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November 2014

Payment Assurance: Getting a Handle on Poor Billing & Credit Card Processes that Disrupt the Subscription Journey

Payment Assurance: Getting a Handle on Poor Billing & Credit Card Processes that Disrupt the Subscription Journey

The basic mission of revenue assurance is to keep a lid on dumb mistakes.

If the business has spent a fortune building networks and acquiring customers, then to bill and provision the subscriber correctly should be relatively easy stuff.  Well, that’s the theory anyway.  In practice, of course, constant vigilance is required to ensure back office systems and processes stay synched up as they should.

Now consider the assurance issues of OTT firms, the providers of music, video, TV, and other content who telecoms are increasingly partnering with.  Well, the OTTs take a different slant on revenue assurance.  They don‘t have a communications network to worry about, but they do focus a ton of energy on “payment management” and ensuring their subscriptions are renewed at the highest possible rate.

So if the long range goal of operators is to partner with OTTs and make a lot of money distributing their content via the mobile phone, it’s important that operators fully understand the many issues OTTs deal with in the payments and direct marketing area.

Luckily, while attending Zuora’s “Subscription Experience” event in New York City, I ran into Paul Larsen, a foremost expert in OTT payment strategies and advisor to many large OTTs such as Hulu, Pandora, and Roku.  I found Paul’s insights fascinating: he really gets to the bottom of the efficiency challenges that all subscription billers face.

Dan Baker: Paul, can we first step back to the history of payment strategies?  Buying media subscriptions off the internet has been around for only 20 years, but subscriptions themselves are as old as telephone bills.

Paul Larsen: Dan, the pioneers of subscription direct marketing and payment strategies were really the print media companies selling magazines and newspapers

I used to work for Reader’s Digest magazine.  And there was a time — and you probably remember this — when Reader’s Digest was pervasive across the U.S.  Their subscription volume was 21 million, plus their newsstand sales were number one.  Their success started in the late 50s and ended in the mid 80s.  I mean, that was quite a run.

But even in the best of times, their highest annual renewal rates — basically a consumer mailing in a check for a one year subscription — was 60%.  And no other magazines came even close to the renewal rates of Reader’s Digest and National Geographic.  Back in the day, you could trade out Time Magazine for Newsweek and U.S.  News and World Report, but Reader’s Digest and National Geographic had no competitors and became part of the fabric of American life.

I remember Reader’s Digest well.  The editorial was outstanding and it was a beautiful business model.  So what about today?  The clients you serve are players that telecom operators consider OTTs.  What challenges do they face?

Well, the numbers explain their challenge very well.  Twenty years ago, the involuntary failure rate was 8%; 10 years ago it was 12%, but today that failure rate is 30%.  And this year we had two monumental events (not to mention, at least a dozen other not-insignificant ones) — the credit card security breaches at retailers Home Depot and Target — so the involuntary failure rate jumped to 40% because well over 150 million cards were re-issued.

So what does this mean?  Well, it means a standard, middle-of-the-road subscription firm like Hulu or HBO Go risks annual payment failures for a third of their business.

Wow, so having the right payment strategies could spell billions in revenue for a large subscription company.

A couple weeks ago one of my clients was telling me they wanted to compete for the OTT business.  They wanted to go after the same sort of business that Hulu or HBO Go is in, where you don‘t have to subscribe to a FiOS or DirecTV, but you can get the service delivered to your tablet or desktop.

And I told them that no matter what subscription-service you offer, success hinges greatly on preventing certain “flashpoints” when the consumer can say, “I am just going to let this subscription lapse.”

There are all sorts of exit opportunities that a company provides either unwillingly or willingly that contribute to involuntary churn.  An exit opportunity, for instance, is when you notify a customer they are going to be billed shortly.  Such notices should not be sent at all for monthly-billed subscriptions.  But it is a best practice to send them to customers who are automatically renewed annually — usually 30 days before they are scheduled to be billed.

The point is to ensure the consumer is not surprised when their card is charged again, but of course that is also a flashpoint — an exit opportunity when the customers could say, “Gee, I hardly used that subscription, so I think I’ll call them to cancel.” Savvy marketers, of course, try to walk the fine line between fulfilling the ‘good-citizen’ obligation to engage their customers and providing a blatant exit opportunity.

Please tell me more about involuntary churn.

Well, there are five major contributors to involuntary churn within that credit card motif and they are: 1) credit card re-issuance; 2) the customer’s credit limit; 3) customer delinquency; 4) stale expiration dates; and 5) inappropriate card type like a prepaid card.

Each of these packs a powerful punch (we already alluded to the re-issuance caused by the breaches) and, together, have the potential to deliver a knockout blow.  Fortunately, there are aggressively protective measures merchants can take to help win this fight against card-caused churn.

For example, a prepaid card used to start a Hulu subscription may ultimately run out of funds when it comes time to renew, so oops, there goes the subscription.  So it’s important to control the type of card you use to acquire the customer.

The idea is to crush this involuntary churn as much as possible because up to the point of involuntary churn, neither the consumer nor the merchant said they wanted to their relationship to end.  So, that is why we are so busy sharpening the tools to proactively prevent involuntary churn ahead of the billing event — or reactively after a failed billing event.  And, of course, Visa and Master Card are actually on our side here because we are theoretically preserving their customer’s satisfaction — and their own revenue streams.

When you say “tools”, you’re talking about techniques or processes that you insert into the billing mechanism.  Is that right?

Yes, I am talking about processes, some that are well known and trumpeted by the card companies, Visa and Master Card, and its issuing banks.  These are processes the merchants should use to increase the likelihood of an approval.

