Why your Authorization Rate is the One Metric To Measure in a Post-PSD2 World

If you have an E-Commerce business and are processing hundreds or thousands of transactions per day, the question you should be asking yourself is:

What is my Authorization Rate?

What is the Authorization Rate?

For PSP’s and Acquirers the Authorization Rate is one of the most important metrics, because it provides insights into the performance of their platform by tracking the number of Authorized Transactions out of all submitted transactions.

In a traditional E-Commerce payment flow, a shopper indicates that she wants to “Checkout” her items. She provides the Merchant with her information, which is either stored in the Merchant’s database from a previous transaction or provided during the checkout process. The Shopper continues to select a Payment Method and goes through the Payment Flow.

For every submitted transaction, which is submitted to the Processor, a Transaction can either be Authorized or Refused by the Issuer. So to calculate the Authorization Rate, we use the following formula:

((Authorized Transactions)/(Authorized Transactions + Refused Transactions)) * 100 = Authorization Rate

For example, if we processed 800 Authorized Transactions and 200 Refused Transactions, the Authorization Rate would be:

((800)/(800+200))*100 = 80% Authorization Rate

The reason why I believe E-Commerce businesses should be tracking their Authorization Rate, is because the lower the Authorization Rate, the more it is hurting your business financially.

For example, if you have an Authorization Rate of 80%, it still means that 20% of your transactions are being refused, meaning you are not able to collect and process the order. Of course many customers will either try again or use a different payment method, but for the ones that don’t, it means that you are losing out on revenue, because your PSP/Acquirer is not able to process your transaction or provide you with relevant information as to why the transaction can not be completed.

One Metric That Matters

In Lean Analytics, authors Alistar Croll and Benjamin Yoskovitz, discuss the One Metric That Matters (OMTM). In reference to Eric Reis, the author of The Lean Startup, talks about the three engines that drive growth: the sticky engine, the viral engine, and the paid engine. While all companies use each engine, he cautions to focus on one engine at a time. In the world of Analytics and Data, this means picking a single metric that you are going to track, to improve the phase you are going through. This is what Croll and Yoskovitz call the One Metric That Matters.

Within Payments, there are many metrics that can be tracked like Transactions, Revenue or Chargebacks. The reason I suggest that you should start to track the Authorization Rate, is because it is the only part of the process that you can’t fully control, but has the biggest impact on your bottom line. So no matter if you are in the startup (sticky engine), growth (viral engine) or maintaining (paid engine) phase, tracking the performance of your PSP can be crucial to your success with payments.

Measure and Compare

If shoppers are browsing your website, but not adding items to their cart, you can A/B test variables including pricing, pictures and copy. If shoppers are adding items to their cart, but not proceeding to checkout, you can add pop-ups or email reminders to complete their purchase. If shoppers are checking out, but abort during the process, you can improve the number of pages or distractions to help them complete the transaction. But the moment you submit a transaction to your PSP/Acquirer, there is nothing else you can do, because an Authorization or Refusal all depends on how the PSP or Acquirer processes your transaction. That is why I would always recommend a Merchant to track the performance of their PSP/Acquirer and to compare it to other PSPs/Acquirers on a regular basis. Either by implementing two different PSPs/Acquirers and doing regular A/B Testing or using industry Benchmarks to compare their Authorization Rates.

How will PSD2 effect my Authorization Rate?

With the introduction of Payment Service Directive (PSD2), I believe that the Authorization Rate is the one metric that will suffer the most unless Merchants take the appropriate action.

As part of PSD2, Strong Customer Authentication will apply to online payments within the EU, specifically where both the PSP/Acquirer and the Issuer of the Shopper’s card are both located within the EU.

The Strong Customer Authentication will mandate that online payments are authenticated using at least two of the following independent elements:

  1. Something that only the customer knows (for example: a password, PIN or code that is only known to the customer)
  2. Something that only the customer has or possesses (for example: a physical card, mobile phone, or hardware token generator)
  3. Something that the customer is (for example: a biometric as a fingerprint, iris scan or facial recognization)

Many banks have already implemented and are actively using 3D Secure, SecureCode from Mastercard or Verified by Visa to reduce fraud, with the introduction of Apple Pay and Google Pay shoppers have the option to authenticate payments through mobile or desktop and local payment methods like iDeal, SOFORT and Bancontact are already using multi-factor authentication.

But adding more steps to the Payment Process, leads to more friction and an higher abandonment rate during the payment flow, which leads to more refused transactions, thus a lower Authorization Rate.

How can I start tracking my Authorization Rate?

Most PSPs provide very little insights into your Authorization Rate, especially if they don’t have any way to control or influence it. So in case you can’t download a report or have an analytics suite available from which you can track the Authorization Rate, I suggest the following:

  1. Track your Checkout Sessions (each time a Shopper clicks to Checkout using your Web Analytics for example Google Analytics or KissMetrics)
  2. Track your WebHook Sessions (each time a Shopper returns to your Thank You or Payment Failed Page)
  3. Track your Successful Payments (each Authorized/Successful Payment, according to your PSP)

Because of PCI-Compliancy you are not able to add Web Analytics to the Payment Page, tracking the Checkout Sessions, give you a good indication of the number of times customers have indicated they wanted to checkout.

The WebHook Sessions, can be tracked and give you a good idea of the number of Sessions that have been successful or not.

To validate the number of initiated Checkout Sessions and your Successful/Failed Sessions, you can compare it to the number of Successful Payments.

Dependent on your Business Model (Direct Sales, Subscriptions), the Issuer of the Shoppers card, the PSP and or Acquirer, and several other variables, the Authorization Rate can range between 70% to 95%. By tracking your Authorization Rate on a daily basis, you can create a dashboard that will give you a better insights into what percentage of transactions actually get Authorized and be able to truly understand the performance of your PSP/Acquirer.

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