Why Do Online Card Payments Fail? Insights from a Payment Processing Perspective

LSP Capital emphasizes the importance of understanding the dynamics of the payment processing ecosystem. By identifying the root causes of payment failures—whether they stem from cardholder errors, issuing bank policies, or acquirer issues—merchants can take proactive steps to mitigate these risks and ensure smoother transactions.
In the realm of online transactions, most payments proceed without a hitch. However, there are times when payments fail due to various factors. The payment processing ecosystem involves multiple participants, each of whom can influence the success or failure of a transaction. Understanding these roles and the common reasons behind payment failures can help both merchants and consumers navigate these issues more effectively.
Key Players in Online Payment Processing
Online card transactions involve four main participants: the Buyer (cardholder), Merchant, Acquirer, and Issuing Bank. Each player has a role that can impact whether a transaction is successful or not. Here’s a breakdown of how each participant might contribute to payment failures:
• Cardholder: Human errors during input are a common cause of failed transactions. Simple mistakes, such as incorrect card details or expiration dates, can lead to declines.
• Issuing Bank: This institution can decline a transaction for several reasons, including suspected fraud or technical issues. The issuing bank is responsible for protecting the cardholder's rights and funds.
• Merchant: Although merchants are seldom directly responsible for payment failures, they can still impact transaction success. For example, if the merchant's business type is not approved by the issuing bank, transactions might be declined.
• Acquirer: The acquirer, often involved in technical aspects of transaction processing, can also cause failures due to issues like incorrect account configurations or system errors.
Essentially, the dynamics of payment processing can be viewed as a collaboration between the Merchant & Acquirer and the Cardholder & Issuing Bank. When a cardholder initiates a transaction on a merchant’s website, both the merchant’s and acquirer’s interests align toward successful processing, while the issuing bank focuses on safeguarding its client’s funds.
Identifying Reasons for Payment Failures
When a transaction fails, merchants typically receive an error code, also known as a “Response Code,” which provides insight into why the payment did not go through. These codes, provided by the issuing banks, help pinpoint the cause of the failure. Understanding these codes can help identify the responsible party and guide appropriate actions.
Common Reasons for Payment Failures
Here’s a closer look at frequent causes of payment failures:
• Cardholder Errors: These are among the most common reasons for transaction failures. Errors such as incorrect card number, CVV code, or expiration date can lead to declines. Such mistakes are usually easy to resolve by contacting the cardholder to correct the information. Typically, cardholders recognize their errors and can resolve them on subsequent attempts. If a cardholder repeatedly fails, following up may help facilitate another payment attempt.
Response codes related to cardholder errors can also signal potential fraud. Codes indicating “Hot Card” or “Special Pick Up” might suggest the use of stolen or lost cards. If there’s a pattern of repeated errors, it could indicate fraudulent activity, prompting further investigation.
• Issuing Bank Issues: The issuing bank plays a crucial role in ensuring secure and legitimate transactions. It may decline a payment due to insufficient funds, cardholder restrictions, or suspected fraud. For example, transactions might be blocked if they exceed withdrawal limits or violate other card restrictions.
Issuing banks also implement fraud prevention measures. If there are indications of fraud, the bank may reject the transaction. Merchants should pay close attention to such error codes as they often signify potential fraud risks. In some cases, transactions might be declined due to the bank’s policies regarding the merchant or website. For further clarity, contacting the issuing bank can provide additional details.
• Acquirer Issues: Errors originating from the acquirer are less common but can still occur. These issues are often related to technical problems or compliance with fraud prevention rules. If the acquirer’s system is misconfigured or faces technical difficulties, it can lead to transaction failures.
As the acquirer is aligned with the merchant, unusual error codes that do not fit typical cardholder or issuing bank patterns should prompt merchants to reach out to their acquirer for resolution.
Takeaway
Understanding why online card payments fail involves recognizing the roles and potential issues of each participant in the payment processing flow. By familiarizing yourself with common reasons for transaction declines and the associated response codes, you can more effectively address and prevent payment failures.