Delinquent payments: what they are and how to manage them

The subscription business model is a proven one. It’s dependable, predictable, and – usually – you can forecast income with confidence and accuracy for the weeks and months ahead.

Payment delinquency, however, can threaten this ideal scene. Delinquent payments and accounts – those which, put simply, don’t pay – can result in customer churn. Which, for businesses like subscription services (that rely heavily on unearned revenue), can be fatal.

Fortunately, there’s plenty your business can do to reduce the likelihood of delinquent payments before they happen – and, when they do, take steps to limit the damaging impact they can have on your cash flow and customer base.

Below, we’ll walk you through what delinquent payments are, and why they happen. Then, we’ll unpack our top strategies for combating them: from leveraging Checkout.com’s payment processing software and real-time account updater service to tailoring your dunning management and data collection efforts.

What is a delinquent payment?

‍A delinquent payment is one that is overdue or unpaid.

Essentially, a delinquent payment is one that hasn’t been made; a payment defined solely by its absence. When a customer, borrower, or debtor fails to make this payment – be it on a loan, credit card, or ongoing monthly subscription service – the account becomes delinquent.

How are delinquent accounts made?

Delinquent accounts arise when customers or borrowers (be they individuals or companies) fail to make a payment on their financial obligations, according to the agreed-upon terms.

This could, for example, be a monthly mortgage payment. It could be a quarterly utilities bill, or a yearly payment for a software subscription service.

Customers may end up missing a payment because:

• The credit or debit card they have on file has expired
• They lack sufficient funds to make the payment
• The service isn’t automated, and they simply forgot
• They’re refusing to pay – perhaps, although not always, because of some unaddressed grievance or dissatisfaction with the service

Why is delinquent payment management important?

Managing delinquent payments is vital because, left unchecked, delinquent accounts can have a range of consequences – for everyone involved.

For you, as the merchant, delinquent payments can result in lost revenue, cash flow issues, impacted relationships, and increased costs – be they to collect the debt, handle the admin, or even, in the most extreme cases, pursue legal action.

For the customer, delinquent payments can incur late fees, penalties, increased interest rates, and potential damage to their credit score.

So, why is it important for your business to manage delinquent payments proactively – and handle them before they have a chance to impact on your brand and bottom line?

The benefits of proper delinquent payment management include:

• Predictable cash flow: particularly for subscription-based businesses such as SaaS (Software-as-a-Service) providers, reliable annual recurring revenue (ARR) is vital. Managing delinquent payments before and after they happen helps ensure dependable cash flow – and more sustainable long-term financial outcomes.
• Reduced costs: staying on top of delinquent accounts can minimize the financial losses associated with unpaid debts – preventing them from escalating into more severe defaults, and resolving them before they require costly legal action.
• More data-driven insights: to effectively analyze and track payment delinquency trends, you’ll need to be monitoring them. This numbers-oriented approach can lead, in turn, to other valuable insights into your payment processing patterns and customer behavior.
• Stronger customer relationships: addressing delinquent payments with speed and through transparent, effective communication can help maintain positive relationships with your customers (who may be facing temporary financial difficulties). This reduces churn, and increases levels of customer loyalty in – and lifetime value to – your brand.

Want to learn more about churn rate – and how payments can reduce churn for subscription businesses? Explore our articles for a detailed take.

Best strategies to combat delinquent payments

Now you know what delinquent payments are, and why it’s important to manage them.

This begs the question, though – how do you combat delinquent payments? Or, better yet, prevent them from happening altogether?

Let’s take a look.

Leverage payment software

Using payment processing software is vital. It’ll streamline how you take payments: adding speed and security into the mix, removing friction, and equipping your business with all the latest insights with which to optimize your payment processing – and grow your brand.

Equally important, though, is picking a reliable payment processing partner.

Choosing the right payment service processor – like Checkout.com – opens your business up to a world of delinquent payment management strategies. One example? The ability to accept – and automate – recurring payments.

Recurring payments retain your customer’s card on file – then automatically charge it, with their consent, every time a payment is due.

This has a few benefits. Not only does it take some of the administrative load off your team’s shoulders, but it’s easier and more convenient for your customer – who, in a subscription payments context, gains from not having to re-enter their credit card information every month to retain your business’s services.

It’s better for your abandoned cart rates – and, in the long run, for your sales and revenue, too.

Recurring payments can also help reduce payment delinquency by ensuring that a customer can’t forget to make the payment. They remove those potential effort and time-related barriers to payment, and boost loyalty through smoother, more seamless subscription payments.

‍If, that is, you have the right, most relevant customer payment information saved. So how can you ensure this?

Use a real-time account updater

Every few years, customers’ debit and credit cards expire, and they receive a replacement. It’s normal – and isn’t something the customer can control. However, through no fault of their own, the old payment card you have on file for them suddenly won’t work.

This, of course, ends up in a delinquent payment. Leading, eventually, to you picking up on the missed payment and reaching out to them for their new card details. It’s a laborious, long-winded process – but there’s an alternative.

Available with all reputable payment service providers such as Checkout.com, a real-time account updater service ensures your recurring payments won’t fail or bounce back due to your customers’ cards expiring, or becoming lost or stolen. With the service, we’ll send you updated details for Visa and Mastercard cards as soon as they happen.

