Dispelling Five Common Payment Recovery Myths
With customer acquisition costs rising, more subscription-focused businesses are searching for ways to improve customer retention and extend lifetime value. One solution is to reduce involuntary churn caused by failed payments. However, misconceptions about payment recovery have led to a number of business leaders ignoring or minimizing this strategy.
I’ve worked in the subscription industry for over a decade, specifically focusing on tackling payment recovery. Below are the five most common payment recovery myths I’ve encountered.
Myth 1: Involuntary Churn is not a Significant Revenue Opportunity.
Involuntary churn, also called accidental churn or passive churn, occurs when a legitimate payment transaction fails and the subscriber’s recurring order is canceled — even though they want to stay subscribed.
The impact of involuntary churn can’t be understated. In my experience, subscription-focused businesses can lose between 10% and 20% in annual revenue to involuntary churn. In other words, a company with $100 million in recurring revenue could be losing between $10 million and $20 million from failed payment transactions.
Myth 2: Payment Service Providers Have Already Solved Involuntary Churn.
Payment service providers (PSPs) are companies that help businesses accept electronic payments by connecting them to broader financial infrastructure. While it’s true that most PSPs have some form of payment recovery solution, they’re typically less sophisticated than providers that focus solely on payment recovery. In most cases, PSPs use a “woodpecker” approach — running a failed transaction repeatedly until it goes through.
This strategy has two major problems. First, I have found that failed payments recovered this way are more likely to be reported as fraudulent. Second, it increases costs and reduces profits when PSPs charge a processing fee each time they run a card. For example, consider failed transactions due to insufficient funds. With a woodpecker approach, you would retry a card multiple times with almost no chance of recovering the payment (because there is no money in the account) while racking up processing fees.
In my experience, a better strategy is to use a tailored approach for every category of failed payments and to run a card only when you know there is a high probability that the transaction will go through. For example, consider estimating when the subscriber is likely paid and retrying after that date.
Myth 3: In-House Recovery Solutions Are Easy to Create.
While developing an in-house recovery solution is achievable, it’s far from easy and often requires a significant amount of money and time. Because of this, it’s more common for large organizations to build an in-house solution.
Here are two things to keep in mind when considering this approach:
1. You Need the Right Hires.
The world of payments is complicated. For example, there are typically 128 or more data elements associated with every payment transaction that can cause a payment to fail. You’ll need payment experts, data scientists and machine-learning engineers to study these elements and implement findings.
Having worked with multiple payments teams, I recommend putting together an eight-person team that consists of:
• One Head of Payments
• Two Data Scientists
• One Data Analyst
• Two Data Engineers
• Two Machine-Learning Engineers
2. You Need Patience.
Hiring a team and developing a solution takes time. In my estimation, it can take between 1.5 and 2 years to build an in-house solution, which includes hiring, planning, development and launching the product. From a business perspective, this wait can be challenging, and you may not see a return on investment for months or even years. Evaluate this option carefully before starting in order to determine if it will be the best long-term approach for your company.
Myth 4: Payment Failures Are the Responsibility of Your Customers.
While customers are responsible for ensuring their payment information is correct and for having enough funds to cover a charge, it’s not accurate to say that fixing payment failures is solely their responsibility. Companies are responsible for the user experience, charge times, technology glitches within their payment stack and staying up to date with standards and security protocols.
For instance, imagine a video game company in Seattle, Washington, that sells digital subscriptions to users worldwide and processes payments at 2 p.m. daily. While the payment timing makes sense for the video game company, it appears suspicious in regions with significantly different time zones. In this case, 2 p.m. in Seattle is 2:30 a.m. in parts of India.
In our hypothetical example, the payment is more likely to be flagged as fraudulent and fail because it was initiated from a different country in the middle of the night. The solution in this case would be to run payments during business hours in your subscribers’ local time zones — not to assume the subscriber made an error.
Myth 5: Recovered Subscribers Will Churn Anyway.
When discussing payment recovery with subscription companies, I’m frequently asked why a business should invest time, effort and resources in recovery when recovered subscribers will churn anyway.
It’s a valid question, and there is a kernel of truth to the myth. Some subscribers actively choose to let their payments fail instead of canceling. As a result, this category of subscriber is more likely to “officially” cancel their recurring order when their payment is recovered. However, I have found that many subscribers want to keep receiving the product or service they signed up for but don’t know how to solve the payment issue or don’t realize there’s been a disruption.
Embrace Facts Over Myths.
Payment recovery can be challenging at the best of times, but reducing failed payments can boost retention and net businesses increased profits. The challenge is cutting through the maze of myths and taking an intelligent approach to recovery. In my experience, brute-force methods like the woodpecker strategy are inefficient and increase churn; instead, consider a more strategic approach. Remember that complexity often creates opportunity.
This article was written by Vijay Menon from Forbes and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.
