Payment routing 101: the essentials you must know
Alina Turchenko
As a business owner, working with a single payment service provider can be risky as every decline, glitch, or downtime on their side can result in your losses. That's why it's reasonable to work with multiple providers and route your payments in the wisest way possible.
This 101 guide will explain the concept of payment routing, the reasons and best practices for routing, and how to take the pain out of it.
What is payment routing?
Payment routing is an essential payment processing feature for businesses working with multiple payment providers. It allows sending each transaction to the optimal payment gateway based on selected parameters. It happens seamlessly for the customer and helps to maximise transaction success rates.
With the help of intelligent payment routing, a business can reach its processing goals, such as transaction cost optimisation, acceptance rate increase, provider downtime protection, or payment load distribution.
The evolution of payment routing
The process of routing payments has a dual essence. For a customer, it's completely seamless, with a transaction swiftly winding its way to successful completion. Meanwhile, under the hood, the complex system of connections between issuing & acquiring banks, payment systems and service providers synergises, making it all work like a Swiss watch.
Historically, most payment service providers (PSPs) connected to a single regional acquiring bank, sometimes requiring merchants to find their own merchant account. It resulted in slow processing and many declines, thus, low efficiency of traditional routing.
The emergence of smart or intelligent payment routing fixed all these issues by identifying the most efficient route between the available banks. Global intelligent payment routing became a true gem of payment processing, making it possible for each transaction to go directly to the bank that will most likely accept and complete it.
This way, millions of merchants and shoppers worldwide can process their transactions through the path of least resistance by working with a smart routing payment gateway.
Types of payment routing
There are two main ways to route transactions: static and dynamic routing. Let's take a closer look at each option.
A business can route its transactions in a desirable way by creating static routing schemes. Static payment routing involves manually configuring fixed routes to payment providers. It is also sometimes referred to as direct card routing. While it provides a straightforward approach, it's unresponsive to any occurrences and can result in lost sales if the pre-defined route becomes unavailable.
Dynamic routing, also known as smart or intelligent routing, on the other hand, enables businesses to adapt to changes and select the most efficient payment route to ensure each transaction's successful completion. Setting up various dynamic routing rules paves the way for the continuity of operations, leading to increased approval rates for routed transactions. For example, a smart processing engine can select the best route based on multiple parameters, such as card issuer/type/brand, auth mode (CVV/3DS), geolocation, store, currency, amount, date & time, metadata, and other payment routing data.
How does payment routing work?
As we already know, payment routing is the process of selecting the best payment provider to handle a transaction. The selection is based on several factors, such as transaction volume, payment method, transaction amount, currency, and risk level. Smart routing takes this process further by dynamically routing transactions based on real-time data and predetermined rules.
The payment router analyses transaction data in real time and determines the best payment provider to handle the transaction. This decision is made based on a set of predetermined rules, such as the provider's success rate for that particular payment method, transaction amount, or currency. The business creates and adjusts these rules based on their unique needs and priorities.
Once the best payment provider is determined, the transaction is routed to them and processed. If the transaction fails for any reason, such as an expired card or insufficient funds, the system will automatically try to route the payment to another provider until the transaction is successful.
But first, businesses need to establish relationships with multiple payment providers across different regions and payment methods. They must also develop sophisticated algorithms to process large amounts of data in real-time mode and make quick decisions. Alternatively, they can opt for a ready-made solution like Corefy, allowing them to benefit from payment routing without development efforts.
Check out this video if you want a more hands-on demonstration of how payment routing works. It shows how our clients configure routing schemes for their business needs.
In summary, smart payment routing is a complex and dynamic process that involves analysing real-time transaction data, establishing relationships with multiple payment providers, and using sophisticated algorithms to route payments to the best provider based on predetermined rules. By implementing it, businesses can improve their success rates, reduce transaction failures, and ultimately enhance the customer experience.
