Mar 14, 2023
False card declines are especially painful for travel industry merchants — hotels, car rentals, airlines, cruise lines, travel agencies, and others — as well as the credit card issuers that process their customers’ payments. Travelers suffer frustration as well, which directly and immediately impacts their spending decisions. Let’s explore this triple pain point and the path to reducing it for all three parties simultaneously.
First, the scope of the problem: The ongoing metrics for the travel industry present a consistent trend:
• Only 80% of transactions are approved.
• Roughly 10% are lost to declined transactions by merchants or their fraud prevention providers.
• More than 10% are lost to declines by issuers.
How expensive is the problem? In the UK, for example, recent research indicates that travel operators stand to lose £5.45 billion in 2022 as a result of failed payments alone, with a staggering 13.4% of all transactions being declined.
To be clear, we are discussing a legitimate transaction, in which the card issuer rejects it due to several understandable — yet regrettably vague— data points. Does the customer care to explore those reasons? Rarely. In an industry where customer loyalty is critical, steadily losing customers due to false declines can devastate a company’s reputation and bottom line.
First and foremost, false card declines result in lost revenue — often substantial — for travel industry merchants. When a card transaction is declined, it is often without a clear explanation as to the reason, and customers rarely understand whether it’s their bank or merchant, who is responsible.
In the travel industry, where the average ticket value (ATV) is usually high — imagine a family of five booking a flight overseas, or a week’s stay at a hotel — and the transactions can be complex, a false decline can result in a significant loss of revenue. This is particularly true for merchants who operate in an intense competition environment or during peak travel seasons when demand is high and operational costs rise. And if the customer leaves a negative online review saying it’s hard to book a flight or reserve a car? The impact can trickle down for months or years.
The most painful reality is this — even after all the investment in branding, marketing, and support, this sale is suddenly in the hands of a third party, one that can unilaterally decline the sale and its revenue. So let’s talk about those banks.
A brief overview of the source of the problem, which is, indeed, in the hands of the bank issuing a card. In their conservative, risk-averse industry, issuers are entirely justified in using a collection of tools to prevent financial loss — from either fraud or attempted charges by customers with insufficient funds to cover them. Their software algorithms typically use a fairly limited data set to make an instant assessment, as the bank only tracks data about the use of its specific card. The issuer doesn’t know about other cards, purchase patterns, or any of the dozens of data points that might paint a clearer picture (who does know? More on that in a moment).
The result: a very common, unfortunately broad “gray area” in which there is not necessarily conclusive evidence that a transaction comes with too high a risk, but enough “hints” to push the dial over to “decline” — just to be safe.
Our travel industry clients report that customers who experience an initial decline will either switch to another card (placing the declined card on bottom of wallet) or waive the purchase. Either way, the bank might lose their customer.
A traveler typically invests a lot in a trip, whether business or pleasure. Travelers sink substantial time to research and compare costs, locations, and descriptions of services — both because costs are significant, but also because of the inherent value of both the vacation and business trip. In vacation cases this is a once a year event with high ticket value, as such, a customer is ready to spend a significant amount of time and money on booking expecting to be treated with the respect due to someone choosing to commit to this particular merchant, over all others.
This makes a decline all the more frustrating; it can easily lead the traveler to jump to a competitor — for the booking, for the credit card, or both — and not return. As mentioned, without knowing the cause of the decline, the most straightforward route is to choose a different hotel or airline and pay with a different card.
Remember, an indication of “insufficient funds” is often a false positive as it’s a limited snapshot of a bank account balance; the customer may have other bank accounts, be in the process of transferring money from a savings account or a brokerage account, may be receiving a gift to cover the expense, or even being re-reimbursed by work. All these scenarios are not always invisible to the bank on the time of the authorization decision, and few customers take the time to call Customer Service to try to explain the situation. It’s simpler to pull out another card.
And yet, can the bank ignore the risk? No, but it can certainly mitigate it.
The key to solving this revenue drain? It’s all about shrinking risk by improving on that limited data set.
Unlike banks, merchants do have a rich collection of information to provide a clearer customer purcahse profile. For instance, most travel companies maintain a membership club offering discounts, which clearly identifies customers as steady and trusted.
This data now has a new, additional function in driving profits.
Platforms like Kipp offer two solutions. First is a bid/ask system in which the bank can request of the merchant a specific amount as a “premium” (usually a few percentage points) that splits the risk between the two parties. If the merchant is willing to pay that amount, the sale goes through, and both profit. Naturally, with thousands of transactions occurring per day or even per hour, this process is handled by automated algorithms on both sides for instant, AI-driven collaborative communications.
A second intriguing option is for the merchant to gather all this information, sharing it with Kipp to convert it into a “reliability” score it provides to the bank. This assurance can reduce or even eliminate the premium required to grant the bank the peace of mind needed to accept the transaction.
In conclusion, false credit card declines can be particularly painful for travelers, travel industry merchants, and credit card issuers alike. The impact of lost revenue, damaged reputation, and lost customers can have significant consequences for all parties involved. To minimize the impact of false declines, it is critical that merchants and issuers collaborate to leverage existing data and reduce risk.