Could your acceptance rate be masking risks to your revenue?

Paying bills, booking flights, subscribing to content, or ordering a pizza – these days, more often than not, we make these transactions digitally. The online checkout button is now a 24/7 staple of daily life. And the click of that checkout button is crunch time. What happens next – throughout the entire payment process – has to be perfect to achieve a successful transaction. Yet the line between a successful sale and a missed opportunity is razor-thin.

All of us are familiar with the experience of a wrongly declined payment. Some 45% of us abandon cart and head to another site. Sale lost, loyalty at high risk. That’s why businesses need to have a very clear picture of how their payments are performing and what they can do to improve performance.

In this article, we’ll look at acceptance rates as the key payments performance metric. We will be looking under the hood to help you understand how acceptance rates are calculated and how to tailor your calculations to meet your precise business needs. It's not often talked about, and it sounds counterintuitive, but sometimes ‘good’ acceptance rates can be bad for revenue. That is to say, acceptance rates that lack transparency can actually be hiding significant risks to your revenue or even losses. We’re here to ensure that doesn’t happen.

The three principles of calculating acceptance rates

When it comes to calculating acceptance rates there are three important principles to always keep in mind.

1. Acceptance rates are a strategic measure with many applications. There is no best calculation per se: tailored calculations are made with a strategic objective in mind depending on your business, your objectives, the specific information you require, and so on.
   
2. But start at the base. A baseline calculation, that does not exclude any kind of transaction or error code, is always the best place to start. It allows for comparative analysis and it gives you access to all the data that can help you to recoup revenue now or in the future.
   
3. And never let it mask trouble. The reason we calculate acceptance rates is to maximize revenue. Therefore don’t settle for a high acceptance rate if you don’t know what lost transactions or attempted fraud it is masking.

The clearest gauge of your ability to convert intent into revenue 

The businesses we work with regularly tell us that acceptance rates are their key payments performance metric. That makes total sense, in theory. Payments acceptance rates matter a lot because they tell you how much revenue you’re capturing versus what's left on the table.

As a result, this metric is the clearest gauge of your ability to convert intent into revenue at the checkout. And because this is a revenue capture metric, it helps you measure ROI (when paired with costs and fees). Importantly, it reflects the performance your payment service providers deliver to you.

The payments industry lacks a standard calculation for acceptance rates

But here's the challenge: measuring payment acceptance involves so many variables. For declined payments there are more than 100 error codes – all of which can be included or excluded from the calculation thus impacting the acceptance rate.

Yet, there's no industry standard calculation. And lots of these codes can get omitted by your payments service provider – before they ever reach you.

That's a problem for a few reasons. 

‍Comparing the performance of payments service providers is challenging

‍Firstly, most enterprise businesses work with multiple payments partners and route payments volume according to the performance of their partners to ensure the highest possible revenue capture at all times. But to know where to direct transaction volumes, you have to be able to accurately compare performance across all payments providers. If you don’t know how each partner calculates acceptance rates, you can’t compare ‘apples with apples’ or make informed choices. 
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Payments service providers may remove certain error codes from the equation, skewing the results. Removing just one error code can push the rate 10 percentage points higher. That's significant in a world where one basis point can equate to millions of dollars lost or gained.

Loss of valuable error code data

‍Secondly, your acceptance rates should be a source of rich intelligence to inform your payments optimization strategy. However, without the range of error codes that many providers automatically remove from the equation, you’ll be missing important clues and cues for improving your revenue capture. These error reasons may include authentication failures, fraud, insufficient funds, and many more.

Removing certain error codes can be helpful depending on what you want to understand. However, businesses should begin by arming themselves with the complete picture before purposefully adding filters. It's the only way to create a comparable baseline that ensures important intelligence is not being missed.  

Now let’s dig a little deeper with examples to better understand the nuances at play. Here are some ways your high acceptance rates could be masking problems – and what to do to avoid this. 

• Example one: Excluding fraud decline codes
  Does your acceptance rate exclude issuer fraud decline codes? If it does, then this is a risky approach to take.
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  Now, you might argue that if a payment is fraudulent, then it's not a payment you want to take, and it doesn’t make sense to include it in the calculation. But this means that you are automatically locked out of very important visibility on potential fraud spikes being directed at your business. And these will likely harm you in due course.
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  Moreover, we know that there are plenty of instances where issuer-identified fraud declines are wrongly applied. In these cases, you’re losing out on revenue even if your acceptance rate looks great. Conversely, if you spot a spike in issuer-related fraud declines, you can explore and address overzealous risk handling from the issuing bank. This will allow you to recoup lost revenue by addressing the issuer relationship and ensuring the correct risk profile is being applied to your business. This is something your payments partner should be helping you to identify and remedy.
  
• Example two: Excluding insufficient funds codes
  Similarly, you may think that removing insufficient funds from the calculation is an acceptable default approach. But that is outdated in today’s business environment where so many companies have various forms of recurring, subscription, merchant-initiated, and installment-based payments in their mix. Insufficient funds error codes are important information for all these businesses as they can inform retry strategies that significantly reduce churn and optimize revenue capture.
• Example three: Excluding authentication failure codes
  Are you losing customers because of a bad authentication integration? Even authentication failures should be captured in your baseline acceptance metric. There is a lot you (or your PSP) can do to minimize authentication failures, so you need to know when and how significantly this is impacting your acceptance rates. An acceptance rate that omits this information does not deliver a rigorous and informative picture of your revenue performance. ‍

How and when to tailor your metrics ‍

The simple truth is: when you capture the whole picture in your acceptance rate you have a solid base from which to build and optimize. Then, having understood and dealt with any fraud problems or any insufficient funds and so on, you can remove these error codes and reach a rate that makes sense based on what revenue you know you could not possibly have captured. But you need to troubleshoot first and always keep an eye on the whole picture. Keep in mind that improvements are key and drive incremental revenue gains. However, it will not be possible to fix all cases of fraud or insufficient funds, and you must be clear on the definitions for all error codes.

Now you have mastered the nuance of how to calculate acceptance rates, you are ready for the important work of measuring your acceptance rates according to the variables that matter. There is little use for one blanket metric when understanding your acceptance rate according to some key specifics will tell you so much more about what’s working and what’s not. 
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To build the most meaningful picture of how and where your business is performing or where improvement is needed, your acceptance rates should be calculated according to variables such as:

• Country
• Region
• Line of business
• Issuing bank
• Transaction type (such as merchant-initiated or customer-initiated)
• Payment method

If you are responsible for optimizing your payments performance and managing your payments key performance indicators and would like to discuss the best way to ensure you’re getting full transparency and control over your acceptance rates, then I’d love to hear from you and to support you with advice that’s right for your business.