What are Cascading Payments?

Cascading payments can be part of an intelligent payment routing strategy. In this post, we break down the details and discuss how they can influence your success rates.

What is a cascading payment and what does it mean?

Cascading payments is a type of payment processing that involves distributing transactions through multiple PSPs, channels or gateways using smart routing. If a transaction is declined through one channel, it’s moved on to the next for approval. This gives each transaction multiple opportunities to go through successfully.

The traditional payment processing flow is fixed and follows a specific path. With smart routing and cascading payments, the transaction follows custom logic and a set of rules that dynamically determine how a transaction will be transmitted for processing. This dynamic flow is based on factors like region to improve the chances of approval.

How do cascading payments and smart routing compare?

The terms ‘cascading payments’ and ‘smart routing’ may appear to go hand in hand, but the terms are not completely interchangeable. Smart routing sends transactions through the channel where they are most likely to be approved. Cascading, however, occurs only with transactions that have already been declined.

A quick way to look at the differences is:

• Smart routing is a preventative measure to reduce returned and declined payments
• Cascading is a remedial measure, which occurs after a valid transaction has been turned down

While both will route the payment to the channel most likely to successfully process the transaction, each option occurs at different points of the transaction flow. Strategically, smart payment routing technology should include cascading payments.

How do cascading payments work?

Card payments can be rejected for numerous reasons, but many cases are due to manual entry errors. For example, a customer might input the wrong credit card number due to a simple typo that could be corrected by re-entering the information. While such errors require a customer’s manual intervention (there’s no point in re-presenting an incorrect card number), they also reduce the likelihood of a successful outcome. Using a cascading payments process to re-present declined transactions that do not require customer intervention, then, is necessary to preserve a high transaction success rate.

Banks and credit card issuers follow a complex system to detect and reduce fraudulent transactions. Abnormal purchasing behavior may trigger a red flag, including: 

• Purchases made from a different region/location
• Higher-than-normal transaction value
• Many items (like gift cards) purchased in a short period of time

Cascading systems search for a path that successfully processes these perfectly valid transactions. They automatically search for the gateway or flow with the highest success rate for the currency, region, or business type involved in the transaction.

What are the benefits of cascading payments?

There are several reasons to consider using cascading payments at your organization. 

1. Improve transactional success rates

The first benefit of cascading payments is to improve your transactional success rates. If the customer doesn’t want to repeat the transaction with a different payment method, you could lose the sale. According to a report by Business Insider, 32% of cardholders will stop shopping at a retailer after a single declined transaction.

2. Assisting with geographic expansion

This is particularly useful if you process a high volume of cross-border transactions. Cascading your payments amongst the shifting leaderboard of PSPs will set up businesses to have the greatest chance to capture a payment - leading to the best experience for the customer. In regions where gateway outages are more common, in particular, re-presenting a transaction that could not be completed owing to the unavailability of the PSP, this can be a game changer for your bottom line.

How do you set up cascading payments?

To enable cascading payments you will need to set up logic in your payment engine that tries the transactions through additional Payment Service Providers (PSPs) if a transaction fails with your primary PSP. This requires that you are already storing tokens from multiple PSPs for each card or that you have the ability to send the card number to a PSP.

In either case you will need to have a PCI-compliant cardholder data environment that you host yourself or with a tokenization platform like Basis Theory. See more information on creating a cardholder data environment here.