Why do authorization rates matter? Answer: Revenue.

Introduction

I’ve written about going truly global and how even if a business accepts card payments from 160+ countries, if consumers in the majority of those countries don’t use cards, the business is NOT truly “supporting” those countries.

A thoughtful former coworker (who I’ve been in the trenches with digging auth data) pointed out another nuance. Even if we believe that in some countries, cards are available and popular, do you truly reach consumers if payment authorization/success/acceptance rate is low?

I love that nuance. It’s easy to think “that country accepts cards, I have cards” and check the box for a product ship (and feel pleased about “going global” and move on to the next shiny thing). The tougher question is — does this product ship grow revenue? If your auth/success rate is <40%, the revenue impact of the ship is limited.

In this post, I will:

1. Explain the revenue impact of auth rates
2. Share levers to increase auth rate
3. Propose what merchants can focus on to improve auth rates

1/ The Revenue impact of Auth rates

Definitions: Auth rate is the number of successful authorizations / total number of authorizations requested. Other terms used are success rate, acceptance rate, approval rates. The various terms encapsulate the same broad meaning — card payments fail sometimes, and so one should measure the number of your successful transactions, divided by the total number of attempted transactions.

What’s happening when a payment fails

Customer experience: You filled in your card number (and additional details) to buy something, and you get “payment failed”. You try a couple more times, the payment still fails. You give up.

What’s happening under the hood: There are network messages being sent to confirm your card payment. To over simplify — a message is being sent from the payments acquirer receiving your payment details, to your bank (that issued the credit/debit card) to “confirm” that you made the payment, via the card network rails (Visa/MC.). The bank (Chase, Citi etc) sends back a yes/no to the transaction. What’s marvellous is that the transaction takes places in seconds, and the network can process thousands of transactions a second!

However, it’s not always clear why a card payment fails: Error code messages of varying levels of detail are sent from issuers to acquirers, and depending on your acquirer, they might have advice on what to do next. This assumes they receive right information, and know how to process it.

Impact: Merchants lose revenue because of the failed payments. For example:

• 100 customers entered their card payment details.
• 30 of them were successful transactions.
• Your payment success rate is ~30%. You lost the revenue on all the other transactions.

Photo by rupixen.com on Unsplash

2/ Levers to increase auth rates

To understand how to improve auth rates, we first understand why payments fail. This is hard and complex — it can be because of fraud, issuer risk appetite, industry merchant category code, online vs offline payments etc. The biggest reason I’ll focus on is that processing cards “cross border” vs “locally” significantly impacts success rate. You can read a 101 guide on local vs cross border acquiring here.

Cross border acquiring/processing refers to processing a non domestically issued card via your domestic merchant account. Example:

• You have a merchant account in the UK
• You are processing Australia (AU) issued cards out of a UK merchant account
• Any country’s card that is not issued from the UK is considered “cross border” → this is cross border acquiring
• Your auth rate will be lower than if you processed an AU issued card out of an AU merchant account (otherwise know as “local acquiring”)

Local vs cross border acquiring

Local acquiring is a significant lever to improve your success rate (guide here). However, the costs are: local entity, bank account, capital allocation requirements, and tax, regulatory, compliance considerations. Perhaps it’s not worth that extra auth/success rate increase, until the business is larger.

Regardless, one should work with an acquirer that at minimum has local acquiring in a few regions you are targeting next. It’s worth checking how easy it is to switch your payments integration from cross border acquiring to local acquiring. Ideally, it should not require a new technical integration, significant changes to the existing integration, or unnecessary paperwork.

Concluding thoughts

I’ve dived into one major lever – local vs cross border acquiring – that impacts auth rates. There are more. A business should know what its auth rates are (the acquirer should have this in a dashboard or an account manager to reach out to), to see the revenue impact of auth rates. Reach out to your payments partner to ask for this crucial information.

Overall, if you’re targetting consumers in a country with high card usage, shipping card acceptance is a solid first step. Don’t stop there. Take a moment after to measure your auth rates, and whether low auth rates will restrict your revenue growth.