Why do online card payments fail?

Andy Tweddle, Payments writer
25 May 2022
Hand holding a debit card with a X next to it

At a glance, ecommerce and cards seem like perfect partners. For example, cards are estimated to represent around 41% of ecommerce payments in Europe. Despite this popularity, cards have their drawbacks. Estimates suggest this payment method will fail up to 14% of the time. Compare that with bank-to-bank payment methods, such as open banking, standing orders, direct debits and manual transfers, where the success rate is around 95% or higher.

In this article, we’ll look at the reasons for those failures, and what a merchant can do to improve their card payment acceptance rates.

But let’s start with a definition.

What are payment failures?

Put simply, payment failure is the percentage of payments that do not complete, out of those payments that are attempted. We can flip the definition to talk about payment ‘acceptance’ or ‘authorisation’, which looks at the success rate.

The formula is: (number of failed payments / number of attempted payments)*100

Let’s take a merchant that tries to accept 20,000 payments per month. If 1,500 fail to complete, the payment failure rate would be: 1,500 / 20,000 * 100 = 7.5%.

While knowing the overall payment failure rate is important, you can also calculate it for individual payment methods, markets, product lines, and by different time periods. This allows you to identify trends and hone in on specific causes.

Why should you care about failed card payments?

For starters, a failed payment means a frustrated customer. Digital shoppers don’t like inconvenience, and may not attempt the transaction again. Worse still, they may go to a competitor’s site to get what they need.

The lost sale is not the only consequence for the merchant. Getting a prospect to the checkout takes a lot of work and money, all of which is wasted if the shopper doesn’t follow through with their purchase. Reputation takes a hit too, making it harder to win new business. It costs a business five times more to attract a new customer than to keep an existing one.

Things can get even worse for businesses with a subscription model. When a customer’s payment fails, they may cancel their subscription and churn, or even have their contract automatically terminated early (ie involuntary churn).

A 2021 report suggests that failed payments cost businesses around the world $118.5 billion in lost sales, higher acquisition costs, administration and fees. With card payment methods (including digital wallets) dominating ecommerce, it’s easy to understand the scale of the problem.

None of this is inevitable. Online merchants have many tools they can use to reduce their card payment failure rate, or even avoid failures altogether. We’ll look at some key reasons card payments fail, quick fixes to reduce the likelihood of failures, and how alternative payment methods like open banking may offer a more reliable way for your customers to pay.

Why card payments fail

1. Incorrect card details

The issue: Card numbers are long. It’s easy for a customer to get a digit wrong, misspell or use a slightly different version of their name than appears on their card, or fill in the issue date instead of the expiry date.

The quick fix: Normally, a second attempt at inputting card details will fix the mistake. But why put the customer through the hassle in the first place? By allowing them to save a card with the website for future transactions, or use a saved card from a web browser, the merchant can enable one-click purchases. However, storing payment details comes with its own risks, namely unauthorised payment fraud.

2. Expired, lost or stolen card

The issue: A card’s validity tends to last 36 months — shorter if it’s been lost or stolen. Whereas a bank or card network will automatically send a new card out ahead of time, it doesn’t follow that a customer will immediately update their ‘old’ one where it’s being stored online. This is a particular problem when the expired card is being used for recurring payments such as subscriptions and instalments.

The quick fix: A gentle nudge to the customer ahead of the card expiry date used to be the only proactive step a retailer could take. Most of the major card networks can now do the job for them, by automatically synching cards that a merchant holds on file with their own records. Visa Account Updater and MasterCard Automatic Billing Updater are two examples of this service.

Tokenization offers another solution. The customer's card is replaced with a series of randomly-generated numbers — the ‘token’ — supplied by the card issuer. Unlike cards, tokens have no expiry date, and therefore can be used indefinitely.

3. Insufficient funds

The issue: If the customer doesn’t have the funds or credit to make the purchase, the issuing bank will reject the payment request.

The quick fix: Though the merchant isn’t at fault here, neither are they helpless. When the issuing bank rejects a payment, it supplies a code giving the reason. A merchant can include this in their payment flow to inform a customer why the payment failed and encourage them to try again with a different payment method. When it comes to a recurring payment, the merchant has more control because they know when the payment is scheduled to be taken and can remind their customer beforehand.

4. Suspicious activity

The issue: With around $20 billion lost to ecommerce payment fraud in 2021, banks and card networks are becoming increasingly vigilant of suspicious activity. As security thresholds rise, genuine payments can be mistakenly identified as fraudulent, and rejected.

The quick fix: The temptation for merchants may be to favour a frictionless checkout instead of adopting potentially interruptive security measures. But that could backfire. And since online card payments now require strong customer authentication (SCA) across the EU, security is no longer optional.

Adoption of 3DS2 protocols is key when taking card payments. 3DS2 (also called 3D Secure 2, EMV 3-D Secure or 3D Secure 2.0) ensures more genuine payments are approved by requiring shoppers to authenticate themselves using two out of three elements, which includes one-time passwords (OTP), and biometric data such as a fingerprint, iris scan, or facial or voice recognition. 3DS2 also shares over 100 data points between the merchant and the payer’s card issuer to assess the probability that the payer is genuine.

5. Cross border payments

The issue: When a merchant and shopper are in different countries, the path of a card payment becomes more complex. Intermediary banks are sometimes required to ‘pass through’ a payment between the acquiring and issuing banks. This chain can grow longer if the card payment is made in a currency that needs converting; and sometimes data standards and IT systems may lack interoperability. Each of these points is a potential for the payment to fail.

The fix: Opening a business bank account in every country you trade in negates the need for card payments to cross borders. But the administrative and compliance hurdles involved makes that unscalable. Instead a payment processing partner with international coverage can reroute card payments through multiple banking layers. A payment is directed through the most efficient route between all the available banks, and if one bank in the chain rejects the payment, it is submitted to another.

Goodbye cards, hello open banking

Online merchants have a lot to think about when it comes to improving their card payment acceptance rates. And though some of the fixes we’ve looked at in this article go some way to addressing the inherent flaws of card payments, none will address the problem entirely.

So it’s no surprise that many are looking to lessen their reliance on card payments and adopt alternative payment solutions. Historically, account to account payments haven’t been fast or seamless enough for ecommerce. But open banking is changing that.

Security is just one advantage open banking has over cards. Two-factor authentication is embedded in the process rather than bolted on, making for both a more reliable and seamless experience. Open banking payments also settle faster than card payments (instantly vs one to three days), and they’re typically cheaper than card payments because of the lack of intermediaries.

So instead of wondering how they can prevent card payment failures, merchants should ask themselves how open banking can improve their payment acceptance rates.

Discover how open banking payments compare to other types of payment methods in our comprehensive guide.

In summary

  • Up to 15% of online card payments fail, costing merchants billions in lost sales and administration

  • There are multiple reasons why a card payment fails — some caused by the customer, others because of shortcomings of the card networks

  • Each point of failure requires a specific solution. This can require complex and ongoing analysis to ensure the ‘right’ solutions are being deployed, which extends the time to remediation and restricts market expansion

  • Alternatively, open banking payments don’t suffer the payment acceptance issues that hamper card payments, and also deliver other costs and operational benefits to merchants

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