When reviewing their latest data, payment teams have various metrics to consider, not to mention the multiple interpretations of those metrics. One metric to consider is approval rates. Approval rates can provide insight into the health of the merchant’s fraud strategy and customer experience. In part one of a two-part series, we provide a detailed look into the difference between gross and net approval rates and the impact of fraud strategy on approvals. 

For a quick review, let’s start at the beginning. When a customer initiates a card transaction, the issuing bank receives an authorization request. At this stage the issuing bank will decide whether to authorize the transaction. The bank may decline this transaction for a multitude of reasons such as insufficient funds or suspected fraud. If authorized, the issuing bank will send an authorization code to the merchant. How merchants setup their acceptance environment for both customer and merchant-initiated transactions has a direct impact on revenue retention, customer experience, and the cost of a transaction – in other words, a direct impact on Transaction Success. 

Gross v Net Approval Rate Metrics

Understanding which transactions are included in your approval rates should be prioritized when evaluating Transaction Success. Gross approval rate includes all transaction attempts; this means bot attacks, retry attempts, and card testing can skew headline approval rates and lead merchants to believe they are underperforming. Net approval rate, on the other hand, removes repeated attempts and evaluates the final transaction as either an approval or a decline; this creates a metric that is more reflective of the amount of revenue converted for merchants.

Recognizing what is creating the gap between the gross and net approval rates provides insight into customer experience and/or points of friction during checkout. Often supplier data focuses on the gross approval rate, which can be helpful but lacks the full story. CMSPI aims to provide both gross and net approval rate metrics which has led to the discovery of numerous inefficiencies across our merchant base.

Fraud Strategy Impacts

Fraudulent transactions, whether intentional or unintentional, are well-known obstacles affecting approval rates for merchants. Understanding how your fraud strategy impacts both approval metrics and performance will guide merchants in the balancing act of optimizing fraud and approvals. Regarding approval metrics, merchants need to consider where their fraud prevention lies in the current transaction process, namely either pre-authorization or post-authorization. Regarding approval performance, merchants need to consider the impact of their fraud strategy, i.e. if their fraud strategy is too lenient or too aggressive. After an evaluation of approval metrics and performance, it is important to keep in mind the subsequent effects if changes are made to your fraud strategy.  

Navigating Approvals Growing Complexity

Approval rates allow merchants to evaluate their Transaction Success and respond accordingly. Within the approvals landscape there are numerous pitfalls, from hidden fees or inefficiencies resulting from the estate setup to expensive solutions that claim acceptance optimization. With all these changes happening so rapidly, what areas should merchants prioritize when evaluating Transaction Success in the approvals space? In Part Two, we will address common complexities including emerging payment methods and asymmetric information and how merchants can stay informed.