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Smart Payment Routing: Controlling How Transactions Flow
It’s a tale as old as time: a merchant goes to market with a single payment services provider (PSP). As transaction volumes grow, the merchant realizes that relying on a single PSP creates a high business continuity risk, and partnering with multiple PSPs can open the door to resilience, new services, and much more appealing fee structures.
To make this work, the merchant now needs to implement smart (intelligent) payment routing to ensure that every transaction travels along the best path to success. The merchant builds a decisioning engine to direct each transaction to the appropriate processor, enabling them to maximize their close rates, and reduce their cost to process.
It is hard to argue that merchants should not deploy payment routing on some level. While merchants with low transaction volumes may not see a need for intelligent payment routing logic, as they scale and consider working with multiple PSPs, building their own intelligent payment routing workflow can have a critical impact on their continued growth, and the improvement of their unit economics..
Why implement payment routing?
Particularly for merchants doing business globally, using a PSP with a presence local to the buyer’s bank will significantly impact transaction approval rates. Downstream financial institutions regularly view in-country transactions as lower-risk than cross-border ones, and, indeed, may charge less for the privilege of providing their services.
This was the case with AppsMarket and the Hearty App, a mobile app offering ideas for spending time with children. The app includes in-app purchases and subscription payments. Customers would use credit cards and Apple Pay, but as the company scaled and information became outdated, payments began to fail.
The company needed a solution to vault credit card and Apple Pay data and unlock a multi-payment processor approach. Basis Theory provided a solution, with features like 3DS and Card Account Updater.
“We wanted to make sure that if the customer card gets out of date, we can pull in the new one and use it,” says Fedir Bobylev, Solutions Architect for AppsMarket, the company that owns the Hearty App. “Then we can route the payment depending on the country or region.
“We have some basic routing options to keep our eggs in two separate baskets.”
Beyond higher success rates for credit cards and globally-popular constructs like Apple Pay, different PSPs will provide access to other payment methods (digital wallets, etc.), meaning that a merchant may need agreements with more than one PSP to offer their customers the incentive to buy with their preferred payment method.
It is also important to note that PSPs offer wildly different fee structures, which can make a material difference to the cost of doing business. Most fees are based on a markup of what is known as the ‘interchange rate,’ which is the fee charged by the card network of whichever card type (e.g., Visa, Mastercard, etc.) the customer wishes to use.
Card networks or full-service PSPs may combine the different fees to create a flat fee (e.g., 2.9% + $0.30), or apply different markups for different services.
With an intelligent payment routing strategy, merchants partner with a range of PSPs and fee structures to optimize transaction costs. The impact on a business can be profound: finding a provider that, for instance, offers preferential rates for debit versus credit cards can add tens to hundreds of basis points to a merchant’s net margins.
Is payment routing the same as payment orchestration?
Payment routing and payment orchestration are two different functions within the payments ecosystem. Both concepts play a distinct role in how transactions are processed and managed.
Payment routing is the process of directing a payment transaction to the appropriate processor or financial institution, based on predefined rules. A merchant will set up dynamic retry logic for transactions to maximize approval rates, optimize costs, or meet other specific criteria.
Payment orchestration is a more comprehensive approach to managing an entire payment process across multiple PSPs. It includes payment routing, along with tools or features like fraud detection, transaction monitoring, and reconciliation. Payment orchestration provides more of a platform, whereas payment routing focuses primarily on directing transactions to the right processor.
Where smart payment routing is a calculated effort to identify the optimal processor for a sale, a cascading payment strategy is intended to automatically re-present failed transactions to alternative processors in the hopes of arriving at a successful conclusion. With smart routing and cascading payments, a transaction follows custom logic and a set of rules that dynamically determine how it will be transmitted for processing.
This dynamic flow is based on factors like region and product risk levels to improve the chances of approval.
While it is true that many ‘soft’ declines of credit cards may turn out to be ‘false positives’, and that a subsequent attempt with a different PSP may go through, intelligent routing is a necessary step in the process to avoid becoming overly aggressive: sending too many already-failed transactions to a downstream PSP may give that partner the impression that a merchant is running a high-risk business, and cause them to end the partnership.
Frequently Asked Questions About Payment Routing
Do I need a full payment orchestration platform, or can a tokenization vault handle routing on its own?
A programmable payment vault handles routing without the added orchestration layer, and gives you complete flexiblity to control where transactions get sent, as well as selecting the related services you wish to integrate. Payment orchestration platforms add built-in features like fraud detection and reconciliation, but typically restrict you to their pre-integrated connector list.
A tokenization vault routes to any processor you already have a relationship with, not just the ones the platform has pre-built, and gives you the choice of which additional services you add (and pay for) within your payment system.
Why can’t I use smart payment routing with a single full-service PSP?
A full-service PSP stores the card data on its own side, so the merchant never has direct access to the details a routing engine needs to make a decision. Routing between multiple processors requires the merchant (or its tokenization provider) to have that access.
Can payment routing reduce payment processing costs?
Yes, routing enables a merchant to contract with a range of processors to arbitrage their fees. PSPs charge different fee structures on top of the card network's interchange rate, some flat, some itemized by service. A routing engine can send transactions to the processor with the most favorable rate for each specific payment.
Would payment routing improve transaction approval rates for international payments?
It should. Using a processor with a local presence near the buyer's bank typically improves approval odds. Routing rules that account for region or geography are one of the more common ways merchants implement intelligent payment routing.
What can I do to start implementing payment routing?
The biggest challenge to executing a payment routing strategy is ensuring control over customers’ credit card and other PII details. This goes back to decisions made before even launching a product.
For merchants just getting started, the shortest path to going live is to use a full-service PSP, which essentially shields the merchant from most of the friction in getting set up: 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.
Full-service PSPs will offer merchants the option to let customers store, and re-use in the future, their credit card information.
To execute a smart payment routing program on their own, the merchant needs to have direct access to these details—something no PSP is likely to grant.
Which is when merchants turn to tokenization service providers.
With a token vault provider like Basis Theory, the merchant stores their customer data in Basis Theory’s vault, then receives a token that they can confidently store without having to solve the ongoing challenge of maintaining PCI compliance.
With the token safely in hand, the merchant can run its decisioning engine, decide which PSP to use for a given transaction, then instruct Basis Theory to submit the details accordingly: all the control, with none of the risk or lock-in. A full payment routing strategy.
That control is what led an insurance company to develop a “Super App” for personal insurance policies—choosing Basis Theory as its tokenization provider. The company manages nearly $100 million annually in premiums.
“We needed a solution that we could implement quickly and was not super operationally heavy. It was clear to me that Basis Theory was what we needed and I’d be hard-pressed to think there’s something more relevant to what we were trying to solve, which was to maintain PCI compliance.”
Read the full story about an insurance company maintaining PCI compliance with Basis Theory.
