Saas Failed Payments 101: What They Are and How to Avoid Them
Subscription renewals are at the very heart of all SaaS businesses.
The revenue earned from recurring payments will lead to profits over time, which is why companies work hard on customer retention and avoid the factors that may lead to churn to keep the revenue flowing.
However, there are times when customers want to use the product or service, are willing to pay for it, and still churn. This is known as involuntary churn, and it happens for one reason and one reason only: payment failures.
Why Do Payments Fail?
Failed payments can occur because of errors on either the provider's or the customer's side. A customer's payment may fail due to poor Internet connectivity, data entry issues, or because they do not have enough money in their account to cover the subscription payments. As a SaaS provider, there is very little you can do to prevent these failures. However, some failed payments are the results of errors or flaws on the SaaS vendor's side, including:
Lack of client notification
Subscription renewals free up customers' time and enable them to operate seamlessly without making manual payments every single month. However, if they are unaware that there are issues with their account or payment plan (e.g., expired credit cards, insufficient funds), payments fail and may lead to service disruption.
Without communicating these issues to the client, there may be higher instances of involuntary churn. Notifications, including payment due soon messages, payment failure notices, and upcoming transactions, will give them time to prepare and react.
Note that this isn't just a good practice to avoid and recover failed payments: your payment provider may require this level of communication as part of compliance.
Lack of dunning management
Missing or poor dunning will lead to payment failures. It's important to implement automatic retries when online payments do fail - the second transaction will often succeed. If you don't have this feature, you may lose the payment, and the customer will lose access to your services.
Having an automated retrial feature will not only improve customer retention and satisfaction but save you the time and effort of retrying all failed payments manually.
Card-not-present transactions
Online card payments or "card-not-present" (CNP) transactions are far more likely to fail than those made in person. Banks are inclined to decline card payments if they have any doubts about the legitimacy of a transaction. SaaS companies, who are at the mercy of online payments, can experience a lot of difficulties as a result. Automated payments with built-in retry logic built into the system can increase your payment acceptance rate.
Lack of funds/analytics
The lack of funds is a common cause of failed payments in SaaS, especially when users use prepaid cards or cards with a spending limit in place. In this scenario, the best way to combat losses is to use retry functionality with built-in logic so that you pick up behavior patterns and retry at the optimal time for success.
Incorrect or missing payment information
Incorrect payment details or missing information will lead to payment failure. This is particularly common for SaaS businesses that rely on recurring card payments, as cards can be lost and expire every 36 months, which causes a change in card details. You can use card validation methods in your checkout flow to notify customers that there are a few card details that aren't correct or missing so they can correct them. Alternatively, you can also let your customers know that the card listed as their primary payment method is about to expire. Your payment processor will usually offer account updaters that sync updates on card credentials on file. Others offer network tokens, which do not expire so that customers do not have to worry about updating their information, but you may incur additional charges and processing fees if you go this route.
Currency Conversion Issues
If you only accept payments in a single currency, regardless of where you operate, your payment acceptance rate may take a hit. Currency conversion creates longer payment chains and greater opportunities for fraud triggers. Selling your solution to customers in their local currency can increase payment acceptance in the market. The execution can be complicated and expensive, depending on your payment infrastructure and the foreign exchange fees applicable, so make sure that you discuss this strategy with your payment processor.
Problems with Financial Compliance
SaaS companies have to keep regulations in mind and implement any requirements into their payment flow. Strong Customer Authentication (SCA) requires multi-factor authentication (e.g., PIN, password, or fingerprint) in order to approve payments. Failure to provide authentication will lead to a failed payment. Your geography (and that of your clients) can also impact your failed payment rate. For example, Brazil has restrictions when it comes to using local cards for international payments, while countries like Iran and Russia are cut off from wider payment networks by sanctions. In India, any subscription renewals over $64 must be manually renewed. Any automatic recharge over this amount will result in payment failures. If your business accepts card payments, you must meet PCI compliance standards to protect your business and your customers. Make sure that your payment provider regularly updates their systems and their platform to meet the latest compliance standards.
How can you avoid failed payments?
Failed payments are a considerable concern for SaaS companies. Fortunately, there are a few things you can do to avoid failed SaaS payments.