Now the best way to achieve payments success and maximize customer lifetime value is to integrate directly with a subscription-oriented, world-class acquirer which, in turn connects directly with Visa and Master Card.  The fewer entities handling transactions, the less mapping and transliteration there will be, affording a higher likelihood of acceptance.  Merchants can nuance how they actually populate the fields of the layout to ultimately move the successful authorization dial one way or the other.

And “acquirer” is a banking term about handling the credit card transaction.

That’s right.  The term processor is applied to a wide array of service providers that can participate in the payments process, such as acquirers, gateways and ISOs.  But, of all the types of processors, only an acquirer is required.  An acquiring bank (acquirer) is a financial institution that processes credit/debit card transactions on behalf of a merchant, as opposed to an issuing bank (issuer) that issues the card to the person who buys something.

But in common parlance the acquirer often ends up being called the processor, basically the entity that acts as the buffer and transaction handler between the merchant and Visa and Master Card, American Express, and Discover.

Even the biggest merchants on earth — the Walmarts and Targets — have to have an acquirer that they send their transactions to.  That’s a required layer.

And as the merchant you can add all sorts of layers in between the acquirer and yourself.  But we find that many merchants who do that, do so ignorantly, and in ways that hurt their performance.  In general, the more layers in between, the more transaction handoffs are required, so the integrity of the transaction deteriorates as it is being handled on the way out to and back from Visa and MasterCard.

So, if you throw an e-commerce gateway into the mix, then you have introduced another entity and it could compromise the transaction.  If you transact optimally and directly with an acquirer, results will often be more successful.

Payment performance usually deteriorates with a gateway because the gateways rarely do more than make it easy for new merchants to get going.  The gateways have built very simple APIs and I give them a lot of credit for helping the non-recurring community, but their simplicity destroys the possibility for lowering involuntary churn.

What about the vendor billers serving the e-commerce and subscription billing market.  How do you like what they offer?

Well first of all, I think it’s important to not misconstrue them as gateways.  They are billing platforms to which the merchant has outsourced the tasks associated with successful acquisition, conversion and retention.  Some of them understand the principles of optimized recurring payments better than others.

The ones that have evolved from the technical world are just developing a sense of what to do on the retention side of things.  And billers who come from the merchant world have personally felt the sting of churn and their very reason for existence is retention and lifetime value, but they are up against a learning curve on the technical side.

So I think you need to err on the side of what these Business to Consumer (B2C) subscription companies want.  At the end of the day, they want their recurrent billing events to go through and they would much prefer a more rudimentary technical approach with a greater number of successful transactions than a hi-tech pathway to failure.

What are things that telecoms should be thinking about to prevent involuntary churn in the payments area?

Telecom companies who bill monthly are in a much better position than many other subscription billers because mobile service is considered essential.  Yet it’s still costly for them to make mistakes and much easier to use processes that prevent problems from happening in the first place.  And of course, OTT services are more discretionary — and prone to upheaval when something is wrong with the card.

Here’s what’s important to understand: There are many tactics that subscription companies can deploy to minimize their involuntary churn problems — best practices that can be implemented, for example: to compensate for re-issued cards (Account Updater services, which cost next-to-nothing and saves 70% of subscriptions associated with re-issued cards); to recover declined credit cards caused by insufficient funds, delinquency and other reasons; to successfully charge cards with stale expiration dates; to determine prepaid cards and take the proper actions.  Each of the best practices needs to harmonize with appropriate decisions regarding grace periods, email campaigns and other communications strategies.

In a world of 30%-40% subscription breakage world, these techniques really add up.

How should smart subscription companies keep up with the latest techniques in payment strategies?  What sort of expertise do they need in-house?

Well, we used to be big believers in the merchant controlling their own destiny.  After all, they know their demographic: they can import and sculpt their policies in the right way and engage the acquirer directly.  Theoretically they can be 100% efficient.

But the level of complexity has risen greatly, making it harder for a merchant to keep the expertise on staff and the technical ability to constantly upgrade and then manage the security issues, such as PCI compliance.

So today we think merchants can be almost as well off finding a quality third party to lend the expertise.  At the same time, there’s a world of difference between the strategies you employ for a Hulu client vs. a Wall Street Journal dotcom player.

So we conduct many RFPs that bring the best-in-class TPPs (Third Party Processors) together to compete for our customer’s business.  And since we have no skin in the game other than our merchant’s success, they get the comfort level of knowing the choice they make will be based on how close we believe we can get to that 100% efficiency goal.

These are splendid insights, Paul.  Tell me, how do you engage with the market and potential clients?

We like speaking — at conferences, roundtables, users groups, subscription-industry get-togethers — both formal presentations and informal payments discussions.  They usually end up being powerful and instructive.

Our customers include Hulu, Pandora and Disney.  You can imagine how getting that extra 1% greater effectiveness translates to their bottom lines.

Our engagements with subscription companies almost always begin with our best practices audit and assessment.  This puts us in a position of understanding their current level of efficiency (based on the anonymized benchmarking from our hundreds of other customers) allowing us to develop an optimization plan that helps get them as close to maximum efficiency as they want to get — whether in-house — or outsourced to one of the TPPs.

Copyright 2014 Telexchange Journal


About the Expert

Paul Larsen

Paul Larsen

Paul Larsen founded Paul Larsen Consulting (PLC) in 2004, for the expressed purpose of helping subscription merchants maximize customer lifetime value by overcoming credit card-caused churn.

Paul honed his payment processing skills in his decade-long stint at Synapse Group Inc., one of the world’s largest magazine subscription companies, and has since deployed his team to effect optimized payments performance for more than 400 subscription companies.

He is a past chairman of both the Direct Response Forum and Payment Processors Association and speaks regularly at industry conferences such as the DRF, MRC and Subscription Site Insider.   Contact Paul via

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