The Direct Cost of Failed Payments

A platform sending 100,000 cross-border payments a month loses more than $5 million a year on failed payments. And this is only the visible and directly attributable component. The indirect costs are much higher.

Let us first look at the attributable and visible costs. Let's assume we have 100 initiated payments. Based on industry benchmarks, 86 go through cleanly, 13 fail on the first attempt but are eventually fixed, and 1 is returned failed.

Both the 13 and the 1 contribute to cost buckets.

The most obvious cost is the fee the intermediary bank charges. But this is a small part of the overall cost. When a payment fails and has to be repaired or returned, the intermediary bank charges a fee. The industry average is about $12 for each payment. This component is directly attached to the problem.

The second cost is the time internal teams spend investigating the issue and repairing the payment. When the system fails, someone has to pull the details manually, identify what is broken, contact the bank or the customer to get that information, and then resubmit it with the required information. This costs an average of $15 to $30 per investigation. This team sits within the operations teams and rarely focuses on just one activity. This makes it hard to attribute the cost.

Another cost is the fully loaded cost of payments that are investigated but still end up getting returned. These are usually more time-consuming than the ones that get fixed. The industry average for this cost is between $25 and $40 per payment.

So we put it all together: 100,000 payments a month is 1.2 million payments a year. Taking a 14% first-attempt friction rate and picking the payments that fail and then get fixed and the ones returned as failed means 168,000 friction events every year. A conservative realistic blended cost across the fee and internal team cost comes to $30. This translates to roughly $5 million every year.

But this $5 million is basically the floor of the incurred cost. There are other hidden costs of failed payments that are not visible and harder to estimate. In the next piece, we will add that element to this and see where the total cost lands.