Benefits of payment routing
Global intelligent payment routing system helps merchants working in a multi-provider setup address four main challenges:
Increase success rates. You can significantly increase your acceptance rates by routing each transaction to the gateway offering the highest authorisation rates for such types of transactions. Routing engines also allow merchants to implement retry strategies for 'soft declined' transactions, restoring otherwise lost sales and minimising payment failures.
Reduce transaction costs. By leveraging multiple PSPs, you can send each transaction to the provider that offers the best price. The ability to find the lowest-cost way for each transaction can save you up to 30% in payment fees.
Improve customer experience. Intelligent payment routing allows customers to enjoy a seamless checkout experience without any hassles or friction. This convenience factor helps to reduce cart abandonment rates and increase the likelihood of repeat purchases, leading to higher customer satisfaction levels and increased loyalty.
Maintain payment process redundancy. Integrating a few different payment gateways would help you improve customer experience and ensure operational continuity no matter what with the help of routing and cascading.
Payment routing allows you to process all your transactions in the most optimal way based on various parameters and conditions. Actually, some of our clients have carefully crafted payment routing schemes with hundreds of rules. And it’s not just nerding out. It’s how you achieve the most striking business results. Denys Kyrychenko Corefy Co-founder & CEO
Drawbacks of intelligent payment routing
While the potential benefits of international intelligent payment routing are great, there are also some severe drawbacks worth considering.
Routing increases the complexity of all payment-related processes. You have to deal with multiple PSPs and their specificities, from fees they charge to their data settling and reporting format. Instead of a quick win, you can find yourself in the payment management and reconciliation nightmare, putting way more effort into handling your transactions than you expected.
With this in mind, try looking for a payment orchestration platform that will help you handle not just routing but the whole process of working with multiple payment providers. For example, Corefy helps businesses conveniently manage the entire payment and payout lifecycle in one place.
Case from our practice
If you are a high-risk business and your conversion rates are suspiciously low, check out this case our team solved recently.
Our gambling client initially connected multiple PSPs across different regions and had the freedom to set up routing as they saw fit. However, this approach led to a conversion rate of only 20%.
To address the issue, we thoroughly examined the client's routing scheme and analysed the reasons behind transaction declines. We discovered that a significant portion of declines was attributed to fraud and restrictions imposed by acquirers on transactions from certain countries. It became evident that there was a lack of effective communication between the client and their providers regarding the specificities of high-risk acquiring and anti-fraud systems.
On behalf of the client, we took the initiative to contact their providers and gather detailed information about the restrictions applicable to high-risk merchant accounts. It turned out that transactions originating from certain regions using specific cards were prohibited.
With this knowledge in hand, we assisted our client in creating a new routing scheme that focused on parameters such as user IP and issuer country. This allowed us to minimise failures by directing each payment to the most suitable provider that accepted such transactions. Additionally, we implemented a cascading feature, providing each transaction with an extra opportunity for successful processing.
Thanks to these strategic improvements, our client experienced a remarkable turnaround, with the conversion rate exceeding 60%.
Route your transactions hassle-freely with Corefy
Corefy's smart routing engine maximises payment performance and enables the highest success rates by optimising all incoming and outgoing transactions in real time. This powerful tool lets you quickly implement and alter various flow strategies.
To make intelligent routing a piece of cake for you, we offer the following:
An intuitive graphical interface allowing you to edit routing schemes easily without any coding.
A single-window system for processing payments and payouts, regardless of methods, flows, and currencies.
The ability to create as many various routing schemes as you wish for greater flexibility. You can revise them to define the most efficient ones based on payment analytics.
A powerful toolkit of accompanying features designed to boost your revenue.
To sum up
In conclusion, payment routing is an essential payment processing feature for businesses working with multiple payment providers. It helps companies to increase success rates, reduce transaction costs, and maintain payment process redundancy. While payment routing can be complex, platforms like Corefy can help businesses handle the whole process of working with multiple payment providers and make intelligent routing a piece of cake.
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Posted Feb 13, 2024
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