Subscription businesses benefit from the advantage of recurring revenue. Acquire new members and keep your existing ones. Sounds simple, right? We understand it’s not that easy. How do you keep your recurring revenue if your members’ credit card charges are declined? When you charge the credit card that you have on file, send the product or service, and then find out the charge was declined, that’s called involuntary churn. And, it sucks. It sucks out your revenue, and the hassle often sucks out the member’s subscription.
I met with Paul Larsen to discuss this challenge. In addition to a lengthy list of credentials and experience, Paul is the owner of PaulLarsenConsulting.com, a company with a focus on helping businesses conquer involuntary churn and increase their recurring revenue.
You will discover:
• Why “lowest price” merchant services firms can lead to increased credit card declines and decreased recurring revenue from existing members.
• Why you are getting so many credit card declines (and it’s not necessarily because your customer doesn’t have available credit) and what to do about it.
• Current trends in the credit card industry and how they impact credit card declines.
• Auto-updater services that get you credit card data when your customer receives an updated card with a new expiration date.
• How to identify a credit card processor that can help you get more charges approved each month and increase your recurring revenue from your existing members.
What are the Biggest Causes of Credit Card Declines?
You see the recurring revenue of your existing members decreasing at a rate higher than your churn. This is what happens with involuntary churn. The charges on your members’ cards start getting declined. Incorrect card information is the biggest cause. When a member’s card information changes, you are not often notified. There are several unintentional reasons for the change, and the customer often fully intends for you to receive your payment.
Card information changes when members are issued new cards. This happens when they lose a card, experience fraudulent charges, change out their card preference for a new rewards program… and the list goes on.
An additional disruption in the system is occurring because every card in America is being reissued with chips. Almost all of them are reissued with new expiration dates if not new account numbers. “Because every card has a new piece of information, the old legacy information has been switched out on which the last charge for that subscription took place,” explains Larsen. “So, we’ve seen overall decline rates steadily rising over the past two years again, in large part because of this mass reissuance.”
“The period of great volatility has been about four years now because, even before the chips, there were the massive breaches at Target and Home Depot, so those two breaches alone caused 110 million credit cards to be reissued. Plus, we’re all losing our credit cards it seems, at least once a year,” adds Larsen.
Companies who have merchant processors who don’t deal with this issue have seen self-involuntary churn triple in the past 18 months. And it’s not over yet. While most credit cards have been reissued with chips, still many hundreds of millions of debit cards are yet to be chipped.
At a time when you are doing all you can to keep your members, this problem becomes a huge hassle for them. They have to proactively update their information. It’s giving the member the opportunity to look at their subscription and decide if they want to renew or not. When often, a card that is regularly charged goes without their attention and the subscription continues.
In addition to changing card information, another cause of card declines is the prepaid cards. When prepaid cards are purchased and used to buy a subscription, they become a declined charge when the money runs out. “Fraudsters endeavor to gain the system using prepaid cards,” warns Larsen.
He adds, “here’s where the right processor makes a big difference. If you integrate with a best in class processor, you can either have them filter out those prepaid cards for you or take advantage of what they call enhanced authorizations, which provide indicators that tell you that the card is a non-reloadable prepaid card. So, you can deal with it right up front.”
“Knowledge is power and, if you have this kind of knowledge as you’re engaging the customer, you have a better chance of not being fleeced.”
Advice to Protect Against Fraudulent Charges
Larsen advises that, “CVV is an absolute must. It’s the first line of defense against fraud and in fact maybe the only thing that you actually have to implement in terms of fraud screening.”
“There’s greater abandonment when CVV is not asked for, because people know that this is an extra layer of security. People doing business on the web legitimately want that security. And most people know their CVV just as well as their account number. One thing we do know, for sure, is that conversion and lifetime value absolutely is greater with a CVV customer, a customer that you brought in by CVV.”
Highest fraud used to occur at the point of sale. Now with the use of chips on cards, this has decreased, causing the offenders to turn to online purchases for fraud opportunities. “Fraud is moving online very rapidly. And merchants better have fraud screening either operable or at least ready to go,” warns Larsen.
Choose Your Merchant Processor Wisely
“I would say that a merchant’s choice of processor has always been important, but never as much as now, because there’s never been so much downward pressure on authorization rates as there is now,” states Larsen.
When you see your recurring revenue decline, your first thought is to cost your costs. “Of course, pricing is important but, at the end of the day, that pales in comparison to the importance of performance over price. Obviously if you can get them both together that’s great, but it’s the processor’s policies, procedures and practices that will ultimately deliver the bottom line results that can help a merchant succeed because of credit card processing… not despite it.”
