Why Account Updater is critical to the success of your recurring revenue business model. How key trends impact your subscription revenue.

Transcription

1 Why Account Updater is critical to the success of your recurring revenue business model. How key trends impact your subscription revenue. What immediate actions you need to take to preserve or increase lifetime customer value.

2 Contents Publisher s Letter... 3 Overview... 5 The Back Story... 6 How Account Updater Works... 7 Account Updater: Data Update Trends... 9 Account Updater: Response Code Trends About PLC About Subscription Insider... 15

3 Publisher s Letter Are you using Account Updater? Let me be blunt: If you part of are a company that sells subscriptions or memberships and you rely on a recurring, automated billing model you should be. Now, more than ever in today s world of rampant data breaches, shifts in technology and changes in the way people use payment cards, you need it! Account Updater a service offered by Visa, MasterCard, Discover and more recently, American Express provides updated payment card information to help merchants manage declined payment cards. It s a key component to minimizing subscriber churn and increasing the lifetime value of customers. Said differently, Account Updater helps recurring subscription merchants retain revenue that otherwise would be lost. Kathy Greenler Sexton CEO & Publisher, Subscription Insider Together with the amazingly talented team at Paul Larsen Consulting, LLC (PLC), we present this Account Updater Trend Report to inform businesses that rely on recurring revenue from payment cards. In addition to explaining how the Account Updater service works, we ve included insights about trends that subscription businesses need to understand and plan for. It should be noted that this Account Updater Trend Report is unique. Usage data and results have been aggregated by PLC from an extensive dataset that includes 50 recurring revenue businesses with Card- Not-Present issues over a two-year period (June 2013 through June 2015). Our goal is to demonstrate the impact of recent events on the subscription economy, such as the massive reissuance of payment cards associated with data breaches and the shift to the new Eurocard, MasterCard, Visa (EMV) chip cards. This information is absolutely fascinating. Here are a few key findings that highlight what merchants need to know: By April 2015, reissuance had finally settled down after the two big breaches in 2013 and But since May of 2015, we are seeing what we believe is the early impact of EMV compliance, and match rates are beginning to increase. In June 2015, Account Updater returned codes for Stale Account updates that were 45 percent higher -- and Stale Expiry Date updates were 25 percent higher -- than in

4 April We expect the percentage of account number match rates to continue increasing for the foreseeable future with EMV compliance, and it s imperative that businesses with recurring revenue models prepare. Annual billing plans, on average, are 150 percent more likely to have closed card accounts and customer advisory updates than monthly billing plans. If your business depends on annual subscriptions, this means you need a customer outreach plan to secure new card information from lost subscribers. New expiry date is the top Account Updater response for monthly billing plans, accounting for 71 percent of the payment card updates in Q That is down 13 percent from 24 months ago when we first started compiling data. As a result of several massive data breaches (Home Depot, Neiman Marcus, Target and others), the responses from Account Updater back to merchants enrolled in the service have shifted to represent a higher percentage of new account numbers, reducing the overall percentage of new expiration dates. I would like to thank all of PLC, especially Paul Larsen, John Sullivan and Melanie Stout, for their time, analysis and talent in putting together this report. The PLC team is the foremost expert in Card-Not- Present and recurring payment processing research. Subscription Insider could not be working with a more talented team on this topic. Thank you, as well, to the Subscription Insider team for designing, editing and supporting this project. It takes a village! Enjoy the report! Kathy Greenler Sexton CEO & Publisher, Subscription Insider

