When a payment is ready to be processed, most merchants cannot simply send it to the card network -...
What is Smart Payment Routing? Intelligent Routing Best Practices
Smart Routing: A Pathway to Sustainable Success
Payment processing historically has taken a fairly linear path: merchants, in a hurry to get to market, have signed up with a single payment services provider (PSP). As their business grows, however, merchants quickly realize that having a single point of failure is risky, and that different PSPs offer other services and fee structures.
To solve the challenge of relying on a single PSP partner, merchants need to bring one or more additional PSPs into their environment. Having created relationships with multiple PSPs, merchants then must build a decisioning engine that directs each transaction to the appropriate processor. This is what is known as smart routing, or intelligent routing.
Why is Smart Payment Routing Necessary?
During the process of transacting online payments, there are a number of factors that can impact the merchant’s business.
The first, and perhaps most obvious, is the likelihood that the sales will successfully close. Particularly for merchants doing business globally, using a PSP with a presence local to the buyer’s bank will have a significant impact on this. Similarly, different PSPs will provide access to different payment methods (digital wallets, etc.), meaning that a merchant may need agreements with more than one PSP to offer their customers the options to buy with their preferred payment method.
It is also important to note that PSPs have varying 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. However, they may blend the different fees together to make a flat fee (e.g. 2.9% +$0.30), or apply different markups for different services. It is critical, therefore, if a merchant is to optimize their costs, to partner with a range of PSPs, so that they can arbitrage fee structures.
How Does Smart Routing Work?
Smart routing intercepts transactions before the customer’s information is sent for processing, and applies an algorithm to the properties of the sale to select an appropriate PSP. For instance, the first step may be to identify the card issuer’s country and choose a PSP with a local presence; if there is more than one, then the second step may be simply to work out which provider will charge the least for the type of card being presented. Once the decision is made, the transaction is packaged up and dispatched to the optimal PSP.
Cascading Payments are an Important Addition to Smart Routing
Where smart routing may be said to be 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. 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, it’s important not to be overly aggressive: sending too many already-failed transactions to a downstream PSP may give that partner the impression you are running a high- risk business, and cause them to end your partnership.
What are the Drawbacks of Smart Routing?
The number one drawback of smart routing is the extra step in between the customer asking to make a purchase, and their details being submitted to a payment processor. Beyond the complexity of building the right algorithm to select an optimal PSP, there is the issue of regulatory compliance while the customer’s PII is in motion: if it is submitted to, and held by, the merchant’s systems while awaiting dispatch, this can bring the merchant’s whole environment into PCI-DSS scope. For a merchant that has historically used a full-service PSP and thus avoided having to submit to PCI-DSS this can be a tricky proposition.
The Control You Need to Execute Smart Routing
The biggest challenge to executing a credible smart routing payments strategy is ensuring you have control over your customers’ credit card, and other PII, details. The choices most merchants start with are to either (1) sign up with a full-service PSP, which will actually store the customer’s details for you; or (2) to build and certify a PCI-DSS compliant infrastructure to store the data. The cost and resource drain of the second choice is sufficiently high that most merchants opt to let their PSP store customer details. However, in order to execute a smart payment routing program, the merchant needs to have direct access to those details - something no PSP is likely to grant.
Modern merchants are turning to tokenization service providers like Basis Theory to solve this conundrum. In this scenario, the merchant stores customer data in Basis Theory’s secure vault, and receives a token that they can confidently store without having to solve the significant and ongoing challenge of attaining and 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.