Dunnings: Handling Declined Transactions in Recurring Billing

Any business with subscriptions or memberships is familiar with recurring billing and saved payment information. These options allow you to securely store customers’ card data to automatically charge their cards when it’s time to renew their subscription or membership. This type of billing provides predictable revenue and better customer retention. But it’s not without its headaches, the biggest of which is declined transactions. Commonly called “dunnings,” each of these failed charges can be a loss of revenue for your business, especially if you’re not proactively tracking them or following up. In fact, according to online payment processor Stripe, dunning failures can cost businesses about 9% of their annual revenue.

In this article, I’ll go over the failed recurring transactions, how they happen, and what you can do about it.

The Dunning Process

“Dunning” refers to communicating with customers to collect payments that are due (or overdue.) In recurring billing, this would mean following up on the failed transactions from saved card information. The word apparently comes from the 17th century, with the word “dun” referring to demanding payment for a debit. While ‘dunning’ formally refers to the process of communicating and attempting to collect the overdue payment, many business owners colloquially use “dunning” as a noun to mean the failed transactions. Some companies run “dunnings reports” to show which transactions failed and require follow up, and consider those individual transactions to be  “dunnings.”

Later in this article, I’ll go over how to craft a dunnings process: the communication and steps to follow to collect payment for the failed transactions. But first lets take a look at how failed transactions happen.

How Recurring Billing Failures Happen

With recurring billing, you collect customer card information when they first sign up and store that securely. Many businesses work with payment processors that offer secure card storage vaults. From there, your system automatically bills the customer at agreed-upon intervals. For gym memberships, it’s usually monthly. For tech support, it could be monthly or annually. Subscriptions and mail order clubs could be weekly, monthly, bi-monthly, quarterly, etc.

Much of the time, transactions will go through just fine. But sometimes, transactions will decline. There are several reasons that could happen, but the most common are that the card details changed (if a customer had a card replaced), the card expired and there was no card updating service in place, or the customer has insufficient funds in the account connected to the card. Any of these common situations can lead to a declined transaction from a saved card.

The Cost of Dunnings

You’ll need to do the math for your own business, but let’s look at a few hypothetical situations. We’ll use Stripe’s assumption of 9% failed transactions.

Let’s say you run a gym with $49.99 monthly memberships and have 500 members. At 9% failure rate, 45 of those transactions won’t go through. 45 transactions * 49.99 = $2,249.55 in lost revenue that month.

Or maybe you have a book of the month club with 2,000 subscribers paying $29.99/month. That’s 180 failing transactions totaling $5,398.20!

Failed transactions in recurring billing businesses can cost you real money, and from customers who already agreed to pay you. It’s important to minimize the loss from failed transactions by following up with an intentional dunnings process.

Creating a Successful Dunnings Process

There are several steps you can take to create a successful dunnings process and minimize lost revenue. If you use a recurring billing platform, you may already have a “smart” dunnings process automatically enabled. But if not, you can still create your own version.

Reporting

Before you can attempt to recover revenue from failed transactions, you first need to get solid data on the failed transactions.

Your processor or recurring billing platform should be able to provide a report of failed transactions. Be sure to set this up to run on a regular cadence and set aside time to review it. Your report should include details on the failed transaction, including:

• Customer name and details
• When the payment failed (this could be multiple dates if auto-retry features are enabled)
• Reason codes for the decline

This report is typically called a dunnings report.

A Note on Auto-Retry

If your payment processor or recurring billing platform allows you to retry failed charges automatically, it’s worth enabling. Some systems even let you set a number of retry attempts or designate how much time to wait between retries. Spacing out the time between retries can help minimize additional declines that may happen if there’s a problem with the customer’s bank, or can allow time for sufficient funds to become available.

Communication

Remember when I said that the actual meaning of “dunning” is communicating about an overdue payment? This is where that part comes in. If a card is declined, you’ll need to get in touch with your customer to request that they update their card / payment method or choose an alternate way to pay.

You can do this by phone or by email, but many businesses choose to start with an email and escalate to phone if necessary. Some recurring billing platforms have automated dunnings management, which can help you streamline the process of communicating with customers, including automatically sending emails.

If you want to start with email, be sure to send it from your business address, state your name, the company name, and that you’re contacting the customer about a failed payment. You don’t need to get into the details; simply stating that their payment couldn’t be processed is fine. Advise the customer to log in to their account to update their card information or contact you to make a payment directly. Be sure to include contact information for your business in case the customer wants to follow up before making payment. Many customers are understandably worried about scams and fraud.

If the customer pays following the email, great! You’re all set. If not, you’ll need to escalate to a second email reminder or a phone call. Be sure to clearly state any timelines for suspending or canceling the customer’s membership or subscription any time you communicate about a failed transactions.

Update Records

It’s important to keep a record of which customers you’ve reached out to for payment and follow up. You can’t assume that sending one email will take care of the failed payment. Make note of the date and method you used to contact the customer.

Some systems let you set reminders for specific tasks or follow-ups, which you can use to keep track of which accounts need further follow-ups or cancellation.

Measure Success

An overlooked but important piece of your dunning process is measuring your success at recovering the money from originally declined transactions.

It’s worth tracking the recovery rate itself (the percentage of failed payments later collected), how long it took to recover the payment, and the methods used. This will help you determine if email or phone is more successful for your specific customer base, and how much time you can expect to have to invest to successfully mitigate the declined transactions.

Subscription Billing Platforms

Multiple payment processors can support recurring billing and offer secure card storage vaults. However, there are also add-on services from companies like Recurly and Chargebee that specialize in recurring billing.

These services typically provide more advanced tools specific to recurring billing, such as advanced dunning management. But they do come with additional costs. You’ll need to decide if your rate of declined transactions and success at recovering warrant the additional fees from a dedicated recurring billing platform.

Automatic Account Updater

Some payment processors offer an automatic account updater service, which allows for seamless continuation of subscription billing transactions when customers’ cards expire or are reissued. This service updates the customers’ billing information before a decline occurs, helping minimize your need to follow up. Account updater isn’t available for all cards, but can significantly reduce the number of preventable declines that may otherwise occur from simple account updates. There are also companies that specialize in card updater services.

Declined transactions are a fact of life in recurring billing businesses, but losing revenue doesn’t have to be. By utilizing tools available to you, like card updaters and automatic retries, you can minimize your “dunnings.”

Need help choosing a processor or gateway that supports better dunning management tools? CardFellow can help you compare features and pricing to find the right fit for your business. Try it now!