Failed Payments: The Unseen Menace Behind Soaring Subscriber Churn Rates

For subscription companies, customer retention is a crucial metric that is rigorously tracked, analyzed, and monitored. Companies are aware that higher customer retention results in rising MRR (monthly recurring revenue), higher customer lifetime value, and higher business revenue. And because higher customer LTV (lifetime value) can result in higher acquisition budgets and new customer cohorts that were earlier unprofitable at lower LTV values, there is yet another under appreciated advantage that is indirectly produced when customer retention is increased.

Of course, lowering customer churn is the only way to improve customer retention and LTV. Therefore, in order to maximize customer retention, subscription businesses need to be aware of the underlying factors that lead to customer turnover. Three main factors – customer fatigue, competitive loss, and an issue with customer support – account for 50% of all voluntary subscription cancellations. 

However, direct churn only makes up half of the issue. The other half of subscriber churn (at least temporary) is a result of payment failure. There's nothing more frustrating and possibly damaging to a business than a payment failure. In addition to the annoyance that interrupted transactions cause, their customers, company owners, and payment service providers run the risk of permanently losing those clients. Not only do late payments reduce their income, but they also harm the company's reputation.

The Payment Challenge: How 50% of Subscription Churn Stems from Failed Transactions

A recent research by PYMNTs found that failed payments account for 50% of subscription churn. The positive news is that most of this can be avoided. 

Involuntary churn is the term used to describe subscription cancellations due to payment-related issues, such as failed credit card payments, rather than consumer choice. The good news is that there are effective solutions accessible to assist subscription businesses in recovering declined payments and lowering the main cause of churn. To maximize both failed payment recovery and indirect churn, it is essential to optimize the technique used to recover failed payments.

Let's examine what failed payments are before we proceed with that. 

What Are Failed Payments and Why Do They Hurt Subscription Businesses So Much? 

Genuine transactions that are incorrectly rejected by payment authorization systems are known as failed payments or false rejections. What causes this to occur? Because of the enormous size and complexity of the payments ecosystem, payment authorization systems must make judgments about whether to accept or reject a transaction in milliseconds. Legitimate transactions are rejected because banks and other authorization systems are constrained and need to obtain all the information required to make informed decisions.

Additionally, because banks suffer significant losses when they accept fraudulent transactions, they end up being overly selective in their decision-making, which frequently results in the rejection of legitimate transactions.

Churn is an unpleasant side effect of false declines. You have lost a customer if you are unable to recover a declined payment.  

What alternatives do subscription businesses have to address this issue?

By incorporating alternative payment methods such Lynk's Pay by Bank service, businesses can significantly decrease their rate of unsuccessful payments. Unlike relying on card networks, Lynk's Pay by Bank service operates on trusted internal bank rails, resulting in fewer errors and failed payments for subscription businesses. 

Lynk's Pay by Bank service boasts a success rate of 99% for both one-time and automated recurring payments on the initial attempt. One of the key reasons for this is that credit cards have a higher risk of expiring, whereas Lynk’s payments are drawn directly from bank accounts with available funds, greatly reducing the likelihood of payment failure and customer churn.

Click here to find out more about how Lynk can reduce unsuccessful payments by using Pay by Bank, or click here to book a free consultation.