Impacts of Failed Payments Matter More Than Actual Hard Cost

The cost of failed payments continues to be a prevalent issue in the payments industry and the many businesses it supports, causing inefficiencies that not only impact companies’ ability to address customer needs, but also hinder loyalty efforts that are aimed at providing a healthy customer experience.

“I think [the impact of failed payments] will continue to be a constant issue,” said Sarkis Akmakjian, senior director of product management at LexisNexis Risk Solutions, in a conversation with PYMNTS. “In terms of improvement, we are seeing the industry take more substantive action to tackle the subject, as they realize it is becoming a larger issue beyond the actual cost.”

Tolerance and Tipping Point

According to the latest study from LexisNexis Risk Solutions, failed payments are estimated to have cost the global economy $118.5 billion in fees, labor and lost business in 2020. This is a huge concern, but one that brings up a discussion about the tolerance of failed payments among banks, financial institutions (FIs), FinTechs and other payment service providers.

Akmakjian said that institutions deem tolerance as a “cost of doing business,” comparing the realistic approach over perfection. However, it is critical to consider the percentage of tolerance in this context. The study reveals that the tipping point for action appears to be when the failed payment rate hits 5% or more. Eight out of 10 organizations indicate that they would actively implement changes to address the issue.

Akmakjian explains that at this tipping point, it is essential for FIs to look at their back payment failure and assess how the impact may or may not threaten the customer base. “The kind of action they take is really looking into their technical back-end and front-end processes and seeing where they can improve,” said Akmakjian.

For example, on the back end, the improvement could involve putting in tools to operate more efficiently in order to reduce the manual cost, while on the front end, it could mean evaluating the payment products to improve the customer experience. The simple solution could include tools that provide critical payment reference information to validate, retrieve and verify discrete elements that come into play when creating a payment request or a payment instruction.

Studies have shown that a single false decline can cause a consumer to bolt. Hence, it is critical to consider the high stakes, and to keep that customer satisfied while addressing the impacts of failed payments.

“Now we’ve got more players, like payment service providers and FinTechs, entering this field and competing with banks in terms of providing payment products. The way in which the competition is manifesting itself is through an enhanced customer experience,” said Akmakjian.

Fierce competition in payment services leaves little room for error. Unhappy customers will sever the relationship and find another provider. Customer satisfaction cannot be taken for granted, as it is crucial in maintaining the business relationship.

See also: FTC 2020 Data Shows Consumer Fraud Hit 2.2M

Predicting and Assessing Risk

So, how can businesses assess risks, predict and prevent failed payments, and improve operational efficiency in the process?

Akmakjian acknowledged that banks are always aiming for perfection by trying to reduce the cost of doing business to zero and to bring straight-through processing rates to 100%. There are institutions that are able to achieve this elusive benchmark based on the type of payment, such as in the case of cross-border, high-value payments and real-time gross settlement. However, for other cases, FIs must genuinely consider tools that have unique technical delivery capabilities and make them an integral part of their solution.

For example, consider a payment product that’s a front-end, consumer-facing solution. Akmakjian explained that the FIs can simply put the payment reference information right at the point of cap, so that when the payment request is raised, the beneficiary bank itself is validated. “The way to reach the beneficiary bank by means of including intermediary banks is being enriched,” he said.

Another solution could ensure that those regional and domestic clearing system capabilities are also included in that instruction, such that it gets executed and processed onto the payment network without incident. “An API system will enable all of this payment reference information delivery in a meaningful way that will address common use cases seen in the industry,” said Akmakjian.

See also: Ford, Kia Allow Motorists to Link Connected Cars to Insurers for Better Rates

Reasoning the Tolerance Rate

While organizations are well aware that there is a cost of failed payments, most do not grasp the full impact – financially nor from a customer retention standpoint. Fees 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.

A select few in the payments industry understand the negative outcomes associated with failed payments, and are taking the necessary steps to combat them. Akmakjian pointed out that it is critical to consider the actual amounts of failed payments – in context with the tolerance for imperfection – when reasoning why many institutions are not taking any preventative measures.

“Let’s say [multinational corporates and emerging FinTechs] remediate a 1% payment failure rate, and they determine its cost-benefit analysis faults, and if that is not having a material impact on threatening the customer base, then the organization is not inclined to act, as the absolute dollar amount involved in remediating these opinions [is even higher],” said Akmakjian.

See also: LexisNexis Risk Solutions Adds Anti-Fraud Platform TruNarrative

Validation Processes Impact Payment Failures

LexisNexis Risk Solutions has been serving the payments community by providing a definitive set of payment reference information that enables customers to verify and validate beneficiary banking details, and to retrieve and obtain additional payment instructions, such as the intermediary banking details needed for payment instructions, said Akmakjian. He acknowledged that there are other solutions in the market that address these needs, adding that businesses should take a consolidated approach, using multiple tools to come up with a solution that adds value and improves the customer experience within their own products.

Dealing with the manual processes while keeping up with regulatory changes still continues to be a major concern for businesses.

“I think the tools that are being used to address these challenges are becoming more technically sophisticated and advanced. Certainly, we are seeing that things are becoming more API-native compared to the banking peers, and preferring solutions that are API-based gives them a platform to make rapid improvements in the customer experience,” said Akmakjian.