Every time a customer swipes, inserts, or taps their debit or credit card, it requires an authorization. A successful authorization implies that a bank account or line of credit has sufficient attainable value that can be set aside for a purchase until it is fully processed and the transaction is complete.
If there are not enough funds available to complete the purchase, then the transaction will be declined. The rate of successful transactions help to calculate the authorization rate, or auth rate. But what are auth rates, and why should merchants care about them?
To further discuss this payments industry hot topic, PaymentsJournal sat down with PayPal’s Nandita Gupta, VP of Core Payments Products & Engineering, and Sandipan Chatterjee, Director of Product Management for Auth Rate, Tokenization & Strategic Partnerships.
What are auth rates?
Auth rates are a relatively simple concept, at least in theory. They are the percentage of transactions that successfully pass through the authorization process and result in a completed payment. To identify what this percentage is, you must divide the number of successful payment approvals by the total number of attempted transactions.
Auth rate is not the same as conversion rate, though the two are related and PayPal’s auth rate does contribute to its overall conversion rate. “If the transaction is not authorized, it will not be converted,” said Gupta. “But there are several other factors, outside of the authorization process, which impact the conversion.”
Why are auth rates important to merchants?
Successful merchants have two main goals: increased revenue and customer satisfaction. Auth rates are beneficial to both. They are one of the most crucial ways for businesses of all sizes to tap into revenue and can directly impact the health and success of an online business.
“And for global enterprises, small little improvements and authorization rates can make a difference of billions of dollars of volume process,” added Gupta. A primary aim for merchants is for customers to complete their transactions on the first attempt without concern over declined authorization or other payment issues.
How does PayPal help merchants improve their auth rates?
There are numerous techniques that PayPal implements to achieve a higher than industry average approval rate for merchants:
- Robust data system – Relationships with over 300 million consumers and 28 million merchants
- Next generation risk solution – Helps approve high quality consumers to eliminate fraud attempts
- Multiple funding instruments – If initial funds are declined, other payment options are readily available to the consumer
- Network tokenization – A unique credential that’s generated to help make a secure payment
PayPal’s data system is particularly important in the improvement of merchants’ auth rates because its partners provide insights into current behaviors and adoption rates across the broader ecosystem.
Its next-gen risk solution works by using risk algorithms—a combination of machine learning, AI, and real-time decision making—to more accurately approve high-quality consumers. “But machine learning is only as good as the data set it is learning from,” remarked Chatterjee. “And that is where we have a strong advantage, due to the data from our two-sided network of consumers and merchants.”
PayPal’s wallet enables secondary funding instruments, which can be beneficial for when the initial payment method is declined. “If you have your credit card, and that gets declined, we can in certain cases automatically move on and find your debit card to see if that payment method goes through,” explained Gupta. When used effectively, this option can lead to high approval rates.
Finally, network tokenization works by creating a unique credential that is different from the 16-digit number imprinted on consumer credit cards, and that credential now has the capability to be used for transactions. “This is really valuable in the case that a card has expired [or was] lost, stolen, or even breached at another merchant,” added Gupta. Because the network token is automatically updated by PayPal, the customer can continue to make secure purchases without any inconveniences.