By: Steve Kramer, PayNearMe
Most lenders can tell you exactly what they pay in transaction fees, down to the basis point. But ask them about the cost of payment exceptions, and you’ll likely get blank stares.
This blind spot can come with a hefty price tag. When payments fail, are disputed, or require manual intervention, they trigger expensive workflows across customer service, collections, and back-office operations. These hidden costs often exceed transaction fees by orders of magnitude, creating a profit drain that most institutions don’t even measure.
This isn’t a problem affecting just a few outliers. Payment failures are creating massive losses. Financial institutions are hemorrhaging hundreds of thousands of dollars annually on failed payments. When factoring in broader operational impacts—from login friction to collection workflows—the true costs become significantly higher.
Many financial institutions don’t fully grasp this hidden expense. They remain focused on transaction fees and processing volume, missing how poor payment experiences drive up costs across every department—from customer service to collections to back-office reconciliation.
Three Payment-Related Inefficiencies That Drive Up the Total Cost of Acceptance
The root of the problem lies in the design of legacy payment systems. Built for processing transactions in daily batches, these systems weren’t architected to manage the complete payment experience or prevent costly exceptions before they occur. When payments fail, are disputed or require manual intervention, they trigger additional work across people and systems and often incur additional transactional fees.
While payment exceptions span numerous categories, let’s examine three of the most costly payment-related inefficiencies driving up operational expenses.
- Exception Processing Costs
Every payment failure triggers expensive manual interventions. This creates widespread operational inefficiencies across the lending industry. More than 1 in 3 financial institutions (34%) rely on manual processes for critical payment operations. Additionally, 51% of financial leaders report their teams waste eight hours weekly on inefficient processes. Much of this manual work stems from handling payment exceptions that require individual attention and costly interventions.
Each NSF return, for instance, costs approximately $20 to resolve through customer support calls and reconciliation work, far exceeding the cost of the initial transaction. For most lenders, this adds up fast.
Consider this hypothetical scenario: assuming a 4% NSF rate and $20 per NSF event, a mid-sized lender processing 12,500 loans annually incurs about $10,000 in NSF costs; a larger lender at 62,500 loans incurs $50,000; and an enterprise lender at 250,000+ loans incurs $200,000+.
NSF returns represent just one type of exception among many that require costly manual handling. When factoring in failed ACH attempts, expired cards, closed accounts and other payment exceptions, these costs can easily double or triple.
However, modern payments platforms can significantly reduce these exception rates before manual intervention becomes necessary. For example, automatic ACH retries can recover more than 20% of failed payments with one retry and more than 40% with two optimally timed attempts.
- Account Login Issues
Login friction creates a cascade of problems. More than 2 in 5 borrowers (42%) struggle to remember logins, passwords, and account numbers when paying loans online. This drives 12% of all payment-related customer service interactions.
When borrowers can’t complete self-service payments, they often call customer service for assistance. Assuming each support call costs $8, lenders spend tens of thousands of dollars annually on avoidable payment-related calls.
The good news? This problem is easily addressed, and borrowers are already asking for the solution. Nearly 1 in 3 borrowers (31%) say the ability to pay without logging in or entering account numbers would make loan payments easier.
Modern payments solutions enable lenders to deliver exactly what these borrowers are asking for: personalized payment links that eliminate authentication barriers entirely. These links, embedded in payment reminders, take individuals directly to their payment screen—without requiring them to enter the dreaded password.
But authentication is only the first hurdle. Nearly 1 in 3 borrowers (32%) have trouble entering their payment information, likely due to typing errors on small mobile screens or not having account numbers and payment details at their fingertips. This represents another straightforward fix that aligns with clear borrower demand. Nearly 4 in 5 borrowers (80%) consider having payment information pre-populated as important or very important.
- Collection and Recovery Workflows
Payment failures trigger costly downstream processes, dramatically increasing operational costs. With mortgage delinquency rates at 3.98% of all loans outstanding and rising auto loan delinquencies, the volume of delinquent accounts requiring manual intervention creates substantial cost burdens.
According to the latest MBA Servicing Operations Study, servicing a delinquent mortgage costs $1,857 annually compared to just $176 for a performing loan. Each delinquent borrower requires multiple collection attempts, legal documentation, loss mitigation efforts, and potential foreclosure proceedings, which consume substantial staff time and resources.
Imagine a mid-sized lender with 12,500 loans: given the industry’s current 1.68% seriously delinquent rate, this would translate to roughly 210 accounts requiring servicing. At nearly $2,000 each annually, this results in more than $390,000 in additional operational costs for that lender.
