Understanding declined codes – 3 ways to cut costs

Rob Crutchington at payment service provider, Encoded discusses how understanding more about declined transaction codes could make a difference to the bottom line.

As a business managing cash flow is a top priority, which means ensuring that payments are processed efficiently and ideally first time. Of course, there will always be instances when a card is declined by the issuing bank and this can be for many different reasons. The real problem for merchant businesses is just receiving a declined error message and not knowing why the payments was declined.

Without sufficient details for the reason, which may vary from there being insufficient funds, to the customer typing the wrong security number or the bank suspecting fraud it may not make sense to represent the card for payment. Particularly as each time the card is presented there is a cost associated with it as both the Acquirer and Gateway require payment.

Having the right information from the declined response code can make a big difference to deciding what action to take next. For example, if the response code advises that the address requires verification, resubmitting the details a second time perhaps with the postcode rather than house name, may result in a successful transaction.

There are over 40 potential different declined codes, which many acquirers group into seven or nine generic codes. These can be anything from insufficient funds or address criteria not met to out of date, stolen or lost card, without any further detail.

This list of codes is sometimes categorised into ‘soft’ and ‘hard’ by payment gateway providers. With soft codes, the reasons that payments are often declined can be due to insufficient funds in the account, the number of transactions supported, or fraud concern – in such cases they can be resubmitted. Hard codes reflect more factual reasons, such as incorrect expiry date, the limit has been exceeded, a new card has been issued or the customer has cancelled the transaction. In these instances, resubmitting the payment request by the merchant will not be successful.

An important measurement for all merchants is the payment decline ratio, which can be seriously inflated by repeated attempts on the same card. For example, some organisations expect a 45% declined rate in card payments because they might be a target for fraud or have stringent criteria for a transaction to be accepted, which if not met, means that the card is declined and the declined rates increase. While this rate may be acceptable to some organisations, most industry specialists would recommend aiming for a 10% decline rate on transactions – any higher and it is probably time to take action.

Having the information why a card is declined makes a big difference to the action that a business might take. For example, if it is because of insufficient funds, there is no point trying to take the money on the same day. This might be the case for a monthly subscription, when it is important to consider the best time to take the payment, especially if the customer has several debits scheduled over the same few days. There are also rules as to how often a card can be presented within certain timescales, which is an additional cost to merchants that needs to be considered.

At Encoded, we have identified three ways to help merchants navigate their way through the tricky issue of declined codes:

The good news is that there are payment gateway providers that make it their business to help reduce the number of declined transactions for merchants. Encoded and CashFlows provide reliable technology solutions designed to facilitate faster card payments – a must have for merchants. With the right information to hand, merchants can ensure every transaction is a profitable one.

Rob Crutchington is Managing Director at Encoded.