Payment Routing - What It Is And How To Use It As A Competitive Advantage

Payment routing is a payment processing feature that is important for businesses working with multiple payment processors. It is the process of finding the best path for a payment transaction from the payer to the recipient. This involves selecting the best suited processor or acquirer based on criteria such as transaction amount, acceptance rate, risk profile, and the type of payment method being used.

Payment routing is important because it makes sure transactions are processed efficiently, cost-effectively, and securely, optimizing the payment experience for both your business and its customers.

There are two different types of routing. Static routing involves a manually configured process by the merchant, while dynamic routing adjusts the path of the transaction in real-time, depending on the current conditions. This means that rather than establishing a predefined path, it follows the one that best fits your current transaction.  

Differences Between Payment Routing, Orchestration And Cascading

One of the reasons payments is such a confusing industry are these buzzwords, which is why we’re going to go through each of these terms and underline the main differences between them. 

If payment routing is the process through which your online transaction finds its way from the customer to your merchant acquiring bank, payment orchestration refers to the management of your merchant payment systems. This encompasses multiple processes including payment routing, but also payment gateways, fraud detection, and more. 

Orchestration platforms are a unified interface through which your business can manage multiple payment service providers, gateways, and financial institutions. If the payment gateway is the bridge between the eCommerce platform and the payment processor, allowing the funds to be transferred between the customer and the merchant, payments orchestration includes one or more gateways, and brings more functionality, including smart routing.

This holistic approach simplifies payment for merchants, but also offers the flexibility to dynamically select the best payment path, to reduce costs, and to optimize payment acceptance rates regardless of markets and payment methods.

Cascading is a specific technique within payment routing and orchestration that is used when an initial transaction attempt fails. In this instance, instead of declining the transaction outright, the system automatically "cascades" it to an alternative payment gateway, processor or acquirer in an attempt to successfully process the payment. This is generally useful when it comes to improving transaction success rates, as it provides a second chance for transactions.

Benefits Of Payment Routing 

• Increased conversion rates - smart routing significantly elevates conversion rates by directing transactions to the acquirers best suited to a business's specific needs—be it sector-specific, risk profile, or geographic market considerations. This targeted approach means that transactions are more likely to be approved, with a direct impact on your business’ revenue.
• Cost management - one of the most compelling benefits of smart routing is its ability to manage costs efficiently. By enabling businesses to switch traffic between various acquirers, it opens avenues for cost savings and allows merchants to take advantage of the most favorable processing fees available.
• Better customer experience - smart routing plays a crucial role in maintaining an uninterrupted customer experience. By automatically rerouting soft-declined transactions without requiring further input from the customer, it ensures that transaction failures do not affect the checkout process, contributing to overall customer satisfaction and loyalty.
• Access to a broader range of payment methods - adapting to consumer payment preferences is a critical competitive advantage. Smart routing facilitates access to a wide range of payment methods, empowering customers to pay how and when they want. This adaptability is relevant especially if you’re looking to expand both locally and internationally, providing you with the tools to quickly accommodate new payment options as they emerge.
• Reduction in transaction fees - working with multiple, local acquirers, as enabled by smart routing, can lead to significant reductions in interchange fees. This benefit is particularly important for businesses operating on an international scale, where the ability to process payments locally can translate into substantial cost savings.
• Flexibility and optimization - smart routing empowers your business to build its ideal payment processing network, giving you the freedom to move between acquirers that best meet their changing requirements. This flexibility is essential for optimizing payment processes, meaning that your business can adapt to evolving market conditions and regulatory landscapes.
• Security and compliance - we’re witnessing more regulatory requirements, such as the strong customer authentication (SCA) standards, and smart routing helps businesses navigate these challenges effectively. It helps by facilitating access to multiple acquirers, and it provides a pathway to securing the necessary exemptions, improving both security and compliance.
• A framework for continuous improvement - implementing smart routing is part of a broader strategy towards achieving payment optimization. Through an orchestration platform, your business can streamline connectivity to the payments and fraud ecosystem, designing payment flows that are not only efficient but also secure and compliant.

Is Payment Routing Relevant To Your Business?

Here’s how to know if smart routing is a useful strategy for your business - if you’ve got a diverse customer base, or if your customers span (or will span) across different geographies, if you have experienced higher rates of transactions decline, smart routing would help you directly and immediately. It is recommended to use payment routing in sectors with high transaction volumes or if you’re operating in markets with multiple payment processing rates, in order to optimize your costs. 

In order to implement a smart routing strategy, you should definitely collaborate with your PSP to help you navigate this decision. By partnering with a payment service provider, you can make sure that you’re adopting the most efficient routing approach for your business. 

Conclusion

Payment routing offers multiple benefits that can help your company increase the success rate of transactions, reduce costs and keep a secure payment process redundancy in place. While it can be quite a complex process to understand, it helps you handle your transactions with the best interest of your business in mind.