With the right payments technology in place, lenders can significantly reduce these costs. For example, AI-powered risk identification built into modern payments systems can predict delinquency before it occurs by analyzing payment patterns and borrower behavior. These systems can then automatically trigger personalized outreach that offers at-risk borrowers solutions like adjusted due dates or payment splitting options.
Payment method flexibility also plays an important role in delinquency prevention. Many borrowers prefer to repay their loans with readily available funds rather than transfer money between accounts or manage cash flow across multiple financial institutions. Since 38% of borrowers want to use funds stored in digital wallet balances, offering comprehensive payment method support reduces the friction that drives borrowers toward delinquency. When lenders offer a wide range of payment options, including partial payments, they help borrowers manage temporary financial difficulties without defaulting.
Despite prevention efforts, some borrowers will still require collection intervention. When borrowers fall behind, collection costs multiply quickly without efficient tools to expedite resolution.
Much of this expense stems from operational inefficiencies during collection calls. Instead of agents flipping between multiple screens to find payment history, payoff amounts and account details, modern payments platforms provide all borrower information on a single interface.
AI-powered tools can display delinquency risk predictions and recommend optimal payment types for each borrower based on their payment history and behavior patterns. Agents can send personalized payment links directly to borrowers during calls, enabling borrowers to complete transactions quickly on their mobile devices while remaining on the phone for guidance through the process.
The True Cost Beyond Transaction Fees
When we tally the costs outlined above, the financial impact becomes evident:
- Exception processing: Mid-sized lender faces $10,000-$200,000+ annually in NSF costs alone, with total exception costs potentially reaching $300,000-$600,000 when including all failure types.
- Login and authentication issues: Additional support call costs of $10,000-$50,000+ annually for mid-to-large institutions.
- Collection and recovery: $390,000+ annually for servicing of delinquent accounts at a mid-sized lender.
For a typical mid-sized institution, these three categories alone can exceed $700,000 annually—costs that dwarf traditional transaction fee expenses by orders of magnitude. For larger institutions processing hundreds of thousands of loans, these costs easily scale into the millions annually.
But this represents just the tip of the iceberg.
Additional cost drivers create even deeper financial drains across the organization. Chargeback and dispute management consume 45 minutes of staff time per incident, while regulatory compliance requirements strain operational budgets amid persistent payment inefficiencies.
Call center volume presents another significant expense, with nearly one in five borrowers (19%) regularly calling to make payments at costs 80 times higher than self-service transactions. Meanwhile, cash handling and check processing require manual data entry and reconciliation, which adds operational overhead.
Daily reconciliation processes alone consume 2.5 hours of accounting team time, creating bottlenecks that delay financial reporting and tie up valuable resources that could be deployed more strategically.
The cumulative impact of these seven factors creates a vicious cycle: higher loan volumes generate more payment failures, which create more exceptions, which consume more operational resources, which ultimately reduce the actual profitability of lending portfolios.
Individually, an NSF return, a failed transaction or a reconciliation delay can be accepted as the cost of doing business. Collectively, however, they represent a systemic inefficiency costing financial institutions hundreds of thousands to millions of dollars every year.
How much money is your financial institution losing to payment exceptions, and how do you plan to solve for it?
Control Costs With Payment Experience Management
Solving the problem of payment exceptions requires more than incremental fixes—it demands a new way of managing the end-to-end payment journey. Payment Experience Management is a modern framework that unifies all aspects of the payment lifecycle—from initiation to reconciliation—into a single platform.
Rather than treating exceptions as isolated back-office issues, Payment Experience Management helps lenders proactively prevent them. It does this by connecting the dots between payment acceptance, customer engagement, and operational workflows, allowing financial institutions to anticipate and address friction points before they become costly exceptions.
For example:
- Dynamic payment recovery: Intelligent retry logic and adaptive routing minimize failed payments automatically, reducing manual exception handling.
- Frictionless borrower experiences: Personalized payment links, biometric login options, and pre-filled payment details lower support volume while improving satisfaction.
- Unified data visibility: Real-time dashboards consolidate payment data across channels, enabling teams to identify patterns and intervene early.
By managing payments holistically—not just processing them—lenders can reduce exceptions, streamline operations and lower their total cost of acceptance. Payment Experience Management transforms payments from a cost center into a competitive advantage, allowing institutions to redirect time and resources toward growth rather than remediation.
Is your institution ready to move beyond managing payments to start optimizing the entire payment experience?
About the Author
Steve Kramer is Vice President, Product at PayNearMe, where he leads the product development team. With more than 25 years of payments and product experience, Steve ensures PayNearMe’s solutions lead the market by reducing consumer friction and offering the widest range of payment options and channels, all while staying focused on security and reliability to help clients lower their total cost of acceptance.
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