Think Globally, Act Locally: The Key to Geographic Routing

Few, if any, merchants in an increasingly globalized economy can afford to limit their businesses to their own country of origin. Instead, they must be designed to serve customers wherever they may be in the world. Ensuring payments can be completed successfully and cost-effectively means paying close attention to the buyer's national origin, as transactions processed across borders are less likely to close and incur much higher costs. 

This is why multi-processor arrangements with geographic payment routing is an essential part of any payment processing strategy.

Payments Without Borders 

When a consumer from one country wishes to buy something from a merchant in another country, the transaction is designated as cross-border, because money literally crosses the border from one jurisdiction to another. If the two countries do not share a common currency, then a currency conversion process must take place; the money must travel between nations that potentially have different rules and regulations; and the preferred payment methods of the buyer’s country may not match those of the merchant. 

Simply stated, cross-border payments involve substantially more complexity than domestic ones.

That complexity has given rise to any number of service providers and strategies, designed to deliver a smooth and frictionless experience for the buyer, and a reliable one for the seller. Indeed, one of the reasons for the popularity of the full-service PSP (think: Stripe, Adyen, Paypal, etc.) is that this complexity is handled, removing the hassles from the merchant’s todo list in return for fees that can be quite opaque and difficult to evaluate. 

However, paying those fees means giving up protections against outages (merchants with just the one PSP can be out of luck if that one provider goes down), and opportunities to recognize their own revenue from currency conversions.

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Potential Business Upsides of Geographic Routing 

There are four key reasons for merchants to take on the responsibility for routing payments geographically from their PSP partners:

• Outage Protection: When a single PSP is the interface between the merchant and the payments ecosystem, that PSP represents a single point of failure.

• Successful Transaction Rates: Transactions settled in the customer’s native country are substantially more likely to close successfully than those processed outside.

• Optimize Processing Fees: When the merchant can choose between a group of PSP partners for each transaction, they can select whichever one will charge them the least, directly impacting their margins.
• Currency Conversion Revenue Opportunity: When the merchant handles the routing of the processing, they can also handle the currency conversion, offering an implicit rate that satisfies the need of the customer, while growing revenue for the merchant.

Given the razor thin margins for many businesses in an increasingly competitive world, any opportunity to keep the doors open more reliably, close more good deals, reduce their operating costs, and increase unit margins demands close attention.

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Multi-Processor is Necessary for Geographic Routing 

By its very nature, geographic routing requires the existence of more than one PSP partner: transactions must, after all, be routed to one of a set of possible end points. 

And, indeed, geographic routing is only one of the benefits of a multi-processor strategy, which includes sending transactions to alternative domestic partners depending on characteristics like the risk level of the product or service being purchased, and even the amount of transactions being sent to a given PSP that is offering volume discounts. Managing chargeback ratios, particularly at a time when VAMP is being tightened, can also be a critical reason to ensure that deals are directed to the right partner.

Equally importantly, maintaining relationships with multiple PSP partners requires the merchant to manage their own customer data: leaving it in the vault of a single PSP can very easily mean not having the option of routing transactions across different geographies, as the PSP may not provide the data in a usable form. 

As more and more merchants, particularly in Europe, expand their processor agreements to to include more PSPs, they are assessing the right infrastructure to enable both a reduction in PCI-DSS scope, and enable new and intelligent decisioning engines, potentially with the support of increasingly-capable Generative AI such as ChatGPT. 

For many, the first step is contracting with a programmable payments vault, which can securely gather and store customer data, while providing the merchant with a token that can be used to programmatically initiate transactions with substantially any downstream payment provider. With the customer data safely secured in the token vault, the merchant can explore building an appropriate group of PSP partners, which in turn provides the foundation for a multi-processor strategy that increases transaction success, reduces processing fees, and measurably adds to the bottom line.

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Keys to Effective Geographic Routing 

Today’s most innovative merchants are building payment systems that enable seamless routing of transactions to the best downstream provider. 

By maintaining control over (though not risky in-system storage of) their customers’ data, they can orchestrate each transaction process to deliver the deal to whichever PSP partner can deliver the best outcome. And by using a third-party token vault, they can keep most of their systems outside of PCI-DSS scope, delivering a safe and secure experience for their customers, and freeing up time, investment, and resources to build a world-class decisioning engine that can increase successful transactions, reduce costs, and maximize margins.

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