Top 7 Payment Processing KPIs Every Merchant Should Monitor (Plus a Bonus KPI You Might Be Overlooking)

The way you manage payments plays a big role in whether your business thrives or struggles. Customers expect a smooth, secure, and hassle-free checkout experience, and the effectiveness of your payment processing system is key to delivering that. Keeping an eye on key performance indicators (KPIs) related to payment processing helps you ensure that everything is working as it should—and that you’re maximizing every sales opportunity.

Why Monitoring Payment Processing KPIs Matters for Merchants

As a merchant, you’re likely already tracking various KPIs that are crucial to your business—like conversion rates, average order value, or customer acquisition costs. These metrics give you insights into how well your business is performing overall. But to get a complete picture of your business’s health, you need to monitor payment processing KPIs alongside these regular business metrics.

Payment processing KPIs are like the underlying support system that makes everything else work smoothly. They help you understand how efficiently your payments are being handled, where potential issues might arise, and how they impact your bottom line. For example, even with a strong conversion rate, if your payment processing is plagued by high decline rates or frequent chargebacks, your revenue and customer satisfaction could suffer. By keeping payment processing KPIs in check, you’re not just ensuring that payments go through—you’re actively contributing to the overall performance and profitability of your business.

Top 7 Payment Processing  KPIs to Monitor: Focusing on What Matters Most

There are numerous payment processing KPIs to consider, but not all are equally impactful. We’ve identified the top 7 KPIs that provide the most valuable insights into the performance of your payment processing system. By focusing on these, you can ensure that your efforts are directed where they’ll have the most benefit.

1. Authorization Rate: Making Sure Transactions Go Through

The authorization rate tells you how many of your customers’ payment attempts are successful. A high authorization rate directly translates to more sales and happier customers. Industry standards suggest aiming for an authorization rate above 90%. If your rate is lower, it’s worth working with your PSP to identify and resolve issues—whether it’s optimising how payment data is sent to issuers or addressing concerns that might be causing unnecessary declines.

2. Acceptance Rate: Ensuring Successful Transactions

The acceptance rate goes a step further. It measures the percentage of all payment attempts that are successfully completed, including those that may have been initially declined but were later resolved and accepted. This rate takes into account all factors that could affect whether a payment is ultimately processed, such as retry attempts for soft declines, and customer actions to resolve payment issues. A high acceptance rate indicates that your payment system is effectively handling both approvals and any necessary follow-up actions. Monitoring this rate helps ensure that you’re capturing as many successful transactions as possible, maximizing your sales opportunities.

3. Decline Rate: Understanding Why Payments Fail

The decline rate measures how often payment attempts are rejected. Declines could be due to expired cards, incorrect details, or even bank-level fraud prevention measures. However, it’s essential to understand the different types of declines—false declines and soft declines—and their impacts on your business.

• False Declines: These occur when legitimate transactions are incorrectly flagged and rejected by the payment processor. False declines can be particularly damaging because they turn away genuine customers, leading to lost sales and potentially harming customer relationships. If customers face too many false declines, they might not try to purchase from you again, which can have a long-term impact on your business.
• Soft Declines: These happen when the issuing bank approves the transaction, but the payment fails due to temporary issues like network errors or insufficient funds at the time of the transaction. Soft declines often result in customers attempting the transaction again, sometimes successfully. However, if the issue isn’t resolved quickly, it can lead to frustration and abandoned purchases.

A typical decline rate might range between 5% and 10%, depending on your industry. If your decline rate is on the higher side, it’s crucial to investigate the reasons. Your PSP can provide insights into these decline codes and offer strategies to reduce them, such as improving data accuracy, using machine learning to reduce false declines, and setting up systems to retry soft declines automatically. Reducing decline rates not only boosts your sales but also enhances the overall customer experience.

4. Payment Decline Recovery Rate: Maximizing Second Chances

The payment decline recovery rate measures the percentage of declined transactions that are successfully retried and completed. This KPI is action-oriented and focuses on your ability to recover potentially lost sales due to temporary issues like soft declines. A high recovery rate indicates that your retry strategies are effective, and you’re minimizing the impact of declines on your overall sales. This KPI is crucial for ensuring that you’re not leaving money on the table due to avoidable declines.

5. Chargeback Rate: Keeping Disputes Under Control

Chargebacks occur when a customer disputes a transaction with their bank, asking for their money back. While some chargebacks are inevitable, the key is to keep your chargeback rate below industry thresholds.

The chargeback rate is typically calculated by dividing the total number of chargebacks by the total number of successful transactions in a given period, then multiplying by 100 to get a percentage. For example, if you had 100 chargebacks and processed 10,000 transactions in a month, your chargeback rate would be 1% (100/10,000 * 100).

Visa and MasterCard generally consider a chargeback rate above 1% to be problematic and could subject you to higher fees or even the risk of losing your merchant account. To help manage and reduce chargebacks, these companies offer tools like Visa's Rapid Dispute Resolution (RDR) and MasterCard's Ethoca.

• Visa Rapid Dispute Resolution (RDR): This tool helps merchants automate the resolution of disputes before they escalate into formal chargebacks. RDR allows you to set up rules to automatically resolve disputes, such as issuing a refund when certain conditions are met. This can significantly reduce your chargeback rate and improve customer satisfaction by resolving issues quickly.
• MasterCard Ethoca: Ethoca is a collaborative solution that connects merchants, issuers, and acquirers to share real-time data about fraudulent or disputed transactions. By leveraging this data, you can prevent chargebacks before they happen, as you'll be notified of potential disputes early enough to take action—like issuing a refund or stopping the shipment of goods.

