Despite recent alternative payment innovations, cards remain dominant in ecommerce — for now. Credit cards and digital wallets are the most popular ways to pay in ecommerce, accounting for over 60% of payments. Some digital wallets leverage bank transfers, but many hold virtual versions of cards and essentially act as card payments.
Unfortunately, card payments don't always work. And the resulting payment failures can be both aggravating for customers and harmful for merchants.
Failed payments — even if they result from customer error — create a frustrating customer experience and add friction to the checkout process. Customers might decide to shop with a competitor or give up on the purchase altogether, costing you a sale and potentially losing you a returning customer.
This post will explain what payment failure — specifically, card-based payment failure — means for your ecommerce brand. It will also discuss why payments fail and show you how to reduce payment failure and improve your overall conversion rates.
What is a payment failure?
A payment failure occurs when something in the payment process prevents the execution of the transaction. Common reasons for failed transactions include:
A technical problem
An issue with the payment method the customer tries to use (like insufficient funds or an expired card)
The customer gets their card information or authentication code wrong
The card issuer blocks the payment because of suspected fraud
The payment failure rate shows you the proportion of payments that fail. To calculate the failure rate, divide the number of failed payments by the total number of payments initiated over a certain period.
Payment failure rate = (no. of failed payments / total no. of payments)* 100
For example, imagine you try to accept 30,000 payments in one month, and 2,000 of those payments fail:
2000 / 30,000 * 100 = 6.6%
To calculate the payment acceptance rate (sometimes called the authorisation rate), subtract the failure rate from 100. If our failure rate is 6.6%, our acceptance rate is 93.4%.
What is the difference between a failed payment and a declined payment?
Payment failure is a general term – it means a payment wasn't successful but doesn't describe why. A declined payment, also known as a card issuer rejection, means that the card issuer didn’t approve the payment.
A card issuer might decline a payment if the cardholder doesn't have enough money in their account for the payment, they've hit a spending limit, or if the card issuer suspects the payment is fraudulent.
What's the difference between a hard decline and a soft decline?
A soft decline is temporary — the card issuer might approve the payment if the customer takes action, like confirming the transaction or updating their billing address.
A hard decline is an irreversible rejection. For instance, if a customer's card has expired or they've reported it stolen, the card issuer will hard decline the payment.
What's the difference between a payment failure and a chargeback?
A chargeback is the reversal of a debit or credit card payment initiated by a bank or card issuer on behalf of a consumer. A payment failure means something went wrong during a transaction that prevented it from completing.
When there's a payment failure, the transaction doesn't complete, and the merchant doesn't receive any funds from the customer. A chargeback happens after a payment has successfully occurred, and the funds are in the merchant account. To initiate a chargeback, the cardholder requests their card network or bank to reverse the transaction to get the funds back from the merchant.
What is payment failure recovery?
Payment failure recovery is a process that attempts to complete payments that initially failed. Businesses first try to understand the reason for the failure. Then, they communicate with the customer to try to solve the issue. For example, they could ask the customer to update their billing address or provide a different payment method (a process known as dunning). Finally, they retry the payment.
Subscription companies use payment failure recovery to reduce involuntary or ‘delinquent’ churn. Involuntary churn happens when a customer signs up for a subscription, but the recurring payment fails. Some companies use software to automate the payment failure recovery process.
Why do payments fail?
Online payments are complex. Once a customer initiates a card payment, it passes through various steps: authentication (like 3D Secure), payment gateway, payment processor, card network, issuing bank, and the merchant's bank. The different entities involved receive and send information and often carry out fraud prevention checks along the way.
With so many different stages, the payment has many opportunities to fail. The different types of payment failure fall into three main categories:
Customer error
Sometimes, payments fail because the customer initiating the payment did something wrong. For instance:
They entered their card details (card number, name, CVV, and expiration date) or the authentication code incorrectly
They didn't get the code to verify the payment (for example, maybe they had changed their phone number and couldn't receive the one-time password from their bank)
The card they're trying to use is expired
There's not enough money in their account
Customer error can be reduced with open banking payments, which bypasses card networks entirely. Customers don’t need to type in card details — they just select their bank’s name from a list and securely verify the payment with fingerprint or face ID.
