How to Reduce Failed Payments for Membership Renewals
Failed payments are an absolute headache for membership operators. There’s no feeling like watching your hard-earned revenue drop due to an unsuccessful credit card payment.
Below I’m going to give you a simple and effective way to immediately reduce the failed payments inside your membership.
The Big Picture:
Banks can decline certain recurring charges for a host reasons. This represents a major risk to your membership revenue.
The Statistics:
Up to 30% of a membership’s total churn can be attributed to failed payments alone.
Once a failed payment occurs, there’s only a 3% chance it will be recovered before the membership lapses.
The Action Plan:
Your Stripe settings will significantly influence your failed payment risk. Use the guide below to minimize this risk and reduce the amount of failed payments in your program.
Why Do Membership Payments Fail?
The rate of failed payments within membership is increasing. Payments fail for a host of reasons, however, with skyrocketing fraudulent activity across the online landscape during 2023, credit card issuers are tightening their controls.
Questionable payments¹ are now being rejected by banks, especially recurring payments. This is an industry-wide trend.
¹ Questionable Payments: One particular element of a payment that can make it questionable from the bank’s perspective is the MCC (Merchant Category Code) associated with the business initiating the payment.
Your Stripe Merchant Category Code (MCC) Matters
MCC codes simply classify the goods and services offered by a business. When a Stripe account is opened, this code is assigned (often arbitrarily) based on info provided during the Stripe setup process.
MCC codes have a significant and direct impact on overall payment success.
Considering online fraudulent activity, it’s not surprising that MCC codes for business categories such as “digital goods, blogs, online gaming” communicate substantial risk to the card issuer, as those categories are laced with fraud.
Unfortunately, unless you specifically identify your business type in Stripe, you’ll be assigned a “general” MCC code that likely doesn’t align with your business, and in many cases, this code is simply incorrect.
So naturally, during times (like the present) of tightened controls at the card issuer level, customers with vague/questionable MCC codes attached to their business will see the most instances of failed payments.
Therefore, it’s crucial that you set an MCC code that’s not only low-risk but in alignment with your business.
Below, I’ll show you how.
How to Determine Your Merchant Category Code in Stripe
You must be strategic when classifying your business in Stripe. The goal here is to choose a category that’s the least-associated with fraudulent activity while also aligning to your business.
The right approach here in terms of what code to use involves ensuring that the business being classified is “professional and essential” in its nature. Fortunately, most membership products align well with this approach.
Merchant Categories to Avoid (if possible)
Entertainment and recreation
Travel and Lodging
Transportation
Food and Drink
Digital products, if possible. (If this classification cannot be avoided, ensure one provides the specific type of digital product being provided)
Clothing and Accessories
Regulated and Age-Restricted Products
Merchant Categories to Use
Note: Be sure to all select the proper subcategory for the categories below.
Professional Services
Membership Organizations
Education
How to Set your Merchant Category Code in Stripe
Once logged in, navigate to Settings > Business Settings > Business Details
Click the Edit Icon.
2. Enter business details along with Product Description. Ensure Product Description aligns with chosen industry and clearly states that charges are recurring (if applicable).
3. Save and Exit
Note: It will take a minimum of 30 days before you see a noticeable shift in the rate of failed payments.
The Takeaway
Failed payment risk cannot be eliminated, but it can be dealt with. Your MCC code is Stripe is your first line of defense against the occurrence of failed payments. Ensuring this code aligns with your business and falls within low-risk business categories will ensure that you minimize failed payment risk within your membership.
