Credit card issuers don’t usually have enough data to make the best choice when accepting/declining a charge. They are typically conservative in protecting themselves and so when faced with a ‘grey area’ where the risk isn’t clear, they reject more than they need to. Obviously, no one can easily eliminate fraud or customers trying to use a card with insufficient funds. However, if card issuers better recognise when the risk is not quite as high as it seems, more transactions could be successfully cleared.
Issuing banks are somewhat disconnected from the data on individual consumers who might hold multiple credit cards with different financial institutions. As a result, while an individual might have exceeded their credit limit on one card and therefore might be declined, the reality is that they are not actually a credit risk. Perhaps, for example, they simply exhibited poor management of their funds that month.
Ultimately, this situation is most frustrating for the merchant, as this decision is in the hands of the issuer and out of their control. And, of course, the merchant has much more to lose as they have invested heavily in customer acquisition and misses out on the full value of the sale.
Morgan Stanley confirms the ecommerce boom in a quote by equity analyst, Brian Nowak. Nowak sees ecommerce reaching 27% of retail sales by 2026: ‘Across the world, we have yet to see a ceiling for ecommerce penetration’. With more and more people purchasing online instead of in brick-and-mortar stores, the security advantage of a merchant being handed a physical card disappears. When it’s all digital, and all you need to do is copy someone else’s credit card number, fraud becomes much easier to execute. And as fraud rates increase – Kevin.eu estimates that ‘in the European Economic Area alone, failed payments are estimated to cost more than USD 40 billion per year in fees, labour, and lost business’. – fraud prevention tools become more and more conservative, resulting in more false positives than ever before.
Merchants often (and should!) process transactions with multiple acquirers for redundancy and to achieve better results. However, this optimisation strategy has marginal incremental benefit and will not deliver the step change required to really lift the authorisation rate.
One key step is to analyse your declined data on an issuer and BIN level and reach out to issuers and see how you can collaborate to improve performance.
Together, you can consider the status quo and try to create a scenario in which the conservative, careful approach doesn’t kick in immediately and trigger a decline when confronting a ‘grey area.’
To really drive change, merchants should strive to engage and collaborate with issuers, sharing data where possible, and possibly engaging commercially to participate in the cost of risk that an issuer would have to take. In short: reduce declines by leveraging the supplementary data that can lead to more accurate analysis.
Today, only very large ecommerce merchants and enterprises have a close relationship with credit card issuers who process their transactions. It’s frustrating, because there’s no real obstacle to better collaboration for a merchant of any size, especially when it’s in both sides’ interest to stop leaving money on the table and sending customers to other credit card companies and merchant sites. These merchants can develop ways to share data (they often know a lot more about the transaction) to create a clearer picture, as well as to compensate the issuers for the risk they would incur in approving above their existing appetite.
Yes. The merchant can help the issuer absorb periodic NSF declines by compensating the issuer with a small premium. It helps mitigate the cost when things don’t go well.
Well, yes – that’s what Kipp does. Our platform automates a rule-based Bid/Ask process to align the financial comfort zones of both the issuer and merchant in cases where the issuer is about to decline a transaction. Assuming they can find a mutually acceptable price for the merchant to pay the issuer — usually a couple of percentage points — the transaction goes through, and the issuer, merchant, and customer are all pleased to have completed the transaction.
About Chanan Lavi
Chanan is an experienced payment expert. Before founding Kipp, he held senior positions that included e-payments management, optimisation, and Business Development roles for leading merchant and financial companies. Chanan holds an MA in Economics and MBA from the Jerusalem Hebrew University.
About Kipp
Kipp, is a global fintech company enabling issuing banks and merchants to jointly approve legitimate transactions that are currently being declined. The company's platform optimises the traditional payment model for increased revenue, customer satisfaction, and loyalty. Kipp's founders and team are fintech veterans and payment optimisation professionals.
Every day we send out a free e-mail with the most important headlines of the last 24 hours.
Subscribe now