It’ll save you the hassle of updating these details manually – and prevent the drain of inadvertently delinquent payments on your business’s resources and cash flow.

Analyze delinquent payment data

When it comes to delinquent payments, it’s not simply about managing them when they arise – but understanding why they are arising.

Here’s where the data-driven approach of a dependable payment service provider can help. At Checkout.com, we’ll provide you with response codes when a payment fails. These kit you out with an understanding of why that transaction didn’t go through: whether it’s a ‘soft’ decline due to the customer entering incorrect information, or because their bank has blocked it.

Alternatively, the transaction may have been ‘hard’ declined – often due to a card that’s been reported lost or stolen, or when fraud is suspected.

Whatever the reasoning, these codes allow you to understand it; helping you get to grips with the underlying motivations of the delinquent payment.

Was the churn voluntary – a switch to another provider; financial constraints; changing needs; dissatisfaction with your service – or was it involuntary? If it’s the latter – and your customer’s delinquent payment is down to accidental reasons, such as card expiry – it’s easy to fix.

If the churn is voluntary, there’s still a few things you might do about it. You could reach out to the customer directly to learn more, and see if there’s a way you can compromise, to better meet their evolving needs and budget.

Either way, you’ll need the right data to know this, and to take the right action off the back of it – and for this, analyzing delinquent payment data is crucial.

Choose more secure payment options

Offering customers a suite of secure ways to pay creates a safer, more trustworthy environment at the checkout.

The customer knows you’ve taken steps to protect their data. And, through allowing them to pay not only via major credit and debit card brands, but with a range of alternative payment methods (such as digital wallets, bank transfers, and cash-based vouchers), you show a willingness to let them pay in the way they’re most comfortable with.

With payments made simple, secure, and convenient, you increase customers’ confidence in the process – helping ensure they pay on time.

Plus, more secure payment options not only reduce delinquent payments, but fraud as well. This reduces the risk of unauthorized transactions and illicit activities: sparing your business from excessive chargebacks, and the bureaucracy of the costly, time-consuming credit card dispute process.

Set clear payment terms

When does a payment become delinquent?

That depends on the payment terms both parties have agreed to. If those are net 30 payment terms, for example, the customer has 30 days to pay from the delivery of the service. On the 31st day, the payment would technically slip over the threshold into delinquency.

What this all speaks to is how important it is to set transparent payment terms before entering into an agreement with your customer. Ensure both parties have a crystal-clear understanding of the expectations around payment due dates – and that this is communicated openly, rather than remaining an unspoken assumption.

Remember, a payment can only be delinquent when it’s late. And, for it to be late, there needs to be concrete guidelines around when it’s owed. Implementing these as soon as possible benefits sellers and buyers alike – and ensures continuing good relations between all parties.

Improve dunning management

When a delinquent payment arises, it can result in your business being out of pocket – especially if you’ve already provided the service.

So what can you do to recoup that money? Dunning is one strategy. Dunning refers to the process of reaching out to your customers to ask them for money they owe your business – and, unsurprisingly, it’s not a tactic that’s overly popular with customers.

That said, dunning is necessary – and, if you do it right, it can be an effective, efficient way of recovering money lost through delinquent payments.

To improve your business’s dunning management, try:

‍Streamlining the process: set up automated email reminders to customers that go out as soon as a payment fails. This takes the manual effort out of the process, and helps you react swiftly to delinquent payments.

• Segmenting your customers: sort your client base by their payment history, behavior, and how they like to communicate. This enables you to tailor your dunning messaging to your customers’ unique profiles and preferences.
• Adopting an empathetic tone: good dunning management isn’t always about how you reach out to your customers – but what you say when you do. So ensure your communications are empathetic: that they relate to and resonate with the recipient. Consider the possibility that they’re struggling through a difficult financial situation.
• Being clear and concise: that said, keep things brief, too – there’s no need to drag your dunning comms out to essay length! Clarity is also crucial – your dunning messages should transparently state the outstanding balance, due date, and what late fees or penalties will apply in the event of non-payment.

Send early payment reminders

Delinquent payment management isn’t solely about addressing missed customer payments when they happen – but preventing them before they do.

Through this lens, sending early payment reminders can help. They remove customer forgetfulness as a reason for payment delinquency, and remind the customer of their obligations to your business. What’s more, these communications – which you can send via email, SMS, or through a phone call, depending on the customers’ preferences – can remind customers to ensure their payment card is up to date.

All that said, early payment reminders are most effective as part of a wider, more comprehensive delinquent payment recovery strategy. They should be used in tandem with a real-time account updater service and recurring payments – not in lieu of them.

Manage delinquent payments with Checkout.com

Here at Checkout.com, we have a sophisticated toolkit for all your delinquent payment management needs.

Our platform enables you to automate your payment processing approach: to accept recurring payments securely, with ease, and in over 150 currencies and local payment methods. With our real-time account updater service, you can rest easy knowing your revenue and cash flow is protected from involuntary churn. And, when payments to your business do fail, our response codes mean you’ll know exactly why – and be able to react accordingly.

You’ll be able to manage all this from a single, centralized online dashboard. Allowing you to analyze every aspect of your delinquency data – then use this payment data to unlock your business’s growth.

Explore our recurring payment processing solution for subscription businesses today – or get in touch with our team for a friendly, no-obligation chat to learn more.