A Report Shows How Credit Card Declines Eat in to Recurring-Payments Revenue

Fourth-quarter transaction decline rates for credit and debit cards used for subscription payments increased to 15.9% from a first-quarter 2015 low of 14.4%, based on the value of the transaction, according to a report from Recurly Inc., a recurring-payments specialist.

The “Recurly Subscription Snapshot,” which analyzed 25 million recurring payments made via Recurly’s platform, found that as the increased shopping normally found in the fourth quarter contributed to the rise, another factor was the continuing rollout of EMV chip cards to consumers. These cards, especially when designated as the payment method for a subscription, have to be updated to avoid authorization declines, says Dan Burkhart, chief executive of San Francisco-based Recurly.

Declines can present short-term and long-term problems for merchants reliant on recurring payments, Burkhart tells Digital Transactions News. Many times, the merchant pays little attention to the type of declines it receives from its processor, he says. “The first step is to raise their awareness about what’s happening at the transaction level,” Burkhart says. “Often times, companies don’t associate declines with losing a customer. They don’t necessarily connect the dots.”

Many declines—often split into a hard decline, like a lost or stolen card, or a soft decline, like a credit limit maxed out—can be recoverable, he says. Even hard declines, such as for magnetic-stripe cards that are replaced with chip cards, can be recovered via automatic account-updating tools available from the card networks. Soft declines might be recoverable by waiting a day or two and running the transaction again, a useful tactic if a credit limit is reached, or by timing the next attempt on the first or 15^th day of a month, when many payroll deposits are made.

Reversing these declines is especially valuable for merchants because their revenue streams might not exist without recurring payments from consumers. “The responsibility of any subscription business is to assess the lifetime value of revenue streams, meaning how long the consumer will remain a long-term subscriber,” Burkhart says. Credit card declines can lead to customer churn, which has a negative impact on recurring-revenue streams.

The Recurly report found that 20% of the overall churn is attributed to so-called “involuntary churn,” which includes outdated credit card information. The goal is not just about recovering that single transaction, but also about retaining the consumer, Burkhart says.

Recurly also found a relationship between decline rates and average order value. Higher-value transactions—$99 or more—had the highest decline rates, 20.9% for business-to-consumer transactions and 11.9% for business-to-business transactions.

“The reason for this is there is a variety of ways in which a decline can occur,” Burkhart says. Each entity along the transaction flow has its own risk-mitigation programs, any of which could trigger a decline, especially as the transaction value increases. “All subscription and recurring-revenue businesses are highly sensitive to customer churn and credit card declines,” Burkhart says, “and those two are often related.”