Evaluating the ROI of Multi-processor Payment Routing for Subscription Businesses

Digital payments have thrown open the ability to market and sell to an almost unlimited global audience for merchants. And those businesses who offer subscriptions can realize secure and growing revenue streams when they provide excellent service, and make it easy for customers to maintain an account. Finalizing the payment routing stack, however, can be a challenge for anyone, as every merchant must balance the simplicity of working with a single partner against the cost savings and continuity assurance of implementing a multi-processor payment routing system.

What is Multi-processor Payment Routing?

In order for subscription businesses to collect revenue from their customers, they must submit transactions, from time to time, into the broader payments ecosystem. In the classic example, the customer provides a credit card, which is authenticated and authorized for the first payment, then re-submitted each month until the consumer opts to cancel their account. The key pivot point as to exactly how that process works is where exactly the customer cardholder data is stored; the three broad-strokes-choices are

1. By the merchant themselves, within their own payments system. This provides significant flexibility in re-use, as we shall see below, but also places the whole payment system into PCI-DSS scope, and requires the merchant to invest in complex and expensive regulatory compliance efforts.
2. By the merchant’s payment service provider (PSP) partners. This can practically eliminate the merchant’s PCI-DSS scope, eliminating cost and effort, but also reduces the flexibility of what they can do with the cardholder data - generally, future transactions must be made through the single PSP, at whatever their current processing rates may be.
3. By a programmable payments vault, such as the one offered by Basis Theory. This can keep the merchant’s payment system largely out of PCI-DSS scope, while maintaining the flexibility to submit future transactions to substantially any PSP partner.

Regardless of the cardholder data storage strategy, the trick to multiprocessor payment routing is to use advanced decisioning to select the best payment partner for each transaction, optimizing for the likelihood each deal will close, the cost of the transaction fees, and contingencies when one or more payment partners’ systems fail.

How Multi-processor Payment Routing Delivers ROI

There are three core risks to payments for subscription merchants:

1. System availability: when a downstream payment provider goes offline, it makes it impossible for the merchant to process payments
2. Close rates: transactions may be more or less likely to close, based on the selected payment provider. For instance, sales transacted in the customer’s country close at a higher rate than those processed overseas (for instance when the provider and consumer are located in different locations).
3. Processing fees: there is a broad array of PSP offerings, each tuned to a different set of services, and each with its own set of processing rules and fees. While full-service providers may charge a flat fee, other PSPs may vary their costs based on a variety of factors, including geography, payment type, or level of processing risk.

Calculating Potential ROI of Multi-processor Payment Routing

Optimizing each of these three areas can deliver impactful shifts to a merchant’s results. 

The impact of eliminating the risk of a system-down situation by having a backup processor, for instance, can be relatively easily calculated by multiplying the average amount of revenue earned per hour by the number of hours a single payment provider is down each year. For a $10M business, the average hourly revenue is $1142; a provider that guarantees 99% uptime should be expected to be down for 87.6 hours per year; so the upside of eliminating all downtime would be 1142 * 87.6 = $100,039.

Close-rates are trickier, but we can come up with a notional model. According to research from industry group PYMNTS, something in the range of 11% of attempted payments fail. If we assume that our $10M a year merchant has an average order size of $100, that would translate to 100,000 orders. Losing 11%, then, would mean 11,000 orders at $100, or $1.1M. Every percentage point of orders successfully processed that were otherwise being lost would be worth $100k.

Finally processing fees: the trickiest of all the optimizations, but arguably the one that can be most clearly modeled. Let’s imagine that our example company uses a single, full-service PSP, which charges 2.9% +$0.30 for each transaction. We can calculate the base cost as ($10M* 2.9%) + ($0.30 * 100,000) = $320k; for the sake of the exercise, we’ll exclude the many other fees - from refunds to chargebacks to cross-border transactions - to one side for now. Almost any move can create value, but one concrete example would be if, say, 20% of the merchant’s customers used debit cards. By law, in the USA the maximum charge for each transaction by the card networks would be $0.21 + 0.05%. Let’s assume that a dedicated PSP offered their service by adding $0.08 + 0.4% for debit cards, that would result in a cost of $0.29+0.45%; for every $100 transaction our merchant would save $2.46…across 20% of the business that would come in at $49,200 in fees not charged. Add in improved rates for cross-border transactions, digital wallets, and even high-risk products, and the potential is significant.

If our merchant were to optimize for all three, they could improve their bottom line by at least $250k - that’s 2.5% in bottom line margin, minus the investment in building their improved payment system.

If you would like to see what the ROI of multi-processor routing could look like for you, try our ROI calculator today.

Why This is Key for Subscription Businesses

Subscription businesses have the most to gain in a multiprocessor environment, because every transaction after the first is (or should be) in their control. Not every transaction has to go to the same provider, and, indeed, not every decline has to be final: soft declines can be met with retries under the right conditions. Meanwhile, the cost of processing fees can rapidly pile up for subscription businesses, particularly when they are aligned with a single, full-service provider: the partner will enjoy the benefits of lower card network fees for subscription payments, without necessarily passing them on to the merchant.

The long-term advantage of the subscription business model is the continuing growth of month-over-month revenues as the number of subscribers grows - but it cannot reach its potential without optimizing costs at the same time as maximizing subscriber growth.

Payment Vault - A Critical Element in Multi-processor Payment Routing

As noted above, in order to make regular subscription charges, the merchant must have access to the cardholder data of their customer. Leaving it in the hands of the PSP eliminates the flexibility to put together an ideal payment partner ecosystem; but storing it locally incurs a substantial regulatory burden. By contrast, allowing a third-party programmable payment vault to store the data at rest and in motion, and submit transactions on demand, drivers flexibility in partners, and lower regulatory obligations.

Our ROI calculator can show you what the ROI of working with Basis Theory could look like for your business. Try it out today.