Your PSP can help by providing detailed chargeback reports, identifying patterns, and offering solutions to minimize disputes, such as better communication and clear return policies. Additionally, utilizing tools like RDR and Ethoca can make a significant difference in keeping your chargeback rate within acceptable limits.

On the other hand, this doesn't mean that merchants should not respond to chargebacks. Card schemes have implemented services to provide merchants with the opportunity to investigate and dispute chargebacks and your PSP can assist in providing guidance on how to prepare sufficient evidence to refute the cardholder’s claim if you believe the claim to be ingenuine.

6. Refund Rate: Reducing Unnecessary Returns

The refund rate measures the percentage of transactions that result in refunds. A high refund rate could indicate problems with product quality, customer service, or mismatched customer expectations. Monitoring and managing this KPI is important because frequent refunds not only impact your revenue but can also strain your relationship with payment processors. By identifying the reasons behind refunds, you can take proactive steps to reduce them, whether through improved product descriptions, better customer support, or clearer return policies.

7. Fraud Rate: Protecting Your Business and Your Customers

Fraud is a major concern in payment processing. Industry standards suggest keeping your fraud rate below 1%. A low fraud rate is critical for maintaining customer trust and avoiding costly chargebacks. Your PSP plays a vital role in this area by providing advanced fraud detection tools and real-time monitoring to catch suspicious activity before it becomes a problem. By working closely with your PSP, you can implement stronger security measures, such as 3D Secure authentication, and ensure that both your business and your customers are well-protected.

Bonus KPI: Chargeback-to-Fraud Ratio 

While the core KPIs we've discussed are essential for monitoring the health of your payment processing system, the Chargeback-to-Fraud Ratio offers an advanced level of insight that can be particularly valuable for merchants looking to fine-tune their operations. 

The Chargeback-to-Fraud Ratio is a valuable KPI that helps you understand the proportion of chargebacks caused by confirmed fraud versus those stemming from other issues like customer dissatisfaction or product returns. Monitoring this ratio is crucial because it allows you to identify whether your chargebacks are primarily due to fraud, which might require stronger fraud prevention measures, or if they’re related to other factors that could be addressed through improved customer service or product quality. By regularly tracking this metric, you can take targeted actions to reduce chargebacks and manage costs more effectively, making it a practical and important KPI for any merchant.

Comprehensive Table of the Top 8 Payment Processing KPIs

KPI	Description	Why It Matters	Industry Benchmarks
Authorization Rate	Percentage of transactions successfully authorized by the card issuer	Ensures transactions get approved smoothly, leading to more potential sales and happy customers	Aim for above 90%
Acceptance Rate	Percentage of all payment attempts that are successfully completed	Provides a holistic view of successful transactions, ensuring you're capturing as many sales as possible	Aim for above 95%
Decline Rate	Percentage of transactions declined by the card issuer, including false and soft declines	Helps identify issues that cause payments to fail, reducing lost sales and customer frustration	Typical range: 5% to 10%
Payment Decline Recovery Rate	Percentage of declined transactions that are successfully retried and completed	Indicates how well you're recovering potentially lost sales, maximizing your acceptance rate by resolving soft declines and other temporary issues	Higher is better; aim to recover the majority
Chargeback Rate and Prevention	Percentage of transactions disputed by customers	High rates can lead to financial losses and penalties; low rates indicate satisfied customers and effective fraud prevention	Keep below 1%; use tools like Visa RDR and MasterCard Ethoca to help manage and reduce chargebacks
Refund Rate	Percentage of transactions that result in refunds	A high refund rate can signal issues with customer satisfaction or product quality; managing this KPI helps maintain profitability and customer trust	Lower is better; monitor closely
Fraud Rate	Percentage of transactions flagged as fraudulent	Low rates ensure customer trust and protect against financial losses	Keep below 1%
Chargeback-to-Fraud Ratio	Proportion of chargebacks due to confirmed fraud vs. other causes	Helps distinguish whether chargebacks are fraud-related or due to other issues, allowing for targeted actions to reduce chargebacks and manage costs effectively	Lower ratio suggests better fraud management

Collaborating with a Payment Service Provider (PSP) to Optimize KPIs

Effectively monitoring and improving your payment processing KPIs requires more than just a basic payment system—it calls for a partnership with a reliable Payment Service Provider (PSP). A quality PSP does more than just handle transactions; they offer the tools and insights necessary to track your KPIs in real time, address issues as they arise, and continually refine your payment processes.

For example, your PSP can provide detailed analytics on metrics like authorization and decline rates, helping you pinpoint the causes of chargebacks and find ways to minimize transaction loss. They also offer advanced fraud detection tools that are crucial for keeping your fraud rate low. Essentially, the best PSPs act as strategic partners, helping you not only understand industry benchmarks but also guiding you toward meeting or exceeding those standards.

Conclusion: Staying Vigilant with Your Payment Processing KPIs

As a merchant, keeping a close watch on these seven KPIs will give you a clear understanding of how well your payment processing system is performing and where there’s room for improvement. By focusing on metrics like authorization rate, decline rate, chargeback rate, and fraud rate, you can ensure that your payment processes are not just efficient but also cost-effective and customer-friendly.

Regularly reviewing these KPIs with your PSP’s support will allow you to identify potential issues early and make necessary adjustments to keep your business running smoothly.

Ultimately, it’s about ensuring that your customers enjoy a seamless shopping experience. When payments are processed smoothly, fees are managed efficiently, and fraud is kept under control, you’re setting your business up for long-term success. By keeping these key metrics in focus and leveraging a strong PSP partnership, you’ll be well-positioned to optimize your payment processing and drive your business forward.