Something you’ll run into as soon as you start accepting payments is failed credit cards. It happens to everyone, and it’s simply a fact of running a SaaS business. If you ignore it from the beginning it can become a huge inconvenience as you grow, but with a few basic systems in place you can take almost all of the headache out of dealing with credit card failures.

There are several reasons for a card to fail or be declined. A spending limit could have been hit. An account may have been temporarily flagged for fraud. An account could have been closed for any number of reasons, including fraud or simply that your customer chose to switch to a different credit card. The credit card may have expired. (Fortunately, this is becoming much less of a problem.) Or, the bank might not even tell you why they decline a charge. Mystery declines are not uncommon. And there are many more less common reasons.

A lot can go wrong with credit cards. But you’ll notice from the list above that it’s usually not your customer’s fault. Give them the benefit of the doubt and go out of your way to help them get the issue sorted.

How big is this problem? Why worry about it now? On average, 10-15% of recurring charges fail. That’s huge, particularly as you reach any kind of scale with your business.

For B2B businesses, we regularly see up to 50% of total churn being caused by failed payments. For B2C, these numbers can climb even higher, especially with more volatile or less loyal business models.

The good news is that because most reasons for failures are out of your customer’s control (that is, they’re involuntary), it’s possible to recover most of them (over 70%).

Think your volume is too small for it to matter? You may be right… for now. But if you intend to grow, compounding gains and losses will soon become key to your stability.

Let’s talk about “The Rule of 78.” it’s pretty simple. If you take compounding gains into account, every additional $1 of monthly recurring revenue (MRR) added (or lost) each month is worth $78 after twelve months.

If you do the math with your own numbers you can begin to see the impact of having a system in place to handle these potential losses and turn them into big lifetime value wins. (Lifetime value (LTV): the total revenue from a customer over the course of their entire time with your business.) It won’t take much to lay the groundwork, and your future self will thank you.

Getting a Solid Foundation Set Up in Four Steps

Depending on which payment processor you choose to use (Stripe, Braintree, and so on), you may have some different requirements and limitations on exactly how to get these processes set up, but the underlying concept remains the same.

  • Step 1: Monitor for failures. Whether that’s a webhook triggering an automatic response, or a manual email to someone on your team, the first step is knowing there is a problem that needs solving.
  • Step 2: Retry the card several times over the next one to two weeks. Many problems like spending limits and fraud false-positives will resolve themselves during this phase. You’ll be able to recover upwards of 20% of failures during this stage without even needing to email those customers. So many companies email their customers every time a payment fails (immediately), which is a terrible experience for them, and frankly unnecessary if we know their card is likely to work after one or two more reattempts.
  • Step 3: Start emailing the customer if they’re still delinquent. Send several emails over the coming month (at least).
  • Step 4: Decide whether the customer’s subscription should be canceled if they aren’t recovered after a month or so. Ensure your payment processor doesn’t do this automatically earlier in your process. As an example, Stripe’s default settings can lead to this happening after about fifteen days.

When you’re small and volume is low, the value of each customer is worth a little effort. Whether it’s a personal email or a quick phone call, it’s absolutely worth your time at this stage to reach out. Most of the time they’ll be happy to update their payment information with you. If they truly want to cancel, it’s a great point in your life cycle to learn why.

Also remember, at this point in time your customer most likely has no idea they’ve even failed a payment. The credit card company doesn’t tell them when charges fail, and they won’t be aware of the retries you’ve attempted. Any contact with them at this point will be the first they hear of the problem.

Some Best Practices (Dos and Don'ts)

Dunning is the process of making methodical requests for payment in order to increase your collection rate for delinquent accounts, and it’s critical for preventing churn. As you set out to build a great dunning process, here are some simple tips to follow.

When Contacting Customers

Don’t give up too soon. You should make several attempts to get in touch with them. Give them a nice long recovery window to get the issue sorted out. It can take a while, be patient.

Be polite. Don’t harass people. This is a critical piece of your customer experience, and can actually be a positive experience and touchpoint with your customer. It’s one of the few opportunities you’ll get to turn a potentially sour situation into a delightful one. Take advantage of the chance to strengthen relationships.

Here’s an example of a simple, friendly, and very effective email:

Hi there,

We’re having trouble processing your most recent payment.

Would you mind updating the card on file (ends 6795)?

Here’s a link to update your billing info [LINK]

Thanks! Your name Your company

Pick up the phone. Don’t be afraid to give your customers a ring. People are busy and procrastinate. Don’t assume an ignored email is a desire to cancel. Maybe they’re on vacation, maybe they left the company recently, maybe they’re buried in their inbox. You’ll often find a happy customer on the other end of the line who is relieved to get the issue sorted on the spot with a little help.

Don’t ‘pre-dun.’ In other words, don’t contact customers preemptively to try to get a new card on file if you see an expiration date approaching. Most processors know how to handle expirations in the background, automatically updating card information in your account once they know the new details. Furthermore, up to 20% of failures resolve themselves during the retry period (after failing the first time). By raising an issue with your customer when there isn’t one yet, you’ll create non-issues and extra support load for no good reason.

In Your Application

Keep card update pages simple. When you send people to the page where they can update their credit card info, think about the goal of that page. Strip out anything unnecessary, keep design simple, clean, and professional. This is not the place to cross-sell, promote, confuse, or redirect attention.

Optimize for mobile. Over 70% of your customers are probably using their phones to update their card. Make it as easy as possible for them to get in and get out. This means making sure your card update page looks nice (and works well) on all mobile sizes.

Bonus: If at all possible, I highly recommend not requiring customers to log in to update their payment information in your app. If you can link them to your card update page without requiring a password you’ll see a higher percentage complete the process. This will become more important at scale, but it’s not critical in the early stages.

Encrypt your card update page. Make sure your card update pages are encrypted, and that you don’t store credit card details on your server. Pass them directly through to your payment provider.

Maintain good points of contact. Particularly for B2B companies, do your best to keep good points of contact for your customers. People frequently leave startups, or move around. Make sure you’re actually reaching the right person when it matters.

I talk to many early-stage business owners who believe that if a customer actually uses their service, they’ll update the card quickly. But every product is different, and your points of contact will vary as you work with larger companies. The billing contact may not be the one using and loving your product. So don’t cut corners here–setup a solid system, and think through the edge cases.

With Your Payment Processor

Optimize cancellation settings. Make sure your payment provider isn’t canceling subscriptions before you’ve had a chance to win them back. When volume is low, you could keep this part of the process manual so you can make a judgment call on when to actually end a customer’s subscription. As your volume increases, you can always switch this to be automatic based on a certain time period.

We regularly see Stripe accounts canceling subscriptions automatically within less than ten days. This simply isn’t enough time for customers to update their cards, and it’s increasing your churn for no reason.

It really doesn’t take much to get a basic safety net in place. As your business grows there will be opportunities to get more advanced, handle more edge cases, track recovery metrics, extend your recovery funnel timeline, and enhance touchpoints.

If you’re in the building stage, you have bigger fish to fry. But you’ll be happy later that your bases are covered when it comes to failed payments. It’s too critical a problem to ignore, but not a big enough one at low volume to spend too much time and energy optimizing.