• Customer/Cardholder: The user who has subscribed to a recurring scheduled payment.
• Merchant: The subscription business provides a service and receives payment from the customer on a recurring basis.
• Merchant of Record: If the merchants are not set up to deal with the complexities of processing card payments, they can make an agreement with a merchant of record to be responsible for accepting payments on their behalf.
• Payment Gateway: The software or service that directs customer payments from the merchant site to the payment processor or acquiring bank.
• Payment Processor: Acts as a mediator between the merchant and the acquiring banks. Payment processors may also fulfill the payment gateway function.
• Credit Card Associations: Entities that create credit cards and set the rules that govern transaction terms. The most widely used credit card associations include Visa and Mastercard.
• Issuing Bank: The financial institutions that issue credit cards to consumers.
• Acquiring Bank: A merchant wanting to accept credit card payments will open a merchant account at an acquiring bank.

The following steps describe the flow of a card payment transaction through the card approval ecosystem:

1. The customer places an order on the merchant page or application. Depending on the exact setup, payment information (credit card number, card expiration date, etc.) may be entered directly on the merchant services site.
2. The payment gateway captures the payment data and sends it to the payment processor via a secure, encrypted transfer.
3. The payment processor finishes processing the transaction and transfers the collected card and payment information to the credit card association network.
4. The credit card association (Mastercard, Visa, etc.) submits the transaction to the customer’s issuing bank to either approve or decline the transaction.
5. Once the transaction is confirmed or denied, the issuing bank relays that information through the credit card association back to the payment processor.
6. The payment processor delivers an approval or denial code to the merchant.
7. If the transaction is approved, funds from the issuing bank are transferred to the payment processor, which then transfers those funds to the acquiring bank.
8. The acquiring bank deposits those funds into the merchant account.

If a credit or debit card payment transaction is declined, the business can take steps in an attempt to recover the failed payment and prevent the customer from leaving the subscription service:

• Basic retry logic: When a transaction fails, the business can resubmit the transaction a few days later. Most subscription management software platforms will automatically retry failed transactions, but there is rarely much insight informing the retry logic. One platform might retry every day until the end of the month, even though card issuer guidelines call for limited retry attempts. Another platform might retry at weekly intervals. Typically, the retry strategy is “blind” to the cause of the failure, the timing, and the players involved in the transactions. The smarter approach is to utilize a service that optimizes retry logic through data-based intelligence and expertise to get the best results.
• Account updating: Account updater services provide information that can be applied to a transaction to increase its chance of success, such as data on expired cards. Many businesses may not know when and how often to query the services for updates. For example, updates can take more than a week to arrive. Some companies may fail to take this into account and will end up canceling the customer’s service too soon and losing long-term subscribers unnecessarily.
• Building a “saves” team: Some companies set up a dedicated saves team to reach out to customers in the hope of manually resolving payment issues. However, this may only be cost-effective for high-ticket subscriptions, as costs can be prohibitive. Also, informing subscribers of a credit card issue is unpleasant, and not conducive to building a long-term customer relationship.

Knowing how to successfully recover a failed payment by resubmitting the transaction is a science and requires a learning process, experimentation, and expertise. Below are some best practices:

Study retry patterns: Instead of relying on robotic retry logic, study the retry successes and failures. What works and what does not work? Analyze the credit card issuer error response codes. Experiment and look for patterns. Repeat the analysis every month to isolate uncharacteristic and exceptional results. This activity will help get the most from the limited retries that credit card issuers prefer you do not exceed.

Experiment with retry patterns: Look for the best days of the week and the best date in the month to retry cards. Hint: it’s not Thursdays in countries where payday is usually Friday or the 31st of the month when payday is usually the 1st. Instead, explore over time to find a pattern that delivers better results for the customer base. Remember, as every business is different, what works best for others may not necessarily work best for you.

Know when to try harder: Some subscription businesses routinely retry cards more times than card issuers recommend, which may raise concerns with payment processors. But it can be smart to retry a number of times for some cards, as long as the business keeps an eye on the cost and the success rates. As the business learns more about response codes, they may gain the insight needed to know when it makes sense to retry a transaction more than the recommended times.

Bring in the experts: Once the business has exhausted all of the best retry efforts, it is suggested that it is time to call in the experts.

Even the smallest increases in payment recovery and prevention of lost subscribers can have a large impact on the company’s recurring revenue stream. For example, a modest increase of just 5% in monthly customer retention rate can increase your subscriber base by 40% after 24 months. That is why it is important to carefully track subscription metrics such as churn rate and subscriber ROI (sROI). Refer to our retention ROI calculator to see how small increases in payment recovery and customer retention can result in substantial gains over time.