Everyone in the revenue chain loses, including the consumer, when a membership or subscription or a payment can’t be captured. No one asks for a relationship to come to an end but it does.
As a result, the best merchant processors have developed policies and procedures that allow merchants to overcome this churn using those tools and weapons that they make available. “Selecting a payment processor is really important because some of them have really developed these tools and weapons to reflect both an art and a science in accomplishing authorizations over time,” says Larsen.
“Some processors don’t even make these tools available at all, so the merchant is left high and dry with all these failed transactions… these imploded customer relationships.”
Larsen adds, “When your processor brings forward your charge on your behalf and presents it to your customer’s credit card company, they’re seeing you as a merchant through the lens of your processor because the processor is the one bringing the charge. And if it’s a high-risk processor or somebody that deals with a lot of fraud, that’s going to trip off those algorithms and you could get a failed charge even though there’s available credit on that card.”
Updating Services are Available to Help You Recover Your Recurring Revenue
Whether the card is replaced because it is a chip, or it’s replaced because it was lost or stolen, there actually are updating services that you can subscribe to as a merchant that would provide you with the updated credit card information.
Larsen says, “It was originally positioned as a courtesy to consumers to create a database into which updated information could be loaded and then merchants through their processors could query these databases to get the fresh information and overcome in large part the churn caused by this reissuance. Visa, MasterCard and Discover now have robust databases that merchants can take advantage of if their processor offers that service. I can tell you that these services have been a lifesaver for many merchants throughout this period of great volatility.”
“Being able to tap into these account updater services is really essential. The best of the processors not only offer account updater and other services, they’ve created a much more useful and robust authorization response. It also includes country of issuance of the card.”
When looking for the best merchant processor, Larsen advises that you “Talk to the right people. It’s all about networking with others in the industry, your peers. That’s really the best place to find those things out. And then once you get a sense of the features and functionality that these guys utilized to help overcome churn, then you forge and sculpt that list into your business needs. And then you use it as the wedge to crack open the treasury of golden tools at a world class payment processor.”
“I’d like to remind merchants that you don’t have to be in the top tier of your vertical to engage a world class processor,” says Larsen. The best processors really want to underwrite who you are. They want to take a look at your sales pages. They want to have some sense of what your product is and really get an understanding of your business because before they stake their reputation on you as a merchant they want to do their own due diligence and check you out. Those are the types of businesses or merchant processors that you really want to do business with,” Larsen adds.
He continues with, “Viewing this as a commodity or a client vendor relationship is a big mistake. This truly has to be understood, and you have to really believe, that you’ve entered a partnership in which not only are they’re scoping you, but you’re scoping them. Ultimately you want to work together to increase the kind of sales that are meaningful.” You both want to see your recurring revenue increase.
“The key element that’s often overlooked and that is that your processing relationship really needs to be viewed as a partnership.”
More Help is at Your Fingertips
Paul Larsen works with merchants to help them with the best practices around their merchant services. He works to make sure his clients are with the best processors. His goal is to help you get the most of the recurring revenue that you’ve earned.
When describing his services, Larsen says, “we inaugurate it with an audit. We want to audit what they do today, who they deal with and how they do it. We have no financial relationship with any processor or any third party. We obviously need to be independent.
So, we do an audit and then we assess their current degree of efficiency. And then, we have a two-tiered approach to optimization. We offer – Here’s what you can do right now in your current iteration, with your current partners, your payment processors to narrow the gap between where you are and 100%. But here’s what a blue sky 100% scenario would look like and what you would need to be able to do to achieve that.”
Larsen wraps it up saying, “We have a sense of how to weave a safety net of astute decline prevention and recovery tactics and practices that really can capture just about every transaction that is capturable.”
To find out more about Larsen’s services, visit PaulLarsenConsulting.com.
About our guest:
Paul Larsen has more than 30 years of experience in the Direct Marketing industry. Prior to consulting, Mr. Larsen held a number of Fulfillment and Operations positions at Reader’s Digest ($2.55 billion) Mr. Larsen, ultimately honed his payment processing skills in his decade-long stint as Director of Operations for Synapse Group, Inc., one of the world’s largest magazine subscription companies (Time, Conde Nast, Rodale.) Paul is also a past Chairman of both the Direct Response Forum and the Payment Processors Association and presents regularly at conferences such as the DRF, DMA and Marketing Sherpa.