The cost of payment failures continues to be a pervasive problem in the payments industry and the many businesses it supports, causing inefficiencies that not only impact businesses’ ability to meet customer needs, but also hamper loyalty efforts aimed at delivering a healthy customer experience. .
“I think [the impact of failed payments] will continue to be an ongoing problem, âsaid Sarkis Akmakjian, senior director of product management at LexisNexis Risk Solutions, in a conversation with PYMNTS. “In terms of improvement, we see the industry taking more substantial steps to tackle the subject, as they realize that it becomes a bigger problem beyond the real cost.”
Tolerance and tipping point
According to the latest LexisNexis Risk Solutions study, payment failures are estimated to cost the global economy $ 118.5 billion in fees, labor and business losses in 2020. This is a concern major, but which raises a discussion of tolerance for failures. payments between banks, financial institutions (FIs), FinTechs and other payment service providers.
Akmakjian said institutions view tolerance as a “cost of doing business”, comparing the realistic approach to perfection. However, it is essential to consider the percentage of tolerance in this context. The study finds that the tipping point for action appears to be when the payment failure rate reaches 5% or more. Eight out of 10 organizations indicate that they would actively implement changes to resolve the issue.
Akmakjian explains that at this tipping point, it is essential for FIs to look back at their failed payment and assess how the impact may or may not threaten customers. âThe kind of action they take is really to look at their back-end and front-end technical processes and see where they can improve,” Akmakjian said.
For example, on the back-end, improvement might involve putting in place tools to work more efficiently to reduce manual cost, while on the front-end, it might mean evaluating payment products to improve customer experience. The simple solution could include tools that provide critical payment reference information to validate, retrieve and verify discrete elements that come into play when creating a payment request or payment instruction.
Studies have shown that even one false drop can cause a consumer to run away. Therefore, it is essential to consider the high stakes and keep that customer satisfied while dealing with the impacts of payment failures.
âNow we have more players, like payment service providers and FinTechs, entering this arena and competing with banks in terms of providing payment products. The way the competition manifests itself is through an improved customer experience, âAkmakjian said.
The fierce competition in payment services leaves little room for error. Unhappy customers will break the relationship and find another supplier. Customer satisfaction cannot be taken for granted, as it is crucial in maintaining the business relationship.
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Predict and assess risks
So how can companies assess risk, predict and prevent payment failures, and improve the operational efficiency of the process?
Akmakjian acknowledged that banks always strive for perfection in trying to reduce the cost of doing business to zero and bring through processing rates to 100%. Some institutions are able to reach this elusive benchmark depending on the type of payment, such as high value cross-border payments and real-time gross settlement. However, for other cases FIs need to truly consider tools that have unique technical delivery capabilities and make them an integral part of their solution.
For example, consider a payment product that is a front-end solution for consumers. Akmakjian explained that FIs can simply put the payment reference information right at the capping point, so that when the payment request is issued, the recipient bank itself is validated. “The way to reach the beneficiary bank by including the intermediary banks is getting richer,” he said.
Another solution could ensure that these capacities of the regional and national clearing system are also included in this instruction, so that it is executed and processed on the payment network without incident. âAn API system will provide all of this payment reference information in a meaningful way that will address common use cases encountered in the industry,â said Akmakjian.
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Reasoning of the tolerance rate
While organizations are well aware that payment failures come at a cost, most do not understand the full impact – financially or from a customer retention perspective. The fees and other financial costs of fixing a rejected payment are a little more easily measurable than the less tangible, but just as impactful, cost of churning customers out as a result of a bad experience.
A privileged few in the payments industry understand the negative consequences associated with payment failures and are taking action to combat them. Akmakjian stressed that it is essential to take into account the actual amounts of failed payments – in the context of tolerance for imperfections – when explaining why many institutions do not take preventive action.
“Let’s say [multinational corporates and emerging FinTechs] remedy a payment failure rate of 1%, and they determine its flaws in cost-benefit analysis, and if this does not have a significant impact on the customer threat, then the organization is not not inclined to act, because the absolute amount involved in resolving these opinions [is even higher]”said Akmakjian.
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Validation processes impact payment failures
LexisNexis Risk Solutions has served the payments community by providing a definitive set of payment reference information that enables customers to verify and validate payee bank details, and to retrieve and obtain additional payment instructions, such as as intermediary bank details needed for payment instructions, Akmakjian said. He acknowledged that there are other solutions on the market that meet these needs, adding that companies should take a consolidated approach, using multiple tools to deliver a solution that adds value and improves the customer experience at the within their own products.
Managing manual processes while staying abreast of regulatory developments remains a major concern for companies.
âI think the tools used to meet these challenges are becoming more and more sophisticated and technically advanced. Certainly, we’re seeing things become more native to APIs compared to banking peers, and preferring API-based solutions gives them a platform to make rapid improvements to the customer experience, âAkmakjian said.