5 Overview Payment card transactions are the heart of all subscription businesses, and nothing puts a damper on renewals like declined cards. The term subscription businesses use is involuntary churn, and it s a key performance indicator on how a business is managing declined payment cards and optimizing recurring revenue. Monthly and annual payment card transactions may have been declined because a member or subscriber was issued a new card (due to expiration, loss or theft) or because other information changed (such as when a bank switches from partnering with Visa to MasterCard). By the end of 2015, and continuing throughout 2016, we expect a major spike in declined payment cards in the United States. Much of this will be due to card issuers adhering to the new EMV chip card global security standard, which required new cards to be issued by October 1, (Europe, Australia and Canada have already converted to the global EMV standard.) As of August 1, 2015, only one in 10 chip-enabled payment cards have been reissued, which means significant involuntary churn is ahead for subscription businesses as consumers and businesses receive their new EMV chip cards. It is predicted that 98 percent of cards will be reissued by Account Updater is a service that updates the payment cards a merchant has on file with current card information so a transaction can ultimately be successful. It is one of the strongest retention tactics we recommend for your payment processing program, since it enables updates of expired and certain types of declined cards.

6 The Back Story Account Updater originated in 2003 by payment card-issuing banks as a courtesy to consumers to help keep perfectly good and wanted subscriptions intact, despite a card being reissued. In 2009, the second generation of Account Updater was launched and with that, the service was now redesigned for merchants. The revised Account Updater service provided automation of card updates for participating merchant payment processing systems. Today, Account Updater is a service on which many subscription and membership businesses rely to minimize involuntary churn. To understand why Account Updater is so important to recurring revenue businesses, look at the recent examples of data breaches and their impact on declined cards. At the end of 2013, Target and Neiman Marcus, among other retailers, announced they had been breached at their point-of-sale. An estimated 40 million cardholders were potentially impacted by the breach. Each major issuer handled the response differently. Some banks immediately reissued the cards at risk of exposure, while others waited until potential fraud occurred before closing cardholders accounts. Home Depot experienced a major retail breach in 2014 affecting 56 million payment cards and it immediate reissued cards. The effect of the breaches retailers experienced and the early reissuance of cards due to EMV adherence is illustrated in Chart #1. card security standard. We can already see the impact of cards being reissued with this new technology. How many cards will be affected? The number of credit cards in the U.S. from the four primary credit card networks (Visa, MasterCard, American Express, and Discover) is in the range of 600 million. If you layer in debit and other types of payment cards, that number doubles. With all the volume of cards being reissued, businesses should expect payment card decline rates to increase dramatically by the end of 2015 and into Recurring revenue merchants who are not leveraging the Account Updater service will face steep challenges ahead with high rates of involuntary churn. CHART #1 By the end of 2015, liability of fraud will shift to whichever party the merchant or the issuer has not adopted the new EMV chip

7 How Account Updater Works Issuing banks that offer Visa or MasterCard payment cards may choose to participate in the Account Updater service sponsored by the card issuers. Discover provides an Account Updater service and American Express has recently rolled out a beta version of a similar updating program, accessible to merchants who conduct on-us billing with American Express. Chart #2, above, shows the flow of information between issuers and recurring subscription merchants. Both large and small merchants with recurring subscriptions and memberships can access Account Updater if they use a merchant acquirer (processor) that is integrated with Account Updater. Merchants that do not have a direct integration with an acquirer will have to rely on a gateway partner to engage this service on their behalf. The cost of setting up the program depends upon the acquirer s or processor s experience in deploying Account Updater. The ROI of the service is magnified by the attractive pricing associated with it, which is normally based on the number of updates provided. Merchants enrolled in Account Updater programs with Visa and MasterCard submit account numbers for customers with whom they have an ongoing payment relationship. The payment card issuers then process inquiries against their database and return a few possible responses to the merchant (updated account numbers, expiration date, etc.). Merchants may apply any account or expiration date changes to the cards on file, and from that point, they can also use the updated information for future authorizations.

8 When a merchant submits accounts to an Account Updater service, here are the possible responses the service will provide: Account Number updates that provide the correct account information for a given card. Expiration Date updates that provide the correct expiration date for a given card. Closed Account advisories that provide notifications that an account is now closed. Contact Cardholder advisories that provide information that typically results from the cardholder opting out of Account Updater programs during his or her payment card application process. The number of banks that participate in Account Updater services is around 70 percent, which includes approximately 85 percent of U.S. cardholders. Most of the non-participating issuers are smaller, regional banks with a relatively low member base. There are many options for optimally deploying Account Updater, and frequency, triggers and timing are all factors to consider. The frequency with which a recurring revenue merchant can submit accounts to the Account Updater service varies and can depend on the billing cycle (monthly, annually, semi-annually or quarterly). The current best practice is to leverage the Account Updater service with a robust recycling or manual re-presentment strategy.

