How false payment declines are costing you revenue, and how to avoid it

What is a false payment decline?

A false decline is when a genuine payment is blocked by the bank and fails, stopping you from receiving the funds. 

False declines are a common occurrence for online payments made by card, with around $25 in genuine transactions being declined for every $1 of actual fraudulent payments.

Why do banks decline legitimate transactions?

Several aspects of online card payments (or card-not-present transactions) make it difficult for banks to accurately determine which are genuine and which are fraudulent.

1. You don’t need a physical card to complete the transaction.
2. There can be thousands of miles between the buyer and the seller.
3. Recurring payments don’t require the customer to be present when the transaction takes place. 

As a result, the banks avoid losses by taking a heavy-handed approach that sees any payment carrying a potential fraud signal declined.

What does this mean for SaaS businesses?

SaaS businesses are reliant on online payments, often have a global customer base, and depend on recurring payments for continued success – all of which means that without a strategy in place for tackling false declines, your payment acceptance could be taking a huge hit. 

To mitigate this risk you need to make sure that the banks see your businesses as a ‘trusted seller”. And this means understanding the processes and satisfying the algorithms. 

Tax authorities, card schemes, and banks use something called Merchant Category Codes (MCCs) to:

• Determine the risk profile of a merchant 
• Block certain merchants from using a card scheme
• Calculate credit card rewards based on categories

Under this system, transactions running through your SaaS business are judged according to data and algorithms for determining risk within your category. 

This approach doesn’t distinguish between B2B and B2C transactions. For B2B businesses –  usually processing a low-volume of high-value transactions (and often across borders too) – even positive signals like a legitimate legal entity aren’t enough to avoid sharing the fingerprints of more high-risk sellers. 

To avoid this happening you need:

• A high volume of transactions – The more past experiences with your business, the more your transactions will be trusted. 
• Low fraud and chargeback rates – Your transactions are less likely to be fraudulent in the first place. 
• Complete payment requests – Collecting the right information for the payment method being used.

What can you do about it?

Broadly speaking there are three options that reduce the risk of false declines:

• Wait it out and build up your payment volume, and “trusted seller” status over time.
• Use a tool to help reduce fraud and proactively optimize your processes to reduce chargebacks.
• Sell through a reseller and utilize its already high payment volume and built-in fraud prevention.

Managing cross-border payments

You might think it’s worth waiting it out in one market but SaaS is global and false declines are everywhere – meaning domestic payments are only part of the problem. 

There are a number of reasons why international payments fail.

Firstly, it’s even more difficult for banks to determine whether or not an international transaction is fraudulent because as of yet there isn’t a standard way for banks around the world to communicate with each other. 

And secondly, cross-border transactions have longer payment chains, which increases the chance of error due to different messaging standards across banks and card schemes. 

One cross border payment could carry the following types of country data:

• Country of the issuing bank (and country of the customers’ card)
• The customer’s IP address when they checkout 
• Email address at the checkout
• Country of the seller
• Country of the acquiring bank (the bank requesting the funds)

To put that into at an example: 

A $200 software purchase on an Irish-issued card (and customer) to an Australian seller via a US acquiring bank from a Canadian IP address. How does the Irish issuing bank assess that request and make sure it’s a legitimate transaction?

What can you do about it? 

To increase payment acceptance of cross-border payments, you need to bank locally. Taking the example above, if the Australian seller used an Irish acquiring bank, it’s far more likely to have a relationship with the issuing (customers) bank – and would be more likely to trust the transaction. 

Unfortunately, banking locally isn’t a quick fix. To do it yourself requires setting up local entities in each market (and then gradually building up your volume and position as a “trusted seller”). 

Alternatively, you can use payment service providers to access international payments, although this can still require setting up multiple accounts across different markets. Other, all-in-one, platforms for payments infrastructure act as resellers and will already have a high volume of payments because of the number of businesses they work with. A reseller is also likely to have local banking relationships you can utilize immediately.

Though it won’t prevent the problem completely, you can also take steps to make sure you’re collecting accurate and complete information in the checkout. Building card validation into your checkout flow, you can set the parameters for the data the customer needs to input (for example, card number length). This way, you can notify the customer of an error in real-time, before the payment is attempted.