👋🏾 Hi and welcome to Batch Processing! “Batches” are bi-weekly articles for paid subscribers that include my reactions to recent(ish) industry news. Think of this as a behind-the-scenes look at the scratch pad that may eventually turn into a public post.

About a decade ago, I found myself on a call with representatives of Wells Fargo and Vantiv, attempting to increase the authorization rate for one of my clients. Vantiv, which would later go on to acquire and take the name of Worldpay, a British payment processor, was sponsoring payments for my startup, Balanced. Wells Fargo is a top-3 American consumer bank, responsible for putting debit and credit cards into the hands of tens of millions of people. Many of these cards were being used to make purchases via Balanced but we were seeing a disproportionate number of them declined and we couldn’t figure out why.

In the view of my client, any transaction attempted by their customers yet declined (for real or spurious reasons) was money stolen from them. I don’t subscribe to that view. Honestly, each transaction successfully processed—in near real-time—is a small miracle. Our current digital payments infrastructure is an incredibly complex (and aging) system, with dozens of interlocking pieces that must fit together perfectly for everything to work. Sometimes things go wrong and no one can figure out why. As Patio11 recently described in his wonderful piece about improving how credit cards work: “a disconcerting number of spurious declines are caused by… gremlins, man.”

But I think it is both important and possible to improve things within the payments ecosystem, so I took it upon myself to get each company’s risk department on a call to see how we could increase Balanced’s baseline authorization rate and the authorization rate for this specific client. I, perhaps naively, assumed that we could solve this problem with a simple phone call. After all, it was in the best interest of each party to have more transactions processed (i.e., more revenue, happier customers, higher lifetime value from each customer), yet I ran into one of the most challenging characteristics of payments, a massive coordination problem.

What is an authorization rate?

Each time a customer attempts to make a purchase online or in-person with a payment card running on one of the major four payment networks, an authorization (aka an “auth”) is attempted. This auth message is sent from an acquiring bank (the merchant’s bank) through a payment network like Visa, to an issuing bank (the cardholder’s bank) to determine if a) the cardholder’s account is in good standing, b) if the cardholder’s account has enough balance (real dollars or credit) available to complete that specific transaction, and c) if there are any other fraud signals that should be considered for this specific transaction. The response from the issuing bank to the acquiring bank, and ultimately the merchant, takes just a few seconds and will come back with a success or failure message, and (sometimes) a more verbose description of why the transaction failed if that was the case.

If a transaction is successfully authorized, it can then be captured, meaning the funds will be reserved to be moved from a cardholder’s account to the merchant’s account. Often, especially with in-person payments, the capture occurs immediately after the auth—effectively at the same time. But there are many contexts where the auth and capture do not occur at the same time (e.g. placing a hold on a card at a hotel) and there are some cases where an auth occurs but the capture never happens (e.g. pledging funds to a Kickstarter campaign that doesn’t meet its goal).

Finally, in a growing number of regions, there is an additional “authentication” step being added before the auth. Requirements like Strong Customer Authentication (SCA) are part of the Payment Services Directive 2 (PSD2) standard, which has been rolled out across Europe over the last several years in an attempt to reduce fraud.

An authorization rate is simply the percentage of attempted transactions that are accepted by an issuing bank.

How payment infrastructure providers can increase payment acceptance rates

There are a few ways payment infrastructure providers (e.g., gateways, facilitators, and processors) can meaningfully boost payment authorization rates.