In the e-commerce world, merchants are fighting a constant and often uphill battle to attract customers. How can you improve authorization rates?
In addition to facing stiff competition from other online retailers, merchants must contend with high rates of checkout abandonment, which is when a consumer has initiated the checkout process but leaves before completing the purchase. In 2018, nearly 75% of online shopping orders were abandoned.
In such an environment, merchants are constantly updating their websites to attract and retain customers and increase purchasing volumes. But this approach of optimizing the front-end of an e-commerce platform is only part of what merchants could and should be doing to drive revenue.
For e-commerce merchants interested in learning what other methods exist for maximizing revenue potential, a recent cobranded white paper from PayPal and Mercator Advisory Group is a good place to start. Titled “Are You Maximizing Your Revenue Potential?”, the paper outlines how payments optimization on the back-end can drive sales and lead to significant revenue increases.
Supporting the customer’s preferred payment method is important…
The first component of payment optimization involves supporting a variety of payment methods. When a customer makes it to the checkout window, they should be allowed to pay with their preferred payment method.
Consumers want to use their preferred payment method because, as the white paper noted, “it eliminates the need to type in payment and personal information, and it is a highly trusted instrument that makes the consumer feel more secure completing a purchase.”
In fact, if they are not able to pay via the method they want, Mercator’s research indicates that it’s common for the consumer to simply abandon the order. According to the white paper, “when a preferred payment method or brand isn’t available, the site will experience a larger than usual cart abandonment rate, ranging from 4% to 10%.”
Therefore, merchants need to configure their website to support traditional methods such as credit and debit cards, in addition to emerging payment types. These include mobile wallets and international forms of payment. Further, the merchant should securely store the customer’s payment information so they do not need to re-enter the information on future purchases.
By offering multiple payment methods and convenient, yet secure, autofill functionality, merchants can reduce cart abandonment and improve the customer experience.
…But improving the conversion process during payments acceptance cannot be overlooked
Once a merchant supports multiple payment methods, they should then focus on improving an overlooked but vitally important part of the payments process: payment acceptance.
For a payment to be completed, it must be authorized by the consumer’s card network and their card’s issuing bank. Here, there are two outcomes: the payment is either accepted or declined. If a customer has their transaction declined, they will be asked to enter an alternative form of payment. Facing a declined transaction, many consumers will abandon the transaction.
Although there are times when a decline is valid—when the customer has insufficient funds or a transaction is high-risk and likely fraudulent—false declines are possible too. It is here that many merchants are leaving money on the table. One study found that 44% of falsely declined consumers either stopped or reduced shopping with that retailer.
There are many reasons a transaction could be falsely declined, but here are the major ones:
- Overly strict fraud rules: Overzealous fraud prevention systems run the risk of rejecting legitimate transactions.
- Outdated card and customer information: It’s common for old card numbers and other outdated data to cause false declines.
- Cross-border payment risk assessment: Cross-border transactions are more complex to verify because international cards often operate on local or regional foreign networks that are not connected to global networks.
- Transactions processed in “high risk” or “less mature” markets: Some international locations experience higher rates of decline than other locations. In Brazil, for example, 12% decline rates are normal.
- Data is not communicated properly: Since the messaging standards used by payment networks are designed for speed, they limit the information that can be sent when a payment is being processed. Authorizing banks are also frequently changing their individual standards for the type of information required to approve a transaction.
- Sub-optimal routing strategy: The chance of a decline can increase if payments are routed through the wrong processing channels. The type of transaction, dollar amount, location of origin, and other factors influence how a payment should be routed.
- Not understanding the root causes of declines: Oftentimes, merchants will not even know why a transaction is declined. This limits their ability to reduce false declines.
These factors influence a merchant’s authorization rate, which is “calculated by dividing all the card transactions that were accepted by the total number of transactions submitted.” The higher the rate, the more revenue the merchants stands to make.
Improving authorization rates can boost revenue
With so many ways for a transaction to be falsely declined, there are a lot of opportunities for a merchant to lose sales. Therefore, even a minor improvement in authorization rates can lead to significant revenue increase.
The white paper described an example where a website has 100 million site visits annually and an average transaction amount of $100. If that site introduced better payment methods such that it increased conversions by just 2%, it could increase annual revenue by more than $3.4 million. Moreover, if the merchant optimized the processing component and boosted approvals by another 2%, it would earn “$1.5 million in previously unrealized revenue.”
Clearly, there is a lot of money on the line. As the white paper put it, “Optimizing processing to boost approval rates is a critical opportunity to capture more revenue, and something that every merchant, small, medium or large, should consider.”
Fortunately, all the pain points identified above can be addressed by a good payment service provider.
Conclusion
While this article sketches out the reasons a transaction can be falsely declined and why limiting false declines can greatly benefit merchants, it does not cover the specific ways merchants can optimize the payment process and improve authorization rates. Those interested in learning what solutions exist can download the PayPal and Mercator Advisory Group cobranded white paper by filing out the form below.