Why do payments fail, and what can merchants do?

Imagine this: A customer finally decides to spend their money on the product you’ve promoted. They enter their credit card details, click ‘Buy Now,’ and await confirmation. But instead of a success message, they receive an error indicating that their payment has failed.

Now, you have a frustrated customer—and possibly a lost sale.

Situations like this happen more often than we’d like. But what causes these issues, and how can merchants reduce them?

In this blog, we’ll explore the basics of payment failures. We’ll discuss why they occur and how they can affect a business and its customers. We’ll also explain the reasons for payment declines and when they might happen.

What is a payment failure?

A payment failure occurs when a customer’s attempt to complete a transaction for goods or services is unsuccessful, meaning the payment does not go through as intended. This can happen for various reasons, which will be discussed in the following section.

Why do payments fail? 

Payment failures can occur for several reasons, which are broadly classified into:

• Payment failure due to technical reasons: These include problems such as gateway errors, timeouts, or network connectivity issues that prevent the payment from processing.
• Payment failures due to user error: These happen when customers enter incorrect payment details, use an expired card, or attempt to pay with insufficient funds.
• Payment failure due to risk and security concerns: These occur when a payment is flagged for suspected fraud or when the card has been blocked for security reasons.

Each reason for payment failure is associated with a decline code, a two- or three-digit alphanumeric reference that indicates why the payment was rejected. Some examples include:

Some examples include:

• Code 51 (insufficient funds). The cardholder doesn’t have sufficient funds in their account.
• Code 54 (expired card): The cardholder's card is no longer valid because it is out of date. 
• Code 05 (do not honor). The card issuing bank stopped the transaction and told the merchant not to accept (‘honor’) the payment). 

Our article exploring decline codes explains more about decline codes.

Is a payment failure the same as a payment decline?

Payment failure and payment decline are, on the whole, used interchangeably as part of the payment lexicon. 

However, there’s a subtle but important difference between the two. A payment decline is a specific type of failed payment where the card issuer explicitly rejects the transaction. Typically, a payment is rejected because of insufficient funds, expired cards, or fraud prevention measures.  

In other words, while all declined payments are failed payments, not all failed payments are declined payments. Understanding this distinction is crucial when diagnosing the root cause of a payment failure and implementing the appropriate solution.

Hard and soft payment declines

Hard and soft declines are categories used by card networks to indicate why a payment attempt has failed. 

A hard decline occurs when the issuing bank outright rejects the payment due to an unresolvable issue, such as a stolen card. Merchants should refrain from retrying the payment, as it will not be approved.

A soft decline, on the other hand, occurs when a temporary issue causes the transaction to fail. These issues may be resolved by retrying the payment immediately or later.

Understanding the difference between hard and soft declines is crucial for merchants in determining the appropriate next steps, such as using an alternative payment service provider (PSP) to retry the payment.

Learn more about fallbacks.

The ripple effect of failed payments

Payment failure is an inevitable part of accepting online payments, but that doesn’t mean it isn’t damaging to a business. The consequences of payment failure extend beyond the immediate effects of a lost sale and frustrated customers. Let’s examine these effects in more detail.

Customer experience: From the customer’s perspective, a rejected or failed card transaction prevents them from obtaining what they want when they want it. This failure creates immediate frustration, which can lead them to abandon the transaction. Over time, repeated issues can significantly erode brand loyalty, driving customers to seek more reliable alternatives. In a competitive market, even a single negative experience can turn a loyal customer into a lost one, as they might choose not to return to that brand.

Business revenue: The major impact of payment failure is lost revenue for merchants, as potential sales are not realized. In the case of customer-initiated transactions (CITs), there is a high likelihood that the customer will abandon their purchase, as discussed above. For subscription businesses handling merchant-initiated transactions (MITs), a payment failure can trigger involuntary churn, where customers unintentionally lose access to services due to payment issues. This results in immediate lost revenue and diminishes customer lifetime value (CLTV), affecting future potential earnings and overall business growth.

Operational costs: Failed transactions often necessitate additional customer service interactions as customers seek to resolve the issue. This increased demand for support drives up operational costs, as businesses must allocate more resources to customer service, payment processing investigations, and potentially even fraud prevention. Moreover, the time spent resolving these issues can detract from focusing on growth initiatives and other value-adding activities.

Payment fees: Beyond lost revenue, the financial toll of failed payments includes additional costs. Merchants may incur fees for unsuccessful transactions, penalty fees from payment processors, or increased transaction costs if they retry payments through different methods or platforms. Over time, these fees can accumulate, further eroding profit margins.

How to combat payment failure: six tips for merchants

Merchants are understandably keen to learn how to maximize successful transactions. Here are our top six tips for minimizing payment failures, optimizing revenue, and enhancing customer satisfaction. 

1. Adopt a multi-processor strategy: Payment processor performance can vary significantly based on several factors, including geography. For example, a merchant achieving a 90% approval rate with a processor in France might experience different results with the same processor in Singapore. By partnering with multiple payment processors, merchants can evaluate performance across various regions, customer segments, and key performance indicators (KPIs). This approach allows them to route payments through the most effective processor for each scenario. Learn more about why it pays to adopt a multi-processor strategy. 

2. Utilize fallbacks: Merchants can employ a fallback strategy when a payment fails due to a soft decline. Also known as cascading payments, this approach involves rerouting a failed payment through another processor to secure a successful authorization without the customer noticing. Many merchants using Primer’s Fallback solution are seeing impressive results, with an average recovery rate of 20% when retrying payments through an alternative processor.

3. Offer multiple payment methods: Providing alternative payment methods helps ensure that buyers have other ways to complete their purchase if their initial attempt fails. Additionally, some payment methods have higher average approval rates than credit or debit cards.

4. Refine risk rules: Every merchant must balance risk and performance. While rules are necessary to block fraud, overly stringent fraud controls can result in legitimate customers being unable to complete their transactions—a situation known as a false decline. False declines often lead to customers abandoning their purchases and can risk alienating them, potentially deterring future transactions with the merchant. See how Primer helps merchants strike this balance. 

5. Use Network Tokens: Network tokens provide issuers with additional information alongside the payment, reducing the risk of fraud. This increased data helps issuers better assess the legitimacy of the transaction, thereby increasing the likelihood of authorization. Visa has observed an average 3% increase in authorization rates among merchants using network tokens.

6. Include more data in a payment request: Collecting additional data during the checkout process can enhance your payment authorization rates, but it’s crucial to proceed cautiously. Gathering more billing information gives issuing banks a more accurate picture of each transaction, helping them make informed authorization decisions. However, it’s essential to strike a delicate balance: request enough information to secure swift authorizations without overwhelming customers with unnecessary fields, which could negatively impact your conversion rates at checkout.

See nine proven ways to boost checkout success.

Final thoughts 

Failed payments can significantly impact online businesses, leading to lost revenue, customer dissatisfaction, and operational challenges. By understanding the common causes of payment failures and implementing effective strategies, merchants can mitigate these risks and optimize their payment processing.

A multi-faceted approach—encompassing robust technical infrastructure, customer-centric practices, and proactive monitoring—is essential for reducing failed payments and increasing revenue.

See how merchants using Primer are reducing payment declines and unleashing their payment potential.