Breadcrumb

What are the consequences of failed payments?

Written by

The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedMay 20223 min read

When it comes to taking payments, there’s nothing more frustrating and potentially harmful to a business than failed payments. As well as causing customers and businesses annoyance, it can also lead to significant customer churn, affecting revenues over the long-term.

In this post we’ll run through some of the causes of failed payments, so that you can act to prevent them. We’ll also detail the consequences of failed payments to motivate you to do your best to avert them in future.

Why has a payment failed?

Payments fail for a multitude of reasons, the principle reasons are listed below:

Card details expired — If a customer doesn’t update their credit/debit card credentials with a subscriptions service, the payment will fail.
Insufficient funds — A common reason for failure to make payment is a lack of funds on the account used to pay.
Incorrect Information provided — When entering card information online or in a physical form, it’s possible to enter in some details incorrectly. This occurs frequently when typing out long card numbers or bank account numbers. When this happens, payments inevitably fail.
Misconfigured gateway — In order for payments to process, the payment gateway must be set up and configured correctly. Sometimes incorrect settings can cause error codes to display and payments to be refused.
Suspected fraud — If a credit card scheme or bank detects suspicious activity they may act to block payments, causing them to fail.

Failed payments with recurring payment plans

Failed payments are an inevitability for businesses that collect recurring payments. In fact, on average recurring payments see failure rates of 14.6%, compared to 11.35% for one-time transactions. This is due to two main reasons: firstly, with recurring payments you are much more likely to come across an expired payment method, and secondly customers are less likely to verify they have sufficient funds on their account before making the payment.

Consequences of failed payments

There are a number of undesirable consequences to failed payments, making it extra important that businesses act to prevent them as far as possible.

1. Increased customer churn

Customer churn refers to the ratio between the number of customers lost and the number of customers retained. In simple terms, it shows you how many customers have left your company over a certain period.

Involuntary churn is when a customer had no intention of leaving a service, but was forcibly made to do so after failing to meet payments. It follows that failed payments are the biggest contributor to involuntary churn and a huge contributor to customer churn generally.

Failed payments can even have an impact on voluntary churn, whereby customers intentionally terminate their use of a service. This is because they are often unaware that their payment has failed, grow frustrated with the fact that they can access their subscription and decide to opt out as a result.

In order to maximise revenue, you want to keep customer churn rates as low as possible. Failed payments can therefore have a big impact on your business’ revenue yield.

2. Uncollected revenue

As a result of failed payments, you won’t just lose out on revenue due to customer churn, but also due to uncollected payments. If you decide to dedicate time and energy to chasing up failed payments, you may be able to successfully retrieve funds. However, you have to factor in the additional cost and resources involved in chasing these failed payments, which inevitably lower profits in the end.

3. More bad debt

Failed payments can also lead to bad debt. On average, businesses with business-to-customer (B2C) revenue see 16-20% of their failed payments turn into bad debt, while business-to-business (B2C) companies see 11%-15% turn into bad debt. This can have very serious consequences on your business’ financial health.

GoCardless can help drastically improve failed payment rates. This is because it enables businesses to collect payments directly from customers' bank accounts. This effectively eliminates any failed payments due credit/debit cards expiring. Additionally, collecting payments directly from a customer’s bank account, via direct debit, puts the business in greater control of incoming payments as it is pull based. That means the business is in control of the payment amount and date, leading to higher payment success rates.

Overall, this can reduce late payments and failed payments, leading to improvements in cash-flow, a reduction in stress and less time being dedicated to chasing up unsuccessful payments.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices and ensuring you get paid on time. Find out how GoCardless can help you with ad hoc payments or recurring payments.