Blog March 28th 2022

How A Bad Payments Experience Can Put Off Good Customers

Retail has evolved incredibly quickly in 2020 and the payments industry has struggled to keep up. In this two-part series, we discuss four ways that the pandemic has impacted payments

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Callum Godwin

Chief Economist

For the fashion sector, the pandemic has highlighted the importance on having a robust strategy for online payments acceptance. The plethora of challenges that come with eCommerce and mCommerce experiences are vastly different to in-store payments. How retailers approach online authentication has become business critical.

Getting Good Customers Through The Checkout

Simply put, an approval rate is the proportion of transactions a merchant submits for authorisation that ultimately get accepted (or approved) by the customer’s issuing bank. The problem for merchants moving online can be summarized equally as succinctly: approval rates for in-store purchases average 97%, while the average approval rate for online purchases plummets to 85%. We can see this illustrated in Figure 1 where CMSPI has calculated average approval rates across Card Present, and Card Not Present transactions in the apparel industry in 2020. The shift to online as a result of the pandemic caused a major shift in the amount of good customers retailers were able to get through the check-out. According to the US Census Bureau, monthly sales figures for clothing stores stood at $16.6 billion in January 2020. The impact of approvals means that, had these same purchases been made just 3 months later, $1.43 billion of them would not have been approved.

For the same customer – that goes into a store, or visits a website – with the same card, purchasing the same goods, online merchants face an additional 12% of those transactions failing after the customer clicks pay. Many of those failed transactions will actually be legitimate customers with enough funds in their account being wrongly declined. In fact, CMSPI estimates that roughly 1 in 5 declined transactions fall into this category, causing a major headache for merchants that ultimately are likely to be blamed for that failure by customers – losing both revenue and potential repeat business.

A lack of transparency in approvals, and a supply chain that is failing to deal with the issues this causes, makes getting transactions over the line extremely difficult for online merchants.

Further, when finding the right strategy to tackle fraud, it is crucially important to balance out how it may impact your approvals. What is the economic model of your fraud tool, and what are they being tasked to do? CMSPI works with many retailers across Europe (and the globe) to set up the most optimal fraud strategy. These market-leading strategies mean merchants don’t lose out on millions of dollars in revenue.

Often times, retailers aren’t aware there is an issue – in the example above, merchants cannot necessarily see that the loss of $1.43bn in a single months’ sales does not reflect any change in demand for their products. Not only this, but it is not always clear which party is responsible for a merchant’s declines; we have found that retailers often need to negotiate directly with issuing banks to truly optimize their supply chain. With CMSPI’s scientific, data-driven approach to approvals & fraud, coupled with a view across the market, we have been able to achieve substantial revenue growth for our clients.

In Summary…

A trend towards online retail was visible prior to the Covid-19 pandemic, but the sudden closure of many stores across North America forced this transformation to take place over just a few months. Merchants, along with consumer habits, have had to adjust at an unprecedented pace. This is especially so for fashion retailers, whose outlets were closed for months as part of measures to reduce transmission of Covid-19. These merchants also face a number of industry-specific challenges such as an increase in refunds.

These dramatic shifts have made optimizing payments arrangements mission critical for merchants; otherwise, they’re at risk of losing out on significant revenues and good customers. Further, with the difference in cost to process payments online, coupled with frequent new, or amended scheme fees, now is the time for apparel retailers to address their payments fees.

CMSPI’s work shows that a scientific approach, coupled with the right outreach to issuing banks, can maximize approvals and boost merchants’ revenue significantly. We have worked alongside our merchant partners in both the optimization and regulatory spheres to ensure that retailers’ response to these complexities is one which reaps the full rewards of the ‘new normal’ – and demands a better one.

See what Smarter Payments Intelligence can do for you.

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