We’ve witnessed a growing demand for credit card transactions in the last few years. In the last quarter of 2022, the number of credit card users jumped to 166 million. With the increasing number of transactions taking place through Visa, Mastercard, Discover, and American Express, there’s a growing need for the optimization of transactions. A declined card is not an uncommon issue today. A card could be declined for many reasons. This article will discuss how smart payment routing can help in many ways including the case where a card is declined.
For instance, the address verification protocol has made it mandatory for cardholders to enter their street number and zip code when processing payments through cards. If this information is incorrect, the payment is declined. There are more such security measures, developed specifically to prevent fraudsters from using stolen cards. While they enhance the security of payments, they can be inconvenient for customers and merchants. There’s a risk your customers might abandon their cart if they are unable to use credit cards because of a stringent verification policy. That’s where smart routing payment comes into play.
The best way to ensure successful transactions through cards is by implementing smart payment routing. Here’s what you should know about it.
What Exactly Is Smart Payment Routing?
Smart payment routing refers to the process of optimizing card transactions for an increased success rate and lower processing fees. Simply put, smart payment routing gives you access to multiple payment gateways and banks. The system is useful for merchants working with clients on a global level and those considering quick expansion. Smart payment routing takes several factors, like the payment type, amount, and location, into consideration to reduce the risk of declined payments.
The technology searches for the best channel based on the nature and size of the transaction. Not only does it improve the success rate of card transactions, but it lowers the transaction fee. The system figures out which acquiring bank, card issuer, and payment gateway can approve the transaction at a lower cost. That’s how it improves the transaction outcome for the cardholder. The main purpose of this system is to reduce unnecessary payment rejection.
How Does It Work?
Suppose a customer is buying something from your store using an international credit card. The smart payment routing will assess the card and the amount of transaction, and connect it to the payment processors that charge the lowest fee on the international transaction. This saves the merchant a few extra dollars on overseas transaction fees. You might wonder how the system knows where to forward the transaction. It has a predetermined set of parameters, and the routing takes place based on these.
- Size of the transaction
- Card issuer
- Authentication process
Smart routing can be used for multiple payment gateways or for a single gateway, but different MIDs (Merchant Identification Numbers). If you have multiple MIDs for your businesses in different locations, but a single payment gateway for each, the smart routing will filter the payments based on the geolocations. For example, all payments processed in California can be routed to your MID 1, while those processed in Pennsylvania can be filtered into another merchant account (both through the same payment gateways).
Direct Routing Vs Smart Routing
Before the smart routing technology was launched, merchants had to rely on direct routing. This traditional approach involves a single payment processor that verifies all transactions and accepts/rejects them based on its pre-set protocols.
Working with a single payment processor or an acquiring bank is good for those who want consistent fees for all transactions, but it comes with its share of drawbacks. The biggest one is that the payment processor might decline the transaction based on specific parameters, leading to customer dissatisfaction and several rejected payments for the merchant. Or, the transaction might not be processed simply because of the unavailability of the bank. The outage is the most common issue in direct routing. And without a backup option, there was no way to process transactions until the technical issue is fixed and the payment processor starts operating.
That’s why merchants are considering this latest, more advanced, and optimised form of payment processing. Smart payment routing is comparatively better, faster, and an effective option for processing card transactions. Working with different payment gateways facilitate successful transactions, as the system connects the transaction with the most suitable and cost-effective processor.
Benefits of Smart Payment Routing
Here’s how the system is beneficial for the merchant and cardholders:
- Convenience: Nothing seems more frustrating than a failed transaction. Customers want a hassle-free and quick payment channel that verifies their transactions and processes the payment instantly. With smart payment routing, they enjoy the convenience of speedy and successful transactions.
- Increased Revenue for Merchants: Around 69.57% of customers are likely to abandon carts due to the checkout process. If their payment declined, they won’t think twice before switching websites. Smart routing prevents unnecessary rejection of a legitimate transaction, thus preventing revenue loss from an increased cart abandonment rate.
- Less Transaction Fee: One of the functions of smart routing is choosing a reliable and cost-effective payment processor for each transaction. This is quite helpful for merchants accepting international card payments. By reducing your transaction fee, the technology increases your revenue.
- Higher Authorization Rate: Every business wants a higher approval rate for each transaction, as the more transactions approved, the more money it will bring into your business. Smart routing offers great support for declined transactions. It is an AI-based tool that reroutes the transaction to another bank if the transaction from a specific bank fails.
- Collect Insights: Smart payment routing doesn’t just bring more money in, but it improves your conversions by providing you with detailed payment analytics. Merchants can evaluate these analytics to learn more about their existing payment structure and make necessary improvements to provide customers with a better shopping experience. Insights like, whether your subscription plans are working and which payment processor has the lowest declined transaction rate, can make it easy for you to identify where you need to improve.
Cons of Smart Routing System
Despite its low-cost payment processing and improved successful transaction rate, the smart routing system is associated with certain drawbacks you should be aware of.
- Unstable Processing Fee: In direct routing, there is a stable processing fee, as each transaction costs you the same amount. The same, however, is not the case with smart payment routing. The system connects your transaction to different payment providers based on its pre-set parameters, making it difficult to predict the transaction cost.
Confusing: Having a single payment processor handle all your transactions is much better than working with different processors. Since each processor has varying reporting formats, fee structures, and payment approval protocols, it might get challenging to learn about each and adapt to their working criteria.
Overall, the system proves beneficial for nearly every merchant. When you combine all its pros, you will know how smart payment routing can improve a company’s bottom line.
Evolution of the Smart Payment Routing
Not every business opts for payment routing when starting their company. Most businesses start with a single payment processor/acquiring bank. These have uncomplicated reporting formats and are comparatively easier to work with than multiple processors.
However, they have an increased risk of transaction failure. If there are any technical issues, the transaction will be straight away declined, leaving people with no option but to abandon the cart. Besides that, they only accept payments domestically.
As the business grows and accepts transactions from more people based in national and international countries, the risk of the transaction failing grows. This growing need requires multiple banks and payment processors. They can choose banks located in the same region or international countries, each processing transactions based on customers’ geolocation. While the method may seem reliable, it’s often unresponsive and has a high failure rate.
At last, businesses expanding at an exponential rate and don’t want to limit their options can choose smart payment routing. The payment method is comparatively much better than the above two and is powered by Artificial Intelligence, making it a highly effective choice for businesses of all sizes and natures. The method is pretty complex as establishing connections with hundreds of banks located in various parts of the world can seem challenging. As mentioned above, these are based on powerful algorithms, which are designed to process large amounts of information in real time.
If you are concerned about security, you can rest easy knowing that smart payment routing is safe. Just like a normal payment processor would verify the transaction’s authenticity, smart payment routing checks each transaction, verifies the cardholder’s details, and approves the payments only if the transaction seems valid.
The entire concept of smart payment routing is based on the idea of identifying the most reliable, cost-effective, and fastest payment processor to authorise the transaction. This results in reduced transaction failure rate and increased customer satisfaction. It’s a win-win! The customer gets to make the payment on the first attempt (mostly), while the merchant enjoys increased revenue and fewer abandoned carts.