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Understanding the Complete Cost of Payment Failures

February 21, 2024

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You need to prioritize payment acceptance rate optimization to stay ahead of the competition. Here’s how to minimize payment failure rates.

Failed payments cost the global economy a whopping $118.5 billion annually.

Payment failures, due to rejection by the beneficiary bank or intermediaries, trap large amounts of liquidity every day. There are several other contingencies created by inefficiencies in payment processes. While most FIs recognize that there is a certain cost to every failed payment and associated processes, few can gauge the size of the hole such transactions create in their cash flows.

Impact of Broken or Failed Payments

Every time there’s a failed payment, it equals dollars lost, clients lost – and a lot of time from the customer service side to try and get clients back,” pointed out Ronald Wong, Head of Wholesale Payments Digital Design at JPMorgan Chase.

Wong’s statement emphasizes that while on the surface, a business only loses the cost incurred in settling a transaction, significant expenses originate from each failed payment. They erode profitability and performance in the competitive business climate. Here’s a deeper dive into the indirect costs of failed payments:

Repair Costs

Certain transactions are rejected by the correspondent or an intermediary bank, which can be repaired and resubmitted. This requires assessing the request, investigating the reason for failure, fixing, and resubmitting. Whether this is done manually or automatically, resubmission costs are added to the provider’s expenses. Plus, the change in exchange rates, if the payment under consideration is cross-border, weighs on the payment services provider.

Staff Workload

Customer service and compliance teams of payment solution providers have to pay additional attention to broken payments. They may initiate procedures to repair the transaction by communicating with the client or

85% of organizations report increased staff workload due to failed payments.

informing the client and explaining why the request cannot be resubmitted. All this increases man hours spent on a single payment request, costing the company precious workforce time and energy. This may even become frustrating, affecting the motivation levels of the employees involved.

Customer Churn

85% of organizations believe that a broken or failed payment adversely affects customer experience.

59% of organizations have lost customers due to failed payments.

While repair and labor costs are easy to estimate, the losses incurred due to customer churn are difficult to measure. Failed instant gratification or suboptimal performance pushes customers away. Today’s customer is quick to switch to another service provider after a single subpar experience. Often, these are the competitors of the customer’s previous company. Additionally, these customers end up giving the brand adverse publicity that hampers public image and business alike.

Navigating Payment Failures

Did you know that 48% of customer churn  for a membership-based business is due to payment failure? If you are a payment enabler, and merchants associated with you bear such losses, they are bound to look for alternatives.

Minimizing and managing broken payments is a continued challenge for FIs of all types and sizes. Precisely evaluating what they cost the company is essential to grasp the urgency of improving payment processes.

A Change in Mindset and Technology Stack

Acceptance of failed payments as a “cost of doing business” in this industry has to be done away with. Since payment accuracy impacts speed, cost, and payment acceptance rate, it is critical to customer satisfaction and, hence, retention. The fierce competition leaves no room for error, more so if it affects the customer experience.

80% of organizations take action only after the payment failure rate crosses the 5% mark.

The current average global STP rate of 26% highlights that there is a lot of untapped potential in this area.

 

Banks prefer straight-through processing (STP) because it accelerates payment flow, strengthens validation, and minimizes manual intervention and error. STP, thus, improves success rates. It enables the verification of payment data at every step of the flow as a transaction progresses. Speed and reduced manual intervention are among the top 3 elements of effective payment processing.

Additionally, FIs can leverage analytics and use payment reference data to locate bottlenecks and causes of repeat failures to further enhance the payment validation process.

Adopting API-based solutions improves payment accuracy, lowering failure rates significantly. The plug-and-play technology enforces industry standards and best practices across the payment validation and authentication processes. Advanced APIs enable the automation of customer-centered verification and help prevent Authorized Push Payment (APP) fraud. A simple extra step of asking the user to recheck the information entered before confirming the payment increases its possibility to go through without any issue. Since the process takes place in the background, it does not weigh on the performance or user experience.

Most Common Payment (Mis-)Information Issues Causing Payment Failures

Enhanced payment success translates into reduced failure overheads and elevated customer experience. Increased customer retention drives revenue growth and bolsters profitability. The next era of payments is expected to be dominated by CBDCs, cross-border transactions, and, of course, customer preferences. Proactively adopting cutting-edge technology and practices can position your financial institution, bank, or credit union to thrive in the emerging payment landscape. Learn how the experts at Opus Technologies can drive payment modernization and failure mitigation efforts to minimize losses and elevate customer experiences.

 

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