Merchants Can Increase Authorizations for Recurring Payments

By Kevin Sullivan

During my time at Mastercard, I was asked to grow recurring payments on credit and debit cards. The service allows consumers and businesses to conveniently set up ongoing payments -- say monthly or quarterly -- and not worry about missing a payment or incurring a late fee.

Amounts can be fixed or variable. Recurring payments are relevant for service industries providers such as utility, telecommunication, insurance and subscription billers. Merchants benefit from timely payments and increased customer retention. We were able to document that customers who arrange for recurring payments stay with the merchant longer than those who don’t. And some consumers will switch providers just to enable recurring payments.

To get this payment mode going we first had to create an indicator in the authorization record so acquirers and issuers knew the transaction was recurring.

We then received approval from the U.S. Board of Directors for an incentive interchange rate for recurring payments at service industries merchants. The auth indicator enabled administration of this merchant incentive. These steps, along with hard work by merchants and acquirers, dramatically increased recurring payment transaction volume.

But authorization approval rates for recurring payments are challenged. Why? Expiration dates linked to card account numbers on file can lapse. The credit profile and “Open to buy” of the cardholder can change over time. The payment account can be closed when reported as lost or stolen -- and no one informed the merchant.

In addition to potential loss of revenue to the recurring biller, declined transactions can lead to customer attrition as the user experience is negatively impacted.

Here are ways service industry providers and their acquirers can enhance authorization rates for recurring payments:

• Include RP Indicator: Fill all recurring payment indicators requested by the payment network in the authorization request.
• Deliver as Much Information as Possible: There are 192 data elements in the ISO 8583 message and many will be interpreted by the issuer in its decision. Ensure information like Merchant Category Code (MCC) and Merchant Identification (MID) number are accurate in auth, clearing and settlement records.
• Use Account Update Programs: Most payment processors, in conjunction with the networks, offer a service that automatically updates payment account expiration dates. This is invaluable in reducing a major cause of turn-downs.
• Leverage Authentication Tools that Encourage Issuers: Businesses with high chargeback-due-to-fraud rates see lower auth rates overall. So, submit identification data such as CVV and Zip Code. 3D Secure adds an additional layer of verification.
• Manage Timing: Your processor or a payment orchestrator can suggest a schedule (date, time) to submit auth requests that is proven to increase approvals for your business type and customer profile.
• Proactively Manage Shelf Life of Authorizations: Submit authorization requests within the time limit (“Authorization validity period”) designated by the payment network (typically 7-30 days) and the maximum number of allowed retries (e.g., 6 within 15 days). During this time, the merchant has the option to submit a clearing record to capture funds from the issuer. Use testing of different cadences to build intelligent retry logic that reflects your business and the habits of your customers. Some processors have devised customized logic based on the authorization patterns of individual issuers. Please note, issuers and payment networks monitor authorization rates by merchant name and sometimes take action. So, there can be a downside to aggressive re-submissions.
• Sparingly Submit Transactions Past Deadline: Only send clearing records linked to stale auth requests if this practice is tested, validated and relevant to your business; you’re recovering from a down-time issue; or is related to a cardholder dispute. To enable this practice, ensure the policy is disclosed in your customer agreement.
• Keep Customer Information Up-to-Date through Communication: Send automated “Failed payment” texts, emails and in-box messages to clients when a payment is declined. The client can provide updates to the stored credential that allows future payments.
• Leverage Tokenization: Tokens from the networks allow the merchant and acquirer to keep a “Card on file” without the risk of touching the actual Personal Account Number (PAN). Even if the PAN changes or the card’s expiration date comes up, the token is still usable.
• Use the Decline Code: Though not always descriptive (05 “No not honor” doesn’t tell the merchant much), merchants and acquirers can use the decline code from the issuer to drive action. “Insufficient funds” can trigger a request to the customer for another payment method or a date when to try again. “Suspicion of fraud” can kick off a process by the biller to authenticate the customer.

The benefits of recurring payments justify continuous effort by merchants, acquirers, issuers, payment orchestrators and networks to strengthen this helpful service.