Fraud prevention
A card issuer or bank might block a payment if they think it's fraudulent. The blocking is usually applied automatically. It follows a set of fraud rules based on the characteristics of fraudulent transactions.
Blocking payments to prevent fraud is a necessary measure — neither customers nor merchants want truly fraudulent payments to succeed. It’s a prevalent concern for consumers and merchants alike. In 2022, fraud losses on UK-issued cards reached £556.3 million.
However, poorly designed rules-based fraud systems can lead to too many harmful false positives.
Let's say a customer makes a payment that seems 'unusual' — for example, in a new location or of a higher value purchase than they usually make. The transaction might seem fraudulent, but it might just be the customer has travelled to a new area or has decided to indulge in an expensive purchase. False positives can lock a customer out of their funds, inconveniencing and frustrating them.
Open banking transactions are highly secure, and because they don’t involve the sharing of sensitive card details, they’re less vulnerable to fraud than card payments.
Technical failure
The payment will fail if any component of the payment process chain fails. Errors from the payment gateway, payment processor, card network, issuing bank, or merchant's bank can all prevent a transaction from clearing.
In the case of cross-border payments, the process is even more elaborate. The payment may go through a correspondent banking network and currency exchange, which adds more chances for failure.
A failure might happen if:
One part of the process is misconfigured or outdated
The data can't be sent or received correctly between two parts of the chain
Any of the components, like the payment gateway or the card network, have downtime
How payment failure impacts ecommerce businesses
Payment failure can have a significant impact on ecommerce businesses, degrading the customer experience and costing merchants potential revenue.
According to a report by CMSPI, 3.3% of customers who land on an ecommerce site end up reaching the payment stage. However, 40% of those don’t end up completing the payment.
Of the payments that don't go through, 20% are 'false declines.' False declines happen when customers have enough money in their bank account and enter the correct payment information, but a different error occurs. In total, false decline causes over €20 billion of lost retail sales in Europe each year.
In many cases, a failed payment means a lost sale. More than half of surveyed companies offering online payment (56%) say implementing SCA has decreased card conversion rates. In ecommerce, 36% of merchants described the drop-off as 'significant'. Many organisations are already aware that payment problems are hurting sales. A 2023 survey by The Paypers found that optimising payments — including preventing payment failures — was a top priority for more than half of respondents.
How to reduce payment failure
Reducing payment failure is difficult because payments fail for various reasons. However, you can do some practical things to reduce the risk.
One option is to let customers save payment details for future use to prevent failure due to human error. However, storing customer's card details leaves you vulnerable to security risks. If you suffer a data breach, for example, cybercriminals may gain access to your customer’s sensitive payment information. Digital wallets are becoming more common and can help customers remember their details.
If you sell to customers in other countries, using a payment processor with global coverage can help you get paid more efficiently. Payment processors equipped for international payments will try to find the most efficient way to complete a payment.
Another method is to look for patterns in payment failures to see if there is a persistent technical issue you can resolve. Monitoring transaction logs, error messages, and customer feedback can shed light on recurring problems.
Why alternative payment methods mean more successful payments
Instead of fighting an uphill battle to improve their acceptance rates, many merchants are turning to alternative payment methods. Open banking payments are among the most promising alternative payment methods. It enables account-to-account payments, creating an effective alternative payment option for ecommerce businesses.
With open banking payments, payment details are pre-populated, which reduces the risk of failure due to human error. No sensitive details are shared between the customer and the merchant, and no bank details are stored. Fraudsters aren't able to intercept and steal customer information, and there’s less risk of customers’ details being compromised in a data breach. Open banking providers securely initiate the payment directly with the customer's bank.
Each payment also uses strong customer authentication (SCA), but unlike with card payments, the authentication is embedded rather than added as an extra step. Open banking payments also feature fewer intermediaries compared to card payments, streamlining and simplifying the process. This creates a more secure and reliable experience for end users.
Learn more about how open banking payments can help ecommerce businesses.
What is 3D secure and how does it work?
5 points for the National Payments Vision
