A customer attempting to make a purchase with a credit or debit card starts a (usually) speedy authorization process that’s verifying a number of customer data points in the background.

• When a customer enters their card information either in-person, online or over the phone, the merchant sends the authorization to their acquiring bank
• The acquirer then sends the request to the credit card issuer to check if the customer’s card is valid, and whether they have enough funds to make the purchase
• If there are sufficient funds to cover the purchase, an authorization hold is put on the customer’s credit card for the dollar amount of the sale
• An authorization code is then sent back to the acquirer letting them know whether the transaction has been approved or declined
• The acquiring bank then responds to the merchant with the authorization code, letting them know whether the authorization has been approved or declined by the issuer
• If the authorization has been approved the merchant can then send the authorization for settlement to receive their funds and complete the purchase

All of this happens in just a few seconds.

Declined authorizations

While authorizations are usually speedy, these requests for payment can also just as quickly be declined by the acquiring bank or the issuer. These declines can be especially prolific for merchants processing recurring or subscription billings.

According to Visa and MasterCard, an average of 15% of recurring/subscription payments are declined for a variety of reasons. These declines can result from insufficient funds, an invalid credit card number, an expired card, or suspected fraud.  What makes managing declines difficult for merchants is that many declines fall into a category called “Do not honor,” which means the authorization was declined, but the issuing bank and acquirer do not offer a specific reason code.

It’s important for merchants in a Card Not Present (CNP) recurring/subscription-based business to be extremely knowledgeable about the different types of declines they are receiving, and how they can not only lower their initial declines, but also recoup some of their revenue through different recoup strategies.

Merchants should work with their acquirer to understand the decline reason codes they are sending back, along with what they should do to attempt to recoup the sale on each decline. There are many strategies to manage your declines, but there are some industry standards.

6 strategies for lowering initial declines

1. Merchants should make sure they are using the Address Verification Service (AVS) that’s provided by acquirers and issuing banks.  AVS checks the billing address submitted by the customer against the billing address on record to detect fraudulent transactions
2. Merchants can provide additional information such as the Card Verification Value (CVV) code, IP address verification (if possible), and 3D secure.  It’s important to note that if merchants are batch processing, they ARE NOT allowed to store CVV codes anywhere in their systems
3. Merchants should do their best to keep fraud and dispute rates low. Merchants who have more payment disputes with the issuer will see a higher number of declines.  Acquirers and issuers also have dispute and fraud levels they need to stay below, so if merchants are significantly adding to their risk, they will stop the sale from happening right out of the gate
4. Merchants should use Account Updater — a service offered by Visa, MasterCard, and Discover to let merchants know when customers have received new card numbers or expiration dates. This will help lower the number of declines with a “Invalid Account Number” or “Expired Card” decline code.  Account updater also alerts merchants to accounts that are closed, negating the need to retry.  This service can not only reduce the number of merchant declines, but it also increases positive customer experience levels, as they will be provided a seamless billing process without needing to lift a finger
5. Recurring billing merchants should always send transactions with a recurring indicator, which alerts the issuer and acquirer that a given customer has previous history with the merchant.  If merchants are not currently doing this, they should work with their acquirer immediately to understand how they can begin
6. Merchants can proactively reach out to customers with cards approaching expiration to get an updated card from them.  Merchants can also utilize automated emails to alert customers that they’ll need to update their current card information

4 strategies for retrying declines

If a merchant is comfortable with their understanding of which decline codes they can resubmit, they can create a retry logic either in-house or through a third-party vendor.  The two most common decline reasons are insufficient funds (the customer wanted the merchant’s service but did not have enough credit available at the time) and Do Not Honor (a blanket decline reason issuers use).  Because the reason code ‘Do Not Honor’ does not specify why the issuer declined the sale, the actual reason could be as simple as a system error occurred while the transaction was being authorized.  Retry strategies are different for everyone and are arrived at through trial and error to determine what works best.  Four common retry strategies are:

1. Resubmitting for authorization at the beginning, middle, or end of month can be highly effective within a merchant’s debit and prepaid portfolio. This technique will help recoup declines that fall into the “Insufficient Funds” bucket
2. Resubmitting at a different time of the day, as some issuers have higher processing volumes at certain times of the day — which could affect a merchant’s authorization rates.  It’s also worth noting the local time zone of the issuer can play a role in increased declines
3. Attempting a multi-acquire strategy.  If merchants work with more than one acquirer, they may find success in sending declined authorizations to their other acquirers.  This technique will often get an approved authorization even though the merchant didn’t do anything different with the data they sent
4. Declines are a large problem for merchants within the CNP subscription model, but there are many providers that can help merchants with retry strategies and optimizing their billing processes. Some of these providers are Zuora, Vindicia, Avangate, Recurly, Chargify, ChargeBee and FuseBill

It’s important for merchants to test different strategies for their businesses and see what works. Also, utilizing acquirers to ensure all retry rules and regulations card brands have are being followed is often worthwhile. Merchants understandably want to bill as much revenue as possible, but they also need to stay compliant with the guidelines.