Failed Payments Cost Banks, Fintechs, And Companies Nearly $120 Billion Last Year

As banks, merchants, and fintechs scramble to win share in the payments business, they can easily lose sight of the fact that not all payments process properly. In fact, many don’t. Some two-thirds of organizations sustain more than 20,000 failed payments each day, while the toll taken globally by all such rejections came to $118.5 billion last year, according to a study released on Wednesday by Accuity, a provider of payments-compliance services and a unit of Lexis-Nexis Risk Solutions.

That dollar cost stems from fees banks charge when transactions fail, but also from the cost of labor to fix and resubmit the payments and from the impact of lost customers, says Accuity, which surveyed 240 banks, fintechs, and corporate entities around the world for the study. European organizations accounted for 41% of respondents, while another 31% are in North America.

The report warns organizations not to lose sight of that last cost factor. “While organizations are well aware that there is a cost to failed payments, most do not grasp the full impact both financially and from a customer retention standpoint,” the report says. “Fees, labor and other financial costs that go into repairing a rejected payment are somewhat more easily measurable than the less tangible, but equally impactful cost of customer churn as a result of a poor experience.” 

Indeed, among those respondents that saw more than 20,000 rejected payments daily, some 80% reported losing customers as a direct result. Among all respondents, 60% said failed payments had cost them customers.

Payments can fail for a variety of reasons, but faulty account numbers are a common cause for a correspondent bank or other institution down the line to reject a transaction. This factor accounts for one-third of failed payments, according to the study. The culprit in these cases is often the manual process many financial institutions use to prepare payments, Accuity says, a practice that lends itself to error by comparison to technology such as lookup tools or application processing interfaces. 

Mistakes in beneficiary details are another cause, the study says, triggering another one-third of failed payments.

Smaller institutions tend to have higher failure rates than larger ones, with rates climbing as high as 5%. Again, lack of technology is often the culprit, according to the study. In fact, that 5% failure threshold, it turns out, happens to be a “tipping point” that generally drives institutions to take action, Accuity says.

The company warns organizations not to underestimate the wide-ranging impact of rejected payments. “Tangible costs such as fees and labor might be easier to measure, but the intangible— including customer relationships—can be more difficult to repair,” says Dalbir Sahota, global head of know-your-customer and payments product management at Accuity, in a statement. “The payments market is fiercely competitive, so it is vital for organizations to take greater measures to improve their payments data to reduce their failed payment rate.”