August 19, 2016
By Karisse Hendrick, Editor-at-Large, CardNotPresent.com
More and more card-not-present merchants are introducing membership and subscription-billing models to capture loyalty and to increase revenue over standard one-time transaction billing. Once the domain of print periodicals and jelly-of-the-month clubs, now products as varied as streaming music, genealogy research, razors and makeup are available—and in high demand—as subscription services. While setting up payments for a traditional business model can be relatively simple, ensuring that consumers who sign up for a subscription will continue to be successfully billed for the service is critical to a recurring biller’s success. And to do that, payments must be at the forefront of the merchant’s mind from the beginning. With input from leaders in subscription-billing payments management, CardNotPresent.com has compiled a list of items to consider when managing payments for recurring billing.
1. Choose the right external partners
One of the most important relationships for a subscription company is the one with their payment processor. Scott Engel, director of Payments at music streaming service Rhapsody.com, acknowledges the vital role payments plays in delivering the best experience possible to his company’s customers. Engel says answering several important questions can help you determine the right payment partner for a recurring-billing business. Is your payments processor simply capable of processing recurring transactions, or do they add value to that process? How well does the partner’s recycling or account updater products work? Do they have an experienced/knowledgeable recurring team? Will they provide support to continually improve the recurring process?
Engel has found that detailed transaction data is especially important, and not all processors can provide the same level of detail. This transaction detail may be critical to understanding why cards are being declined, how to optimize cost, and how to create solutions that ensure successful authorization as quickly as possible.
2. Set up the right internal systems & processes
It’s imperative to have a backend system that is set up to recycle the right transactions and provide analytics and reporting that optimizes the payments process. Having a system that not only allows systematic retries based on the decline messaging but also the ability to change strategies such as days between retries based on card type or BIN, provides the flexibility needed to maximize the number of accounts that go into “paid” status. The system also should be able to allow for different retry logic based on payment method and international rules. Additionally, the system should provide account details that complement the information from the processor on each account to aid in reporting and ultimately inform payment strategy changes. And, when setting up your merchant account with your processor, having the correct Merchant Category Code for subscription services will ensure a “recurring flag” is attached all charges for subscription services, which will decrease declines due to insufficient funds.
3. Reduce declines to increase profits
Sending a declined transaction to be authorized again is known as “retrying” or “recycling” a transaction and is a major part of managing a subscription business. Because not all re-billing attempts can be authorized, it is important to have a strategy and the systematic ability to determine which cards get handled in what ways. Determining which transactions should be retried depends on the decline message, the payment method used in the transaction and the rules for retries per card type and country.
In the case of the major credit card brands, if a card is declined due to insufficient funds, it will most likely be authorized after the cardholder’s billing cycle if retried. However, if the decline response is a canceled or expired card, there is little chance the card number on file ever will be authorized again. Instead of retrying these transactions, messaging to the cardholder to update the payment method can be successful. Determining when these messages should be sent and the strength of the language should be considered when setting up the processes for recurring billing.
Another way to reduce subscription-billing declines is to use “account updater.” This is a service provided by most payment processors through the card brands that provides updated card numbers for cards that have been canceled and re-issued due to circumstances such as a card being expired or canceled due to suspicion of fraud. How a merchant can use this information depends on how and when the processor provides the data, the fees they are willing to pay and overall strategy. Some merchants are charged to just receive a notice that a new card is on file, while others do not receive a fee until they receive the new card number. These factors, among others, can help a merchant decide whether to receive proactive notices before the billing date, or reactive ones after an attempt has been made and a decline has occurred. Utilizing these tools to take action when a card is declined during a subscription payment can protect revenue and retain customers for a longer life-cycle than not taking action when a decline occurs.
4. Set up a successful international strategy
Markets outside the U.S. have different payment methods and rules (both in the market and with each alternative payment method) for managing subscription payments. One of the payment methods that has the most unique rules around subscription billing is SEPA for direct debit payments in Europe. As of 2014, companies using a subscription model in Europe must be in compliance with SEPA rules. SEPA requires, for example, that billers must notify consumers in writing prior to their billing renewal date that they will be charged for another billing cycle. The internal system must be set up to send these notifications within the required window for each customer. Additionally, recycling rules are extremely restrictive.
It also may be necessary to have more than one payment processing partner for international markets. “When you have a number of customers throughout the world, one solution might not be the silver bullet,” Derek Blatter, senior manager of electronic payments and fraud prevention at Ancestry.com, said in a session devoted to recurring billing at the most recent CNP Expo.
5. Continually analyze, report and adapt
The most successful subscription companies have dedicated resources continually measuring and adjusting their subscription strategy for maximum authorizations and as little “churn” as possible. Studying reporting broken out by payment method, marketing strategy, subscription levels (if more than one subscription offering), etc. can have additional benefits beyond increasing revenue through decreasing and retrying declines. It also leads to a better understanding of customers in each market and how customer satisfaction can be increased. When a specific data point has a spike in declines, the turn-around time to research and fix the root cause could be the difference between a small loss and a large financial impact. The quality of data impacts the quality of insights gained through reporting, which highlights the importance of having a processor that provides great data, married with the internal systems and processes in place.
These five factors can be the difference between a successful subscription strategy and leaving money on the table. Having a dedicated resource to manage the ups and downs of the payments process is almost a necessity for subscription businesses. For companies that cannot afford a dedicated resource to manage payments, there are providers that will manage the retry/recycling process on behalf of merchants, though it is still important to review reporting and strategies to ensure they align with customer service goals.
“There is a lot of opportunity in payments to retain customers through creating a comprehensive recycling strategy, using account updater, and communicating with customers in a way that reduces churn overall. This can make a significant impact to your companies recurring bottom line,” says Engel.