This is a guest post from contributor Ericka Hallgren, Compliance & Risk Manager for PayNearMe.
Even though they make up only a small percentage of your monthly payment transactions, exception payments — such as non-sufficient funds (NSF), ACH returns, and failed transactions — can result in major operational headaches.
By the very nature of their name, exception payments interrupt the normal flow of doing business, disrupting your ability to collect and requiring staff intervention. And this disruption is expensive. According to NACHA, exception payments can cost the industry more than $720 million annually.
While exception payments are a standard part of doing business and cannot be 100% eliminated, risk management strategies can go a long way in proactively reducing them to an acceptable level, which in turn improves operational efficiency.
To better understand the impact of exception payments on your organization, here are six reasons exception payments hurt your business:
- Compliance Considerations: Organizations must stay under allowable return thresholds set by various compliance standards, such as NACHA, PCI-DSS, banking partners and payment processors.
- Penalty Fees: One or more parties along the processing chain may charge penalty fees for exception payments.
- Decreased Employee Productivity: Each exception payment requires employees to spend time manually analyzing, processing and resolving the transaction.
- Operational Inefficiencies: Additional efforts to collect on exception payments can add to the cost of processing and collecting payments.
- Cash Flow Impact: Many exceptions result in late or non-payments, affecting cash flow for many businesses.
- Reputation Management: Failed transactions can create negative service interactions with customers who expected their payments to go through.
As not all exception payments can be prevented, focus your efforts on reducing those that can be controlled through proactive risk management. Here are three risk management tips to get you started:
Risk management tip #1: Know your customers
The best defense against exception payments is to know your customers, including their needs and their regular and expected behavior. Using internal data collection and analysis technology, you can review payment history to answer questions to help understand your customer from an exception payment risk perspective.
For example, does the customer:
- Have a history of NSFs attached to his account?
- Make payments above and beyond her average monthly payment amount?
- Often use payment methods that are not in their name?
- Primarily use cards to make payments, which are at a higher risk of chargebacks than customers that primarily pay with cash, ACH or check?
- Use numerous bank accounts, debit cards and credit cards to make periodic payments?
Collecting as much relevant customer transaction information as possible at payment origination is also critical for increasing your chance of winning exception payment disputes. Leverage technology to attach metadata to all payment information, including date, time, location, device, and channel. This is key as all of this information must be stored securely according to regulations.
Risk management tip #2: Use technology to influence actions
Once you better understand your customers’ behaviors, you can use technology to put configurable, logic-based business rules in place to influence payment actions that limit exception payments.
These tools can flag customers with previous exception payments, customers with high exception payment risk profiles, and new customers, often the highest risk customers, because their payment behavior isn’t yet known.
For these customers, technology can minimize risk by enacting proactive controls such as setting minimum or maximum payment amounts, restricting the number of payments per month, and limiting overpayments.
In conjunction, many external tool options verify customer data to help reduce fraud, such as three-digit CVV (card verification value) security codes, billing address verification services, ACH payment bank account authentication, and bank account balance history.
Technology can also improve customer communications to reduce exception payments proactively. Customers often initiate exception payments when they are unaware of or confused by deducted funds. Communications can minimize these surprises with:
- Easily recognizable payment descriptors in customers’ account records
- Regularly scheduled payment reminders for one-time and autopay transactions
- Offering more reminder channels that best meet customer preferences, including mail, email, SMS or push notifications
- Immediate payment receipts to prevent duplicate payments
Risk management tip #3: Encourage lower risk payment options
Some payment types are less likely to result in exceptions. Cash, for example, is a near-guaranteed payment type that cannot be charged back, returned, or disputed through a third party. Digitized cash solutions can allow your customers to pay with cash while still giving you all the benefits of electronic payment options.
Many newer, technology-driven payment types also come with features that help reduce exceptions. For instance, Apple Pay’s and Google Pay’s biometric security technologies, such as Face ID, can help minimize the risk by verifying the sender’s identity. With this in mind, you can leverage technology to dynamically display different payment types based on the customer’s payment history to help manage risk. A customer who is flagged as a repeat NSF risk, for example, may be automatically restricted to using cards or cash to complete future payments.
Modern and reliable payment technologies incorporate many proven, data-driven risk management tools that can help prevent exception payments. However, keep in mind there is no right or wrong way to manage risk. Your risk management strategy must align with your organization’s goals. For example, if ACH returns must be under 15% to remain compliant, how close to 15% are you willing to go to achieve more on-time payments?
To understand where your goals land on the risk versus controls continuum, you need to complete an enterprise risk assessment and then configure your risk management technology tools accordingly.
