Navigating Declined NSF: Insights for Card Issuers

Mar 26, 2024

Non-Sufficient Funds (NSF) declines refer to situations where a transaction cannot be completed due to insufficient funds in the account linked to a credit or debit card. NSF declines not only disrupt financial transactions but also affect all parties involved, including merchants, issuers, and customers. NSF declines have significant impacts, with Americans paying an estimated $280 billion in bank overdraft fees since 2000, according to CFPB data. Understanding NSF declines from multiple perspectives is crucial as it influences customer trust, operational efficiency, and financial stability.

 

What are NSF Declines?

NSF declines occur when a transaction is denied because the account does not have enough funds to cover the purchase. Data shows that 50% of declines from card issuers are due to insufficient funds. The transaction process, from initiation to completion or decline, involves various checks and balances, with NSF being a critical point of failure. NSF declines differ from other transaction declines, such as those for suspected fraud, because they specifically relate to transactions declined due to insufficient funds. Riskified’s 2019 study indicated that the majority of customers experiencing NSF declines are often engaged in significant life events, such as wedding planning, relocating, or welcoming a new child. These events typically involve substantial expenses, making it particularly troubling for individuals to encounter financial obstacles during these periods.

With millions of transactions declined each year due to insufficient funds, understanding its impact is essential for financial institutions.

 

Impact of Declined: NSF on Merchants

For merchants, declines due to insufficient funds translate directly into financial losses as transactions that could have generated revenue are not completed. Beyond the immediate loss of sales, merchants must handle the operational disruptions that ensue, which include re-processing payments and managing inventory that was not actually sold. The cost of handling declines is not trivial; it involves additional administrative tasks and can strain customer service resources.

Worse, declined NSF can severely impact the customer experience. When a transaction is declined due to insufficient funds, customers may feel embarrassed, frustrated, or inconvenienced, potentially eroding trust and loyalty toward the merchant. The long-term effect can be significant, with customers choosing to shop elsewhere to avoid similar experiences in the future. According to the Riskified survey, more than 50% of those who experienced a false decline were returning customers. Following a decline, approximately 42% of shoppers chose not to place the order again, either abandoning the purchase (28%) or taking their business to a competitor (14%).

 

Role and Impact of Card Declined NSF on Issuers

Issuers, such as banks, FinTech’s, and credit card companies, detect and decide on NSF situations based on account balance and transaction history. While preventing fraudulent transactions is one concern, accurately identifying legitimate transactions that risk NSF is equally crucial to avoid unnecessary declines. That’s because authorizing more transactions and reducing unnecessary declines has become a priority for issuers.

Cards declined due to insufficient funds can have several repercussions for issuers. Financially, they face the cost of processing decline fees from the schemes and the potential loss of interchange revenue. Additionally, frequent NSF declines can damage the issuer’s relationship with its customers, leading to dissatisfaction and potentially causing loss of top-of-wallet status when customers switch to other forms of payment, such as Buy Now Pay Laters.

To prevent NSF declines, issuers are increasingly relying on advanced analytics and machine learning models to predict and manage account balances more accurately. These tools can alert customers about potential insufficient funds situations before they initiate transactions, helping to prevent declines.

Communication strategies are also vital. Issuers can educate customers on how to manage their accounts better and provide tools for monitoring account balances and setting up alerts. By proactively managing NSF risks, issuers can reduce the frequency of declines and improve customer satisfaction.

 

Collaborative Solutions

Collaboration between merchants and issuers is essential to reduce NSF declines effectively.

Kipp offers an innovative approach to merchant-issuer collaboration. Kipp capitalizes on the shared interests of card issuers and merchants to increase the approval of legitimate transactions. This is achieved by merchants paying card issuers a % premium to approve “over-the-limit” transactions. Issuers use extensive data and algorithms to identify reliable customers, assess the likelihood of the customer’s ability to pay, and calculate the cost of a temporary card limit increase. This process enables issuers to determine a manageable level of risk and assign a monetary value to it. Merchants, on the other hand, have their own criteria for deciding the amount they’re willing to pay, considering factors like transaction size, customer lifetime value, marketing expenses, and more.

Kipp’s system allows merchants to seamlessly accept the compensation terms offered by card issuers, facilitating the approval of payments. This transaction is conducted in real-time and is fully automated, making the process easily scalable.

 

The Future of Non Sufficient Funds Management

Addressing declines due to insufficient funds requires a multifaceted approach, involving improved practices by merchants, advanced predictive tools by issuers, and collaborative efforts between all parties involved in the payment process. As technology evolves, we can expect more effective solutions to manage and prevent NSF declines, leading to smoother transactions and better financial management for consumers. This shift is essential as McKinsey predicts that “US issuers could by 2025 lose up to 15% of incremental profits to newer forms of borrowing, based on our simulation of the potential impact of buy now, pay later (BNPL).”  The time for issuers to get creative is now.