The Key to E-commerce Profitability: Multi-processor Payment Routing

When a payment is ready to be processed, most merchants cannot simply send it to the card network - instead they must work with a Payment Service Provider (PSP). The PSP acts as a middleman, and, having provided a valuable service, collects a fee on top of whatever the payment network charges.

Different processors levy different fees, based on the services they deliver. Some will charge more because they are able to handle high-risk merchants, others will charge flat fees in return for a simplified process for payment routing. The reality is that most payment processors are better at some things than others, and that they often have wildly divergent pricing schedules. As a result, merchants seeking to optimize their payments and their business operations find that implementing a smart payment routing strategy - in which payments are routed to different payment processors, based on an intelligent decisioning process - is a highly valuable option.

Intelligent payment routing: making smart payment choices

Merchants that have relationships with multiple payment providers may be able to categorize them in some useful way: one may be the best at processing cross-border payments, while another may offer to lower fees so long as they are guaranteed a certain volume of transactions, while still another may have an unusually positive rate card for just one kind of payment method.

An intelligent payment routing process captures the payment before it is submitted for processing and executes a decisioning process to select from among the multiple payment processor options. The smart payment routing logic will balance the likelihood of a successful transaction against the fees the PSP will charge, and select the most beneficial option.

What prevents every merchant from executing intelligent payment routing

Implementing a multi-processor payment routing strategy is not without its challenges. The first, and most common, challenge is getting to market quickly: for merchants just getting started, the shortest path to getting live is to use a full-service PSP, which gets them started quickly - but costs them more. A full-service PSP essentially shields the merchant from most of the friction in getting setup: they will obtain a merchant account, provide APIs or other SDKs to rapidly implement payment processing, and may very well offer a flat fee schedule that simplifies business planning.

Having launched a product, the next challenge preventing intelligent payment routing is ownership of existing customer credit card details. Full service PSPs will offer merchants the option to let customers store, and re-use in the future, their credit card information. However, just when the merchant starts pondering a multi-processor strategy, they discover that it is very difficult - not to mention incredibly expensive - to have that customer credit card data released by the existing PSP so the merchant can use it with other providers.

The other significant challenge is security: many merchants launch using full-service providers who remove the necessity for the merchant to become PCI-DSS compliant. Generally they do this by accepting credit card information directly into their systems - thus preventing the merchant’s system from ever ‘seeing’ data that would otherwise have to be secured. As a result, when merchants start exploring a multi-processor payment strategy, they may be concerned about the resource requirements and costs of becoming PCI compliant.

How a tokenization partner can make a multi-processor payment process a reality

Regardless of whether or not a merchant has already launched their product, avoiding the requirement to become and remain PCI-compliant should be a focus. The key to doing so is to avoid bringing PII and cardholder data (CHD) into their systems. A qualified Tokenization Service Provider (TSP) like Basis Theory can make this a reality.

In essence, the merchant delivers all credit card information directly to the TSP’s vault (a PCI-compliant, highly secure storage facility), and receives in return a token. This token is then used to instruct the TSP to deliver the associated CHD to a particular PSP to process the payment. In this way, the merchant can route payment transactions to any number of PSPs, without ever bringing the PII into their system. Meanwhile, they retain ownership of the tokens necessary to route transactions to any processor with whom they have a business relationship, avoiding the time and expense of reclaiming any details from a primary service provider.

The difference in fees can be significant

When selecting a payment processor, it is easy to choose one that makes launching a product quick and easy. The downside tends to be flat fees: the PSP will charge something like 2.9% + $0.30 for every transaction, which seems reasonable for the service provided. Until, that is, the merchant discovers that, for instance, debit cards actually incur substantially lower processing costs than credit cards (generally 0.05% plus $0.11 in the USA), and yet the full-service PSP will charge for them as though they were credit cards. Similarly, they may find that when using a less full-service PSP the fees for a given set of payment methods are way lower than the average (though in fairness, they are also often shocked to discover how very expensive it can be to transact deals with American Express).

As a merchant’s volume increases, the savings opportunity offered by a multi-processor payment routing strategy will likely become irresistible. A savings of, say, 1% to 2% on a million dollars is just $10 - $20k, not enough to justify engineering a sophisticated decisioning system, or possibly even to maintain multiple PS relationships. However, as turnover starts to grow, the annual savings that intelligent routing can bring can fundamentally re-shape a company’s trajectory - 2% of $50M in turnover is just too much to turn down.

Find a tokenization partner and get into smart routing when the moment is right

Once the savings are large enough to justify implementing multi-processor payment processing, the first step is to find a tokenization partner like Basis Theory. Select one with simple-to-implement yet powerful APIs, a fully secure vault, and a track record of supporting clients in achieving their goals. Then start finding new PSP partners: savings are close at hand with smart routing.