1. Expiration Date Reminders
If you or your payment provider can set reminders about pending expiry dates, this can give your customers a fair warning to update their cards before their subscription fee is due. These reminders can be used via email, text, or push notifications and will reduce the odds of your customers using expired cards.
2. Notifying Out-of-Range Payments
As a SaaS company, anyone around the world can use your services. This means that customers may attempt to process payments from countries that are out of range, which could result in failed payments. Letting your customers know that their location may be out of range can prompt your customers to use a different payment method to access your services and reduce SaaS customer churn.
3. Identifying card or financial restrictions
A customer's card may have structural or functional restrictions that could lead to issues with payment processing, e.g., limits on international card payments or FSA/HSA cards that can only be used for healthcare payments. Prompting your customers to try different payment methods before a failed payment occurs can prevent churn and recover the subscription fees.
4. Identifying failed checks
Network errors may lead to CVV/AVS code failures. If the country where the card is issued differs from the current IP address of the client (e.g., if they are using a VPN or traveling), it may be ruled as a fraudulent transaction. Understanding the reason why cards fail is the first step every business should take to combat failed payments.
5. Choosing the right payment processors and partners
Make sure that your payment partners are efficient and competent in everything they do. Stripe, for example, allows you to collect payments with a few lines of code and supports different types of payment (recurring, once-off) and payment authentication. If your payment system can show you which payments have failed or declined, you can follow up with customers. Before choosing a collection or payment vendor, make sure they are able to meet your current and future needs.
This includes evaluating:
- Costs, including that fees, are low while payment collection rates are high;
- Churn rate, as suboptimal payment processing software, can lead to involuntary churn;
- Compliance, including that the company follows governance standards and adheres to local rules;
- Global payment and processing capabilities;
- Continuous improvement and optimization to ensure that payment acceptance isn't impacted by changes that come into effect.
6. Reach out to customers with solutions
When payments fail, reach out to your customers with the necessary next step to update their credit card details or payment methods. If you know why the payment failed, you can guide them towards correcting the issue. The more information your customer receives about correcting their payments, the better the odds that they will try again.
7. Integrating an automated dunning solution
Dunning refers to the process of contacting consumers repeatedly to collect a debt, usually after a card has declined. A dunning solution is payment recovery software that lets customers know when their subscriptions are due. This can reduce churn and improve the collection of customer payments.
8. Review Your Reactivation Schedule
There are different retry settings to choose from, depending on your needs. Some payment companies will retry a card even if it's been marked as canceled or unpaid; others won't retry at all. This can impact your customer retention rate because if customers do update their payment methods, your payment processor won't retry the payment again automatically. This will place a barrier between the customer that wants to be retained and your business.
9. Automate payment collection
Automated billing services can put the entire payment process on autopilot. Manual collections can increase the margin for error and take up a significant amount of your valuable time. With the right solution, you can access invoicing, rating, collections, dunning, revenue recognition, and improved customer interactions.
Why Switch to Automated Collection?
If you are a SaaS business, you may be losing customers because of expired cards, insufficient funds, or any of the issues we've mentioned in the article. Up to 10% of your monthly recurring revenue is at risk because of payment failures. Automating your collection process will assist with recovering failed payments.
With a solution like Subcovery, all it takes is two minutes to set up. From there, you can match your unique brand tone, style guide, and color scheme to match customer expectations and build trust and professionalism. You can preview and turn on campaigns at any time, and the solution will run in the background. You'll also gain much deeper insights into your subscription and churn analytics so that you make changes to improve your payment acceptance rates and client service.
With Subcovery, you can view the breakdown of voluntary versus involuntary churn, your all-time recurring revenue rates, and recovery rates. That way, you can customize campaigns to keep at-risk accounts from churning. Information also includes a live feed of all active, recovered, and lost customers, enabling you to gauge the health of your subscriptions at any time.
Many best practices are already packaged into the solution, including customizable email templates and automatic retries before the email sequence begins.
Failed payments can lead to involuntary churn and unsatisfied customers, not to mention a reduction in revenue. By following a few simple steps, you can minimize the impact of failed payments on your SaaS business.
