How online merchants can drive authorization rates

Apr 08 2022 | PayPal Editor

Your customers enjoy the user experience and are ready to buy, but they're stuck in the payments section and your completed sales are waning.

Maybe their desired payment method isn't available or maybe they're repeatedly encountering a transaction failure...

This isn't just a hypothetical scenario. A recent report by Forrester says that improving customer experience is the No. 2 priority for decision makers across all verticals, just behind growing revenue. Clearly, having a good website may not be enough without an equally smooth transaction process.

Solving for transaction obstacles

Offering more payment choices is one strategy to support conversion, but even if you add different payment options, a problem remains: What about failed transactions?

Most merchants spend a lot of time and effort on improving the customer journey — which can include everything from product development, merchandising, marketing, search optimization, and UX design. Data from DemandJump shows the average customer acquisition cost for e-commerce can be anywhere between $7 to $400 depending on the industry. But that investment doesn't mean anything if the transaction is declined.

That's why top-performing merchants focus on optimizing the front-end and back-end payment ecosystem as part of their customer experience strategy to improve the bottom line. A key part of streamlining your payment process and increasing your chances of conversion is improving your authorization rate. Also known as the approval ratio, an authorization rate is "the percentage of transactions that successfully pass through the authorization process to complete a payment," Jim Magats, PayPal senior vice president, payments, said.

Declined payments and failed transactions are a part of running an e-commerce business, but there are ways to reduce the chances of this occurring. After all, the higher your authorization rate, the more you're converting — and eventually, the more you're earning.

Here are some strategies online businesses can use to help drive authorization rates and streamline the payments process to better engage ―and stop losing―customers.

Understand declined transactions

Once you've noticed a low authorization rate, the first step is understanding why the transactions are failing. Often, a transaction is declined due to insufficient funds, outdated or incorrect card information, or a suspicion of fraud or imposter behavior.

The last factor is increasingly common.

"With consumers spending more money online, fraudsters have found new ways to steal their personal information," Magats said. "Since card fraud is on the rise, businesses are rightfully careful of authorizing bad or fraudulent payments."

He added that businesses with high-priced items including luxury goods and experiences find authorization failures are more common because customers are more likely to surpass their credit limits and merchants are wary of fraud.

Understanding such common reasons behind transaction failures can give you a roadmap to a solution.

Transactions shouldn't be overwhelming and inefficient

Typically, there's not much sellers can do if their customer's transactions are failing on the bank/card-issuing company's end. But it's possible to help reduce these issues by working with a good payment partner.

BetterMe, a behavioral healthcare app recently partnered with PayPal and increased its overall approval rate by 6.4%. "Previously, clients were reluctant to onboard while being presented with a credit card as a single checkout option," Magats said. "So, the addition of PayPal resulted in BetterMe's product conversion rate almost doubling."

According to Magats, PayPal offers merchants higher approval rates than the industry average. According to its own analysis in 2019, PayPal Wallet transactions demonstrated a 7.9% uplift of authorizations over non-PayPal Direct Credit Card market transactions. PayPal leverages its consumer and merchant network data to gain deeper insight into card behavior and conversion rates to identify opportunities to help drive authorizations and reduce fraud. The combination of machine learning, artificial intelligence, and real-time decisioning helps more accurately determine whether a transaction is legitimate or not.

Network tokenization is also a key enabler of authorization rates and can help merchants achieve the right balance between security and a frictionless customer experience.

"Merchants have typically had to choose between good authorization rates and keeping risk losses low," Magats said. "If they wanted higher authorization rates, they would accept more risky transactions. If they wanted lower risk losses, they would be more restrictive on their approval rates." 

Network tokenization works by creating a unique credential for a card that is separate from the number imprinted on a physical card, which can be used for conducting transactions. The benefits of network tokenization include improving the behind-the-scenes processing of each transaction, known as card lifecycle management, as well as credit card storage. Network tokenization also enhances security by making credentials more fraud resistant, and it offers greater brand recognition and trust.

PayPal is one of the largest network token providers, which it uses in conjunction with other technologies to help merchants strike the balance between approval rates, security, and a frictionless customer experience.

Using a digital wallet with multiple funding instruments can also help reduce failed transactions.
For example, the PayPal wallet enables secondary funding mechanisms when the initial payment method is declined. So, even if a customer's credit card is declined, in certain use cases PayPal can automatically try to run the customer's debit card instead.

By using tools like this, not only can companies understand why transactions are declining, but they can also automate the necessary solutions by working with a payment partner that is getting the job done.

Find out more about how PayPal can help your company get past the digital last mile.


This post was created by Insider Studios with PayPal.

Was this content helpful?

We’ll use cookies to improve and customize your experience if you continue to browse. Is it OK if we also use cookies to show you personalized ads? Learn more and manage your cookies