What Causes Issuer Declines to Payment Authorization?

Credit card transactions facing an issuer decline is not an uncommon occurrence in eCommerce. While annoying for the buyer, it also negatively impacts merchants with the possibility of lost sales revenue, and a bad rapport with the customer leading to ramifications for future sales and customer lifetime value. However, proceeding to process the transaction without authorization raises the risk of penalties and charges for the merchant. So how should merchants handle issuer declines?

In this blog, we will explore issuer declines in detail and the importance of following an authorization process for a card transaction.

What is an issuer decline?

Issuer declines occur when issuing banks reject, stop or hold a transaction that a customer makes during card transactions.

These declines occur due to reasons like:

• Insufficient funds in the customer’s account to cover the particular transaction.\
• Customers exceeding their set withdrawal limits with a transaction.
• Expired or invalid card.
• Incorrect entry of information such as the CVV or billing address.
• The card has been reported lost or stolen.
• Unusual, suspicious activity noticed on the card, like sudden spikes in shopping, spending in questionable neighborhoods and so on.

In such cases, the issuers supply the merchant with a specific “issuer decline” code that explains the exact reason for rejecting the purchase. Sometimes declines also occur due to errors on the part of the merchant. Thus, examining the cause is necessary to reduce the incidence of issuer declines.

What are the types of issuer declines?

Issuer declines mainly fall under two broad categories.

Soft declines: These are temporary failures in payment authorizations. They often occur during situations such as interrupted network connectivity or incorrect data entry by a customer while paying with a card.

In soft declines, merchants can attempt re-authorization by retrying the same transaction after a few minutes and expect to get a different response.

Hard Declines: These include the more severe payment authorization declines where an issuer downright refuses to authorize a credit card transaction.

Hard declines occur typically because of security issues such as invalid account information or suspected fraud. In such cases, merchants cannot get authorization even by retrying the transaction. These are meant to be a clear signal for merchants to refrain from using that card for the transaction and asking for a different payment method.

A rundown of the transaction authorization and pre-authorization process

Issuer declines are an outcome of the transaction authorization or pre-authorization process.

Let’s understand the process better with an example: Suppose a customer visits your store to purchase a $3,000 watch and desires to pay using a credit card. There are two ways for you to approach the authorization process.

Attempt swiping the card for $3,000 directly:

In such a case, you swipe the card, and the customer enters the necessary details. Suppose there’s a postal address mismatch. Then, the issuer will decline, stating “AVS mismatch.”

In this situation, the cardholder’s pending credit card balance will fall by $3,000 until that pending charge is cleared.

Let’s suppose that the remaining credit limit in the customer’s account is only slightly above $3,000, and the AVS mismatch issuer decline was due to mistaken faulty data entry and not any fraudulent intent. Now, repeating the transaction and rectifying it as a merchant may not be possible as there will be another decline, now, due to insufficient funds on that card.

The way to overcome the above scenario is by doing a test or a pre-authorization transaction before attempting the main transaction. In this case, you can first run a trial transaction, typically amounting to $1, to test and match for address and funds. The pre-authorization success can help you determine whether the actual transaction amount will run or not. Depending on the outcome, you can decide on the actual transaction. You can also use a pre-authorization to avoid chargebacks.

Please note that the card pre-authorization process (AKA pre-auth) isn’t standard with every merchant account and usually has some associated costs. However, it is often worthwhile paying for as the benefits usually outweigh the costs.

Why is a card authorization process needed?

You may wonder why to look for payment authorization in the first place if it can result in a lost sale or revenue and an upset customer.

Simply put, following authorization procedures ensures that the transaction is legitimate, the card is valid, and the customer can pay for it. In such cases, authorization guarantees that it shall be settled once an authorized transaction is incurred.

Without any authorization, it becomes effortless for fraudsters to use other people’s credit card numbers without their permission.

Moreover, when a customer (or the bank itself) disputes a transaction that never received authorization approval, it usually results in an automatic loss for the merchant. In such scenarios, the risk of chargebacks for merchants also increases, and they tend to fall prey to penalties and additional charges.

At the same time, it’s essential to note that even in genuine transactions, authorization can fail for several reasons. Data suggests that merchants suffer a cost of false declines amounting to $443 billion every year. Therefore, as a merchant, you must know when to retry and ask for a different payment method.

After all, you need to know how to balance your interest in saving the sale along with the need to protect yourself from costly revenue reversal and chargebacks.

Wrap up

Issuer declines can be an annoying situation for both merchants and customers. While it can insult or embarrass customers, it can lead to revenue loss and charges for merchants.

Therefore, merchants need to ensure that they follow the transaction authorization process to ensure no issuer declines and protect their long-term interests. 

In case of soft issuer declines, there’s always room to re-attempt the transaction and get it approved. Hard issuer declines are an excellent indicator to stay away from payment settlement complexities and chargeback risks.