Fighting Friction: Three Ways to Overcome Failed Payments

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Part One of the Accelerating Payments Series

How to prevent failed payments insight article
If you work for a bank, payment service provider (PSP) or other non-bank financial institution, you have no doubt encountered failed payments. Failed payments are estimated to have cost the global economy $118.5 billion in fees, labor and lost business in 2020, according to a LexisNexis® Risk Solutions study.

There are a host of reasons why a payment might fail, including inaccurate or incomplete information, data entry issues due to human error, or poor reference data and validation tools. But the consequences are severe; the same study indicated that around 60% of organizations have lost customers as a result.
As digital commerce continues to increase, so does the cumulative cost of failed payments; however, by taking three simple steps your organization can tackle the root causes. 

1. Understand why payments fail

Whether it’s due to input errors from customers or suppliers, missing information, or outdated data, failed payments can occur from issues anywhere in the payment process. 

When setting up payments, customers or suppliers can easily make errors when entering their instructions. This has increased because of “fat-finger errors” from more people using small-screen devices to enter information. If a single digit of a bank account or routing number is entered incorrectly, the payment may fail. The aforementioned study showed that account numbers (IBAN and non-IBAN) comprised almost one-third of all payment failures and beneficiary details comprised another third.

Insufficient data also contributes to failed payments. With up to ten pieces of information required to set up and process a payment, it is not surprising that customers or suppliers often leave out necessary details. It is unrealistic to expect a customer to know what network(s) the beneficiary bank supports, details of correspondent banks, or which countries require purpose of payment information.

Even after a payment is initiated successfully, it might fail due to the information becoming stale. This issue is particularly common with vendor payments where there may be a significant time lag between collecting payment instructions and initiating the payment, during which time correspondent banks, supported networks, standard settlement instructions or other details may have changed. 

Often the real challenge is finding the issue and fixing the error, yet it is not always immediately clear to the entity that initiated the payment why the bank, for example, declined the transaction. Manually researching the problem is time-consuming and does not scale well over large payment volumes. 

Once a payment fails, it can take up to six days for the initiator of the payment to receive notification. A survey from and Oxford Economics found that 65 percent of merchants do not receive detailed codes on failed payments and over 40 percent do not get any actionable analytics with their payments data. The lack of this information further complicates and delays an organization’s ability to repair errors.

2. Assess the impact

Optimizing the payments process to reduce the number of failed payments should be a top priority due to the financial and reputational impact on a business.

Unnecessary friction during the onboarding process can lead to lost opportunities with customers and suppliers who want to experience a streamlined service. In retail banking, foreign exchange (FX), private wealth, online remittance and other sectors, friction during onboarding can negatively impact new customer acquisition. One industry study by Signicat reported that 40 percent of customers abandon onboarding of mobile banking applications, citing time taken as the reason. Asking customers and suppliers to look for bank addresses and overseas account number formats can create unnecessary friction.

Another impact is that increased operational costs can also hurt the bottom line. With some organizations sending over 1,000 payments per minute, if even a small percentage of those fail, the bank fees, and the cost of manual follow-up to identify and fix errors quickly add up. 

Finally, late payments erode trust and impact customer retention. Delays in payments can cause supply chain issues if products are not shipped on time, and contractual issues may arise if funds are not in place to execute on transactions. Delivering an efficient service will help to retain customers and solidify trust.

3. Remember that prevention is better than cure

Failed payments can be costly in terms of customer churn, fees, and related expenses. The best approach to manage costs while delivering an optimal customer experience is to prevent payments from failing in the first place. Some key principles include:

  • Get it right from the start: Implement an automated, real-time payment information solution that checks the accuracy of information provided by customers and suppliers during payment set up. If there is an error, the customer is immediately notified and asked to recheck the information, so everything is correct before they hit ‘send.’
  • Take the onus off your customers: Don’t expect your customers and suppliers to have all the details necessary for payment setup. Mitigate the risk of information gaps by automatically adding required information, such as standard settlement instructions and bank details, so your customers do not need to worry about it.
  • Maintain correct information: Accounts close, banks merge, addresses change. Where there can be a long time between payment setup and payment initiation – such as supplier payments – it is good practice to cleanse files regularly to proactively correct errors that may have accrued within your database. 

Tools to help fight friction

Defending your organization from failed payments requires innovation, rather than throwing more people at the problem.

Payment validation APIs can arm you against the cause of most failed payments by verifying details against payment and compliance rules in real time, during the payment set-up process. The advantage of this approach is that if an IBAN, ACH number or other information is incorrect, your customers are alerted before they complete the transaction. Alternatively, for batch payments, you can use comprehensive reference data files to cleanse uploaded information before the payments are initiated.

As payment networks become more diverse, the complexity of moving funds will only increase, and so will the chance of failed payments. By implementing these simple tools, you can eliminate the stumbling blocks that cause payments to fail. 

The result? You will avoid unnecessary payment delays, rejections and fees, and your customers will enjoy fast and frictionless service.

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