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The three principles of calculating acceptance rates
The clearest gauge of your ability to convert intent into revenue 
The payments industry lacks a standard calculation for acceptance rates
How and when to tailor your metrics ‍
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Could your acceptance rate be masking risks to your revenue?


COULD YOUR ACCEPTANCE RATE BE MASKING RISKS TO YOUR REVENUE?




Feb 28, 2024
Download PDF

Guillaume Merindol

Paying bills, booking flights, subscribing to content, or ordering a pizza –
these days, more often than not, we make these transactions digitally. The
online checkout button is now a 24/7 staple of daily life. And the click of that
checkout button is crunch time. What happens next – throughout the entire
payment process – has to be perfect to achieve a successful transaction. Yet the
line between a successful sale and a missed opportunity is razor-thin.

All of us are familiar with the experience of a wrongly declined payment. Some
45% of us abandon cart and head to another site. Sale lost, loyalty at high
risk. That’s why businesses need to have a very clear picture of how their
payments are performing and what they can do to improve performance.

In this article, we’ll look at acceptance rates as the key payments performance
metric. We will be looking under the hood to help you understand how acceptance
rates are calculated and how to tailor your calculations to meet your precise
business needs. It's not often talked about, and it sounds counterintuitive, but
sometimes ‘good’ acceptance rates can be bad for revenue. That is to say,
acceptance rates that lack transparency can actually be hiding significant risks
to your revenue or even losses. We’re here to ensure that doesn’t happen.



THE THREE PRINCIPLES OF CALCULATING ACCEPTANCE RATES

When it comes to calculating acceptance rates there are three important
principles to always keep in mind.


 1. Acceptance rates are a strategic measure with many applications. There is no
    best calculation per se: tailored calculations are made with a strategic
    objective in mind depending on your business, your objectives, the specific
    information you require, and so on.
    
 2. But start at the base. A baseline calculation, that does not exclude any
    kind of transaction or error code, is always the best place to start. It
    allows for comparative analysis and it gives you access to all the data that
    can help you to recoup revenue now or in the future.
    
 3. And never let it mask trouble. The reason we calculate acceptance rates is
    to maximize revenue. Therefore don’t settle for a high acceptance rate if
    you don’t know what lost transactions or attempted fraud it is masking.




THE CLEAREST GAUGE OF YOUR ABILITY TO CONVERT INTENT INTO REVENUE 

The businesses we work with regularly tell us that acceptance rates are their
key payments performance metric. That makes total sense, in theory. Payments
acceptance rates matter a lot because they tell you how much revenue you’re
capturing versus what's left on the table.

As a result, this metric is the clearest gauge of your ability to convert intent
into revenue at the checkout. And because this is a revenue capture metric, it
helps you measure ROI (when paired with costs and fees). Importantly, it
reflects the performance your payment service providers deliver to you.



THE PAYMENTS INDUSTRY LACKS A STANDARD CALCULATION FOR ACCEPTANCE RATES

But here's the challenge: measuring payment acceptance involves so many
variables. For declined payments there are more than 100 error codes – all of
which can be included or excluded from the calculation thus impacting the
acceptance rate.

Yet, there's no industry standard calculation. And lots of these codes can get
omitted by your payments service provider – before they ever reach you.


That's a problem for a few reasons. 


‍COMPARING THE PERFORMANCE OF PAYMENTS SERVICE PROVIDERS IS CHALLENGING

‍Firstly, most enterprise businesses work with multiple payments partners and
route payments volume according to the performance of their partners to ensure
the highest possible revenue capture at all times. But to know where to direct
transaction volumes, you have to be able to accurately compare performance
across all payments providers. If you don’t know how each partner calculates
acceptance rates, you can’t compare ‘apples with apples’ or make informed
choices. 
‍
Payments service providers may remove certain error codes from the equation,
skewing the results. Removing just one error code can push the rate 10
percentage points higher. That's significant in a world where one basis point
can equate to millions of dollars lost or gained.



