Payment Optimization: What It Is and How to Improve Payment Performance

According to one study, around 11% of e-commerce transactions fail each year. Meanwhile, chargebacks annually cost merchants around $117.47 billion. 

While your payment processing tools might be out of sight and out of mind, they can have a real impact on your company’s bottom line. High decline rates, chargebacks, customer abandonment, and fraud can add up over time. 

Fortunately, payment optimization can help you quickly detect problems and find workable solutions. Monitoring tools can track issuer behavior, fraud patterns, and decline rates, so you can effectively route transactions and avoid common pitfalls. With a data-driven approach, you can maximize your approval rates, improve your checkout experience, prevent fraud, and avoid unnecessary costs. 

To take the first step in optimizing your payment processes, read on. 

TL;DR

• What is payment optimization? At its heart, this technique involves monitoring data and making changes that improve your payment processes and user experience. 
• Optimization may involve updating your tech stack, modifying your transaction routing, changing authentication rules, and adjusting your retry strategy. 
• Through payment optimization, you can improve your approval rates, prevent fraud, and ensure a smoother checkout experience.
• Smart payment routing involves sending transactions to the acquirer that works best for the card type, geographic region, and performance data. 
• With intelligent retry strategies, merchants can overcome soft declines.
• By monitoring payment metrics, you can see which optimization measures are effective and where you still need to make changes.
• Effective payment optimization should span the entire payment lifecycle from before the transaction begins to after it has been processed.

With the help of PayCompass, you can evaluate your payment setup, prevent fraud, track metrics, and optimize your payment processes.

What Is Payment Optimization?

So, what is payment optimization? And how can you use it at your company? 

Payment optimization involves improving your technology stack, payment processing approach, and payment strategy. It relies on metrics to see where changes are needed and to track how effective each adjustment is. While each company is different, optimization is normally carried out with the goal of lowering costs, reducing instances of fraud, boosting authorization rates, and ensuring a seamless customer experience.

How Payment Optimization Helps Merchants

Through payment optimization, merchants can boost their authorization rates and avoid unnecessary declines. Over time, small changes can have a big impact on your checkout experiences and processing costs as well.

• Improve Authorization Success: Through optimization, you can increase the likelihood that payments are approved on the first attempt without increasing the rate of fraudulent transactions. 
• Reduce Unnecessary Declines: Card declines can often be avoided through intelligent retry strategies and other techniques. Additionally, you can prevent declines by adjusting your fraud rules.
• Boost Customer Retention: If customers can’t complete their payment, you’ll likely lose their current and future transactions. Improving your payment processes can decrease your churn rate and boost your customer retention rate.
• Lower Processing Costs: When you have fewer failed retries, better routing, and lower fees, you can spend less on payment processing.
• Better Payment Resilience: Routing transactions through different processors and acquirers means that you don’t have to rely on a single provider. If there is an outage or a regional disruption, your operations are more likely to continue with minimal disruption.
• Create a Smoother Checkout Experience: From optimizing authentication requirements to avoiding declined transactions, there are important steps you can take to enhance your overall checkout experience.

How To Improve Your Payment Performance

From switching to a better payment gateway to updating your retry strategy, there are a few effective steps you can take to boost your company’s payment performance. If you are able to increase your approval rates by just 1%, that change can directly impact your revenue. To get started, try using the following techniques to optimize your payment processes.

Smart Payment Routing

Your current acquirer is likely not the best choice for every geographic region and card type. Through intelligent routing, you can dynamically send payments to the best acquirer for that payment type. This type of system considers the acquirer’s historical performance, the payment’s geographic region, the card type, and similar factors. With the help of live performance data, smart payment routing can help you reduce issuer friction and prioritize the best-performing paths.

Intelligent Retry and Recovery Strategies

When you process payments, you may receive soft or hard declines. While hard declines are final, you can often retry soft declines. However, the right retry logic is essential for successfully processing soft declines. Your system needs to take into account the issuer’s behavior, the payment amount, and the timing. For subscription-based companies, you may want to time retries around pay cycles, such as right after payday each week.

Enhancing Payment Data Quality 

Issuers process data in milliseconds, so it’s essential that this data is accurate. Missing information or inaccurate data can result in a card decline. You may also want to incorporate additional data, such as payment indicators and the customer’s history, so issuers can easily spot risky transactions.

