Intelligent Payment Routing: For Your Freedom and Flexibility
January 17th, 2018
The rapid exchange of cross-border commerce has presented new challenges in payments and among these challenges is the issue of payment routing. How a payment is routed in the few seconds from the time the customer submits their purchase to the time that the purchase is approved can greatly affect the rate of cart abandonment, conversion, and overall customer satisfaction. What exactly happens to the transaction in this short period of time? And how can businesses optimize their routing strategies to ensure a smooth and efficient transaction flow?
Common Issues in Payment Routing
In 2015, improper payment routing and a lack of preferred payment options were the top reasons for a cart abandonment rate of 74% in e-commerce businesses. If a transaction is routed improperly and the customer receives an error from the payment page, they might give up on the purchase and not return to the business to avoid the hassle.
The biggest factor in the routing strategy is often the geographical location of the acquirer in relation to the issuing bank. Localized routing is the traditional routing strategy that originated in the early days of e-commerce, when business was more restricted to certain geographical markets. In this type of routing, transaction details are sent to a local acquirer. That acquirer contacts the issuing bank linked with the payment method and geographical area of the customer, asking for authorization of the payment. The challenge here is that if the customer’s transaction history is largely within their home country, their issuing bank may flag the transaction coming in from a foreign acquirer as fraudulent. This can lead to false fraud claims and denied transactions, which will ultimately result in a customer loss.
Think of this example:
A customer in Germany wants to buy a plane ticket to Spain from a Spanish airline. The Spanish airline will most likely send the transaction to a Spanish bank (its local acquirer). This bank will try to contact the purchaser’s issuing bank in Germany to request authorization for the funds to be released. However, based on the customer’s large transaction history in Germany, the bank may flag the request as a fraudulent purchase and the purchase could be denied.
Other factors that may also contribute to denied transactions are the payment method, the monetary amount of the transaction, or the currency used. It is therefore important for businesses to have a routing strategy that can anticipate any miscommunications between certain acquirers and issuers and route the payments in a proper way.
Intelligent Payment Routing
Intelligent routing is an innovative strategy to optimize payments for online businesses, especially for cross-border commerce. Rather than geographically limiting the number of possible acquirers, the routing system sends the transaction to an acquiring bank that is deemed optimal for the transaction type, amount, and location.
One example for an optimized strategy is using the location of the purchaser’s bank account or credit card to identify an ideal local acquirer. By routing the payment to such an acquirer, it is much more likely for the customer’s issuing bank to approve the transaction and if it is still denied, the system can try another similar acquirer.
Apart from location, any relevant parameter can be used to design the routing strategy, such as currency, type of product purchased, language, fees from acquirers or payment service providers, average payment acceptance rates or response times for different financial institutions. Such routing strategies can often be saved and programmed to use in future scenarios by the routing system.
Additionally, intelligent routing systems can be designed with different levels of customization and automation available. Some routing systems allow for the business to design their own strategy for each transaction, choosing each parameter manually and the possibility of saving past choices for future use. Others may have the option to fully automate the routing strategy by using big data from thousands of previous transactions.
By using these routing strategies, businesses can greatly expand their international customer base by boosting the acceptance of various global acquirers and payment methods. Both the reduced rejection rates and a more efficient processing lead to a greater conversion at checkout and a growing customer base. The optimized payment processing can also minimize the fees paid per transaction to different acquirers and can cut operation costs for businesses.
Choosing an Intelligent Payment Routing System
If your business is ready to invest in an intelligent payment routing system, there are a few things to keep in mind in order to ensure successful payments to the widest range of customers. One consideration is the local payment culture and the number of payment methods available for your target market. Despite the inherent cross-border nature of intelligent payment routing systems, it is still important to have local payment methods available, as some customers may only have access to these payment options.
Another important aspect to consider is the number, type, and location of acquiring banks within the network of the routing system, and therefore within the payment gateway. There must be ample choice among acquirers of different countries to improve transaction success rates for cross-border commerce and therefore conversion. A gateway should have a routing strategy that intelligently chooses an acquiring bank to process the transaction based not only on the locations the acquirer can cover, but also on the acquirer’s risk management. This routing capability allows the gateway to anticipate the risk of a transaction being denied or flagged as fraudulent.
In the end, the short amount of time after the customer submits the purchase makes all the difference in the purchase success. Selecting an intelligent payment routing system that allows for geographic coverage, transactional flexibility, and integration within your chosen payment gateway is one of the most important choices your business can make to ensure that online payments go through.