LOSS OF VALUABLE ERROR CODE DATA

‍Secondly, your acceptance rates should be a source of rich intelligence to
inform your payments optimization strategy. However, without the range of error
codes that many providers automatically remove from the equation, you’ll be
missing important clues and cues for improving your revenue capture. These error
reasons may include authentication failures, fraud, insufficient funds, and many
more.

Removing certain error codes can be helpful depending on what you want to
understand. However, businesses should begin by arming themselves with the
complete picture before purposefully adding filters. It's the only way to create
a comparable baseline that ensures important intelligence is not being missed.  

Now let’s dig a little deeper with examples to better understand the nuances at
play. Here are some ways your high acceptance rates could be masking problems –
and what to do to avoid this. 


 * Example one: Excluding fraud decline codes
   Does your acceptance rate exclude issuer fraud decline codes? If it does,
   then this is a risky approach to take.
   ‍
   Now, you might argue that if a payment is fraudulent, then it's not a payment
   you want to take, and it doesn’t make sense to include it in the calculation.
   But this means that you are automatically locked out of very important
   visibility on potential fraud spikes being directed at your business. And
   these will likely harm you in due course.
   ‍
   Moreover, we know that there are plenty of instances where issuer-identified
   fraud declines are wrongly applied. In these cases, you’re losing out on
   revenue even if your acceptance rate looks great. Conversely, if you spot a
   spike in issuer-related fraud declines, you can explore and address
   overzealous risk handling from the issuing bank. This will allow you to
   recoup lost revenue by addressing the issuer relationship and ensuring the
   correct risk profile is being applied to your business. This is something
   your payments partner should be helping you to identify and remedy.
   
 * Example two: Excluding insufficient funds codes
   Similarly, you may think that removing insufficient funds from the
   calculation is an acceptable default approach. But that is outdated in
   today’s business environment where so many companies have various forms of
   recurring, subscription, merchant-initiated, and installment-based payments
   in their mix. Insufficient funds error codes are important information for
   all these businesses as they can inform retry strategies that significantly
   reduce churn and optimize revenue capture.
 * Example three: Excluding authentication failure codes
   Are you losing customers because of a bad authentication integration? Even
   authentication failures should be captured in your baseline acceptance
   metric. There is a lot you (or your PSP) can do to minimize authentication
   failures, so you need to know when and how significantly this is impacting
   your acceptance rates. An acceptance rate that omits this information does
   not deliver a rigorous and informative picture of your revenue performance. ‍


HOW AND WHEN TO TAILOR YOUR METRICS ‍

The simple truth is: when you capture the whole picture in your acceptance rate
you have a solid base from which to build and optimize. Then, having understood
and dealt with any fraud problems or any insufficient funds and so on, you can
remove these error codes and reach a rate that makes sense based on what revenue
you know you could not possibly have captured. But you need to troubleshoot
first and always keep an eye on the whole picture. Keep in mind that
improvements are key and drive incremental revenue gains. However, it will not
be possible to fix all cases of fraud or insufficient funds, and you must be
clear on the definitions for all error codes.

Now you have mastered the nuance of how to calculate acceptance rates, you are
ready for the important work of measuring your acceptance rates according to the
variables that matter. There is little use for one blanket metric when
understanding your acceptance rate according to some key specifics will tell you
so much more about what’s working and what’s not. 
‍
To build the most meaningful picture of how and where your business is
performing or where improvement is needed, your acceptance rates should be
calculated according to variables such as:


 * Country
 * Region
 * Line of business
 * Issuing bank
 * Transaction type (such as merchant-initiated or customer-initiated)
 * Payment method

If you are responsible for optimizing your payments performance and managing
your payments key performance indicators and would like to discuss the best way
to ensure you’re getting full transparency and control over your acceptance
rates, then I’d love to hear from you and to support you with advice that’s
right for your business.


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ABOUT THE AUTHOR
Guillaume Merindol



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