To ensure the best quality of data, it’s a good idea to leverage network tokenization and account updater programs. Many card declines occur because payment information is outdated. By spotting incorrect and outdated payment data early, you can ask customers to update it before it results in a failed transaction.

Comprehensive Fraud and Authentication Strategies

When fraud prevention is overly aggressive, you can end up losing valid transactions. Because of this, it’s essential to strike a careful balance between strong fraud prevention and transaction approvals. Risk-based authentication strategies should be applied to high-risk transactions, so you can preserve your conversion rate.

Monitoring and Optimizing Payment Processes

No matter what type of payment orchestration you use, you need to track key metrics to see how effective your approach is. Payment acceptance rates, latency rates, authentication challenge rates, and similar data allow you to detect problems before they lead to major revenue losses. By creating a consistent feedback loop, you can continue to improve your payment operations over time.

What Are the Most Important Payment Metrics To Watch?

From payment acceptance rates to chargebacks, there are many different metrics you should monitor. These key performance indicators (KPIs) provide insight into disputed transactions, lost revenue, and optimization opportunities.

• Approval Rate: Your approval rate shows the percentage of your payments that are approved by issuers. In conjunction with routing information and decline reasons, it can give you insight into the major performance problems that you need to work on.
• Authorization Rate: The authorization rate reflects how many payments are initially approved before recovery logic and retries are used. It helps you understand how your payment setup and data quality are impacting your customers’ checkout experience.
• Chargebacks: Chargebacks occur when a customer disputes a transaction. If they are successful, the funds are returned to the customer. To lower the cost of reversed transactions and fees, merchants should work to lower their chargeback rate through better product descriptions, clearer return policies, improved communication, and similar methods.
• Cost: The cost of payment processing includes cross-border fees, chargeback fees, fixed monthly costs, fees per transaction, equipment rentals, and other costs. By tracking the cost of payment processing alongside your other metrics, you can determine if your payment optimization is worth the money invested in it.
• Decline Rate by Reason: When a card is declined, a reason code is provided that shows why the decline occurred. Merchants should monitor these reason codes to detect spikes and find solutions to common problems.
• Fraud Rate: The fraud rate shows the percentage of transactions that involved confirmed fraud. While your goal is to reduce fraud levels, you don’t want to sacrifice customer experience and approval rates in order to do so. Instead, you need to find a balance between fraud prevention and speedy approvals.
• Latency: Latency is the time it takes between submitting a transaction and receiving an approval. High latency rates can lead to higher decline rates, increased timeouts, and a worse customer experience.

How Payment Optimization Fits Into the Payment Lifecycle

Payment optimization doesn’t occur at a single point in your payment operations. Instead, it should take place throughout the payment lifecycle. At each point in the payment lifecycle, different KPIs and optimization tools can enhance your payment processes.

Before a transaction even begins, merchants need to set up routing rules, select an acquirer, and incorporate a smart routing approach. During the actual transaction, risk-based fraud detection, network tokens, selective authentication, and smart routing can ensure a high level of approvals and a low level of fraud. Afterward, intelligent retries and recovery methods can help you process soft declines. 

How PayCompass Can Optimize Your Payment Processes

At PayCompass, we have years of experience in working with merchants on their payment optimization strategies. We start by carefully reviewing your setup to determine the best payment processing and gateway configuration for your needs. Then, our payment monitoring system can help you maintain ongoing performance visibility.

Whether you want to leverage network tokens or take advantage of an account updater tool, we can help you find the right options for your needs. Our team can review your existing setup and discuss the best payment optimization approach for improving your conversion rate. Additionally, our fraud detection and chargeback prevention programs can help prevent lost revenue. 

Final Thoughts

So, what is payment optimization used for in modern businesses? Today, payment optimization is no longer a nice-to-have to supplement your company’s payment methods. It is a necessity for ensuring a consistent revenue stream, low fraud rates, and high approval rates. 

For many companies, achieving these goals can be challenging. There is a range of different metrics that you need to track in order to understand your company’s payment performance. In addition, you also have to navigate a wide assortment of payment tools and products. 

Even a small improvement in your recovery rate or approval rate can lead to significant revenue gains. By being proactive about your company’s approach to payment optimization, you can lower transaction costs, improve authorization rates, and enhance your customers’ checkout experiences. 
If you are struggling to take the next step, we can help. PayCompass can evaluate your existing payment operations to determine the routing strategy, payment gateway, and tools you need to succeed. To learn more, reach out to our team of payment processing experts today.