9 Account Updater: Data Update Trends To fully understand the impact of Account Updater services on subscription and membership businesses, PLC aggregated Account Updater s usage data and results from Card-Not-Present (CNP) recurring merchants from June 2013 through June Understanding the impact of recent events on payment processing such as the massive reissuance of payment cards associated with data breaches and the shift to EMV chip cards is important to better manage and mitigate their impact on future subscription revenue. Chart #3 shows the total percentage of cards successfully updated with what we call actionable updates provided by the Account Updater service. This immediately usable information includes identification of account numbers and expiry dates that are stale and consequently, updated by the service. A merchant using an Account Updater service would be able to retain subscribers (or members) via these updates and see an immediate and positive impact on recurring subscription revenue, while also extending the lifetime value of subscribers. CHART #3

10 Reviewing the past two years of Account Updater trends, we can see a shift in response types and it s clear that Stale Account updates and Expiry Date updates rates were impacted heavily by external forces. The shift primarily occurred as a result of major upheavals in the industry, such as data breaches. Note the surge in Stale Account numbers began in Q at the same time that cards were being reissued as a result of Target s data breach a few months prior. We also see that there was an even larger spike in reissued account numbers as a result of the Home Depot breach. This breach occurred over the five months spanning from April through August 2014, but wasn t announced until early September The Stale Account and Stale Expiry Date update rates peak in June and July 2014, due to the breaches, with nearly10 percent of a subscription merchant s file of customers cards at risk of early, involuntary and potentially avoidable cancellation. Comparing the Q2 year-over-year, we see a 33 percent decline in Stale Account updates and a 52 percent decline in Stale Expiry Date updates. The breaches in late 2013 through early 2014, along with the corresponding higher match percent rates, account for this decline. successfully updated, with a 14 percent decrease in Stale Account updates and a 10 percent decrease in Stale Expiry Date updates. Quarter-to-quarter, we see declines in the percent of updates to total merchant requests to the Account Updater service; however, merchants should not assume that this trend will continue. In fact, Q represents a turning point in the declining match percent trends we have been observing since the major breaches in April 2015 was the lowest match percent we have observed. Starting in May (Chart #4), we see what we believe is the early impact of EMV compliance in the U.S., as June 2015 Stale Account updates are 45 percent higher and Stale Expiry Date updates are 25 percent higher than in April We expect match percent rates to continue to increase for the foreseeable future. CHART #4 Comparing Q to when we started compiling data in Q3-2013, we see an 86 percent increase in Stale Account updates as a percentage of the overall updated information being returned, and a corresponding decrease of 22 percent in Stale Expiry Date updates. Comparing the first and second quarters in 2015, we see declines in the total percentage of cards on file that were

11 As we dive into the data a bit more and explore MONTHLY and ANNUAL recurring transactions, we can also see nuanced trends for merchants based on their primary billing schedules, along with when and how often they use Account Updater. Chart #5 demonstrates Account Updater results for those merchants who bill primarily on a MONTHLY basis, and submit accounts to the Account Updater service approximately six days before scheduled billing events. Critical to the lifeblood of any subscription or membership business that bills monthly, in Q2-2015, 14 percent of a recurring merchant s customer base can be at risk in any given month of increased involuntary churn. With Account Updater, this churn is preventable. The majority of the monthly updates are related to expiration dates. Chart #6 shows merchants that primarily offer ANNUAL subscriptions and submit customer account numbers to the Account Updater service six days before each annual billing event. Here we see the biggest difference between monthly and annual billing plans and Stale Account updates. This makes sense since with annual billing cycles: These payment cards have had a full year between billing events to have something happen (e.g., a lost card being replaced). While there are many differences between types of subscription services and products that B2B and B2C companies offer, many of the Account Updater trends we observed did not have statistically significant difference between B2B and B2C customer bases. However, we did find that Account Updater responses for MONTHLY billing plans are much different than ANNUAL billing plans. CHART #5 CHART #6

