For the last few years, digital payments have been transforming companies across practically all industries – and the microfinance sector is no exception. Nowadays, many companies use a payment gateway to grant micro-loans online, making the lending process faster and much more versatile. However, the nature of these services is also very peculiar, because it revolves around debt recovery and large volumes of operations. For this reason, it is extremely important to enable payment analytics and keep track of key KPIs to keep your approval rate high, and avoid penalties from network processors.
In this article, we will show you a glimpse of the Payment Analytics reports that MYMOID sends to customers in the microfinance sector, and we will take a look at 5 important KPIs that you need to track to ensure that you are implementing the best practices for your company.
The importance of Payment Analytics
Microfinance companies face many dangers that threaten their long-term viability and sustainability. In fact, because the sector is relatively new, not yet regulated, and deals with small individual loans, it is considered risky across industries.
Companies in this sector need to find the right balance when providing micro-loans. On one hand, they cannot afford to be conservative on their lending, because it may restrict their growth. On another, becoming too enthusiastic and granting credits without maintaining a solid control on their effectiveness may result in losses.
In addition, because debt recovery is the core of a microcredit company’s cash flow, and it is tightly related to the capacity for lending loans, it is extremely important to maintain the number of denied transactions low. If denial ratio becomes too high, the payment network may apply penalties in response to the request of card brands and issuers.
For this reason, keeping track of microfinance analytics will be key towards establishing an effective long-term strategy and avoiding possible penalties from network processors.
5 KPIs that MYMOID tracks for microlending companies
Each quarter, we send Payment Analytics reports to our clients to help them optimize their payment logic for maximum efficiency.
As a Payment Gateway that serves all the major micro-credit companies in Spain, MYMOID has developed a solid know-how on the techniques required to maintain denial ratios low, and approved transactions high. Here are the 5 KPI that we’ve observed to be the most important in Payment Analytics:
1. Approval ratio
One of the most important KPIs for companies in the microfinance sector is the approval ratio (approved transactions vs. total transactions). When we prepare our Payment Analytics reports, we always pay a specific attention to its fluctuations throughout the quarters.
As we already mentioned, if a merchant experiences too many denied transactions and a low approval ratio, he might face penalties from the payment network. These penalties will depend on both the number of declined transactions, and the total percentage – always keeping in mind that they should not exceed 50% of the total number of transactions.
If the merchant has accumulated more than 3 months of non-compliance with the payment network’s requirements, the penalties can increase even further.
2. Effectiveness ratio
The effectiveness ratio measures the number of paid payment orders vs. the number of total generated orders.
Sometimes, merchants generate orders as requested by customers that never get paid. This can happen for a variety of reasons: the order expired because the customer took too much time to pay, the order was canceled because he changed his mind, etc.
Presenting a low effectiveness ratio usually means that companies don’t have a good control over their payment logic, and aren’t making a good use of the generated orders. At MYMOID, we provide tools that help the merchant personalize expiration dates and reuse previous orders (whenever they are available), giving him complete control over the payment process.
On the other hand, improving this ratio directly impacts the optimization of your company’s operations, reducing costs associated with IT equipment, web services, bandwidth consumption, technical maintenance, etc …
3. Denial type
Card declines are generally categorized by soft and hard. When soft declines happen, it usually means that the customer didn’t have sufficient funds, his card has expired, or he has exceeded transaction limits. This type of denials could be resolved by contacting the customer for further verification.
However, when hard declines happen, in cases like “card stolen”, “invalid card”, or “account closed”, do not try to capture lost revenue. Hard declines usually mean that the issue is not temporary, and won’t be solved with subsequent attempts.
At MYMOID, we always pay close attention to the type of denied transactions. If the merchant experiences too many hard declines, it could be alarming for his business. In this case, we work together to resolve this issue.
As we already mentioned, the cash flow of businesses in the microfinance sector revolves around debt recovery. This means that the generation of payment orders is strictly related to the activity of the customers.
For this reason, keeping a close look on customers’ behavior and the evolution of their activity throughout the week or month is important for the implementation of successful debt recovery practices.
With our Payment Analytics reports, microfinance companies are usually able to identify certain key trends, such as high or low activity during certain days of the week. Another common trend, although it may vary depending on the company and the sector, is higher activity during, for example, the first or the last days of the month – which could indicate a strong correlation with pay dates.
By identifying key performance trends, companies are able to understand customer behavior and discover the best practices that will lead to a successful debt recovery. For example, if you observe that customers are more likely to pay in the mornings or on Wednesdays, you can prepare for the intense activity with a higher number of call center agents.
On the other hand, if you notice that the ratio of approved transactions is higher during a specific time period, you can focus your Marketing or Operations efforts on capturing the biggest amount of revenue during that period.
5. Average ticket
Another KPI that could identify growth or lost opportunity over time is the average amount of approved and denied tickets. Generally speaking, if you notice that the amount of money that customers are willing to pay when paying off a debt gets higher, it might represent an opportunity for diversifying your portfolio of services.
On the other hand, if you notice that the average ticket of denied transactions is high (or higher than the approved transactions), it also means that there is a room for improvement in terms of debt recovery conditions.
Analyzing your payment performance represents key opportunities for improving your business strategy, and avoiding possible penalties by payment networks. If you are looking for a Payment Gateway provider with a solid know-how in the microfinance sector, do not hesitate to contact us!