diff --git a/pallets/hyperdrive/src/lib.rs b/pallets/hyperdrive/src/lib.rs
index 0260b92d..5c50491a 100644
--- a/pallets/hyperdrive/src/lib.rs
+++ b/pallets/hyperdrive/src/lib.rs
@@ -23,6 +23,7 @@ pub mod pallet {
 
     use frame_support::dispatch::PostDispatchInfo;
     use frame_support::traits::Get;
+    use frame_support::transactional;
     use frame_support::{
         pallet_prelude::*,
         sp_runtime::traits::{
@@ -409,9 +410,13 @@ pub mod pallet {
             <CurrentTargetChainOwner<T, I>>::set(owner);
         }
 
+        /// Processes a message with `key and `payload`.
+        ///
+        /// **When action processing fails, the message sequence increment above is still persisted, only side-effects produced by the action should be reverted**.
+        /// See [`Self::process_action()`].
         fn process_message(
             key_bytes: &Vec<u8>,
-            message_bytes: &Vec<u8>,
+            payload_bytes: &Vec<u8>,
         ) -> Result<(), ProcessMessageResult> {
             let message_id = T::MessageParser::parse_key(key_bytes)
                 .map_err(|_| ProcessMessageResult::ParsingKeyFailed)?;
@@ -422,6 +427,11 @@ pub mod pallet {
             );
             <MessageSequenceId<T, I>>::set(message_id);
 
+            Self::process_action(payload_bytes)
+        }
+
+        #[transactional]
+        fn process_action(message_bytes: &Vec<u8>) -> Result<(), ProcessMessageResult> {
             let action = T::MessageParser::parse_value(message_bytes)
                 .map_err(|_| ProcessMessageResult::ParsingValueFailed)?;
             let raw_action: RawAction = (&action).into();
diff --git a/pallets/hyperdrive/src/tests.rs b/pallets/hyperdrive/src/tests.rs
index 47aa3b3d..d4344583 100644
--- a/pallets/hyperdrive/src/tests.rs
+++ b/pallets/hyperdrive/src/tests.rs
@@ -360,10 +360,12 @@ fn test_verify_proof() {
 }
 
 #[test]
-fn test_send_message() {
+fn test_send_message_value_parsing_fails() {
     let mut test = new_test_ext();
 
     test.execute_with(|| {
+        let seq_id_before = TezosHyperdrive::message_seq_id();
+
         let actions = vec![
             StateTransmitterUpdate::Add(
                 alice_account_id(),
@@ -429,5 +431,99 @@ fn test_send_message() {
                 value
             )
         );
+
+        // seq_id was incremented despite payload parsing failed
+        assert_eq!(TezosHyperdrive::message_seq_id(), seq_id_before + 1);
+
+        assert_eq!(
+            events()[5],
+            RuntimeEvent::TezosHyperdrive(crate::Event::MessageProcessed(ProcessMessageResult::ParsingValueFailed)),
+        );
+    });
+}
+
+#[test]
+fn test_send_message() {
+    let mut test = new_test_ext();
+
+    test.execute_with(|| {
+        // pretend given message seq_id was just before test message 75 arrives
+        let seq_id_before = 74;
+        <crate::MessageSequenceId::<Test>>::set(seq_id_before);
+
+
+        let actions = vec![
+            StateTransmitterUpdate::Add(
+                alice_account_id(),
+                ActivityWindow {
+                    start_block: 10,
+                    end_block: 20,
+                },
+            ),
+            StateTransmitterUpdate::Add(
+                bob_account_id(),
+                ActivityWindow {
+                    start_block: 10,
+                    end_block: 50,
+                },
+            ),
+        ];
+
+        let tezos_contract = StateOwner::try_from(hex!("050a000000160199651cbe1a155a5c8e5af7d6ea5c3f48eebb8c9c00").to_vec()).unwrap();
+        assert_ok!(TezosHyperdrive::update_target_chain_owner(
+            RuntimeOrigin::root().into(),
+            tezos_contract.clone()
+        ));
+
+        assert_eq!(TezosHyperdrive::current_target_chain_owner(), tezos_contract);
+
+        assert_ok!(TezosHyperdrive::update_state_transmitters(
+            RuntimeOrigin::root().into(),
+            StateTransmitterUpdates::<Test>::try_from(actions).unwrap()
+        ));
+
+        System::set_block_number(10);
+
+        let snapshot_root_1 = H256(hex!(
+            "8303857bb23c1b072d9b52409fffe7cf6de57c33b2776c7de170ec94d01f02fc"
+        ));
+        assert_ok!(
+            TezosHyperdrive::submit_state_merkle_root(
+                RuntimeOrigin::signed(alice_account_id()),
+                1,
+                snapshot_root_1
+            )
+        );
+        assert_ok!(
+            TezosHyperdrive::submit_state_merkle_root(
+                RuntimeOrigin::signed(bob_account_id()),
+                1,
+                snapshot_root_1
+            )
+        );
+
+        assert_eq!(TezosHyperdrive::validate_state_merkle_root(1, snapshot_root_1), true);
+
+        let proof: StateProof<H256> = bounded_vec![];
+        let key = StateKey::try_from(hex!("05008b01").to_vec()).unwrap();
+        let value = StateValue::try_from(hex!("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").to_vec()).unwrap();
+
+        assert_ok!(
+            TezosHyperdrive::submit_message(
+                RuntimeOrigin::signed(alice_account_id()),
+                1,
+                proof,
+                key,
+                value
+            )
+        );
+
+        // seq_id was incremented despite payload parsing failed
+        assert_eq!(TezosHyperdrive::message_seq_id(), seq_id_before + 1);
+
+        assert_eq!(
+            events()[5],
+            RuntimeEvent::TezosHyperdrive(crate::Event::MessageProcessed(ProcessMessageResult::ActionSuccess)),
+        );
     });
 }
diff --git a/pallets/hyperdrive/src/types.rs b/pallets/hyperdrive/src/types.rs
index efd4da28..a796b761 100644
--- a/pallets/hyperdrive/src/types.rs
+++ b/pallets/hyperdrive/src/types.rs
@@ -170,4 +170,11 @@ pub enum ProcessMessageResult {
     ActionFailed(RawAction),
     ActionSuccess,
     InvalidSequenceId,
+    ProcessingFailed(DispatchError),
+}
+
+impl From<DispatchError> for ProcessMessageResult {
+    fn from(value: DispatchError) -> Self {
+        ProcessMessageResult::ProcessingFailed(value)
+    }
 }