12 Account Updater: Response Code Trends The mix of Account Updater response codes returned to merchants Account Number Updates, Expiration Date Updates, Closed Account Advices and Contact Cardholder Advices is never static. Market dynamics such as data breaches impact the number and type of responses greatly. Obviously, the higher the volume of recurring transactions a merchant has, the greater the impact. Overall, the responses returned from Account Updater that we classify as useful are the New Account Number and New Expiration Date response codes. Since these response codes are automatically updated, they directly benefit merchants by enabling the recovery of subscriber revenue that otherwise would be lost. In Q2-2015, 83 percent of the response codes for monthly billing and 72 percent of the response codes for annual billing were useful, highlighting the immediate revenue impact an Account Updater service can have. Merchants should avoid re-submitting cards with codes such as Closed Account and Contact Cardholder to avoid having an additional fee incurred for updates to those accounts. However, we do recommend that authorizations continue to be attempted as scheduled for these customers. CHART #7 For merchants with MONTHLY recurring billing plans, New Expiry Dates is the top updater response accounting for 71 percent of the payment card updates in Q Twenty-four months ago, a business that charges monthly recurring subscription fees would have had 82 percent of its Account Updater responses result in New Expiry Date matches, identifying and updating cards on file with new expiration dates. Two years ago, a business could recover lost revenue from a declined card without using the Account Updater service by manually representing different expiry dates and many did and were able to recover what otherwise would have been lost revenue. But, as we have discussed, the world has changed drastically since then. As cards are being reissued with the new EMV chip technology, we are seeing expiration dates pushed out farther and following a different cadence, with the months and years changing from the previous card. Historically, months of expiration would remain static while

13 only the year changed. Because of this, Account Updater while we have always recommended it as a best practice is now a must-have tool for recurring merchants. For businesses with ANNUAL recurring billing plans, our analysis shows a higher percentage of New Account updates than we saw for the businesses that bill monthly. As of Q2-2015, annual billing plans received New Account updates for 30 percent of their total responses versus monthly billing plans that had only a 12 percent match rate for new account numbers a 150 percent difference. We have also observed a percent increase between Q1- and Q in New Expiry Date updates for annual billing plans, presumably due to the reissuance of the EMV compliant cards. CHART #8 The other major difference between annual and monthly billing plans is that annual billing plans have almost twice the percent of response codes that are not useful matches (e.g., Closed Account or Contact Cardholder advisories) than monthly billing plans. For Q2-2015, that represents 28 percent of Account Updater matches as not useful for annual billing. For these matches, merchants should reach out to their subscribers and members directly to secure new payment methods, or they should continue to attempt card authorizations, or both. We have seen merchants have success in retrying authorizations on these accounts.

14 About PLC PLC exists to maximize the lifetime value of subscriptions by helping crush credit card-caused churn. The company s mission is to serve the community of subscription merchants by optimizing their bottom-line credit card processing results through the application of the recurring industry s best practices in the most effective ways. After 13 years as a merchant, the company has spent 13 more years delivering fine-tuned tools and weapons to more than 400 subscription merchants, including Ancestry, Angie s List, Audible, Consumer Reports, Disney and Dollar Shave Club. For more information: (845) Plarsen@paullarsenconsulting.com

15 About Subscription Insider Subscription Insider, an online media business owned and operated by Authority Media Network, LLC, delivers intelligence on how to build, market and sell subscription-based products and services. Through exclusive news, research and tools (including case studies, trend reports, buyer guides, tutorials and best-practice information), Subscription Insider provides the industry's most authoritative how-to guidance on running subscription businesses more profitably. For more information: (800)