Payment Routing: Best Practices, Types, And Tips

Have you ever wondered how your online payments seamlessly reach their destination? Payment routing is the unsung hero behind this process, playing a crucial role in the world of global payments. It’s the system that determines the most efficient path for transactions, ensuring they’re processed quickly and securely.

In today’s digital age, where e-commerce is booming, understanding payment routing has become essential for businesses looking to optimize their financial operations.

What is Payment Routing?

Payment routing is a crucial feature that helps businesses process transactions smoothly while working with multiple payment providers ^[1]. It’s essentially the path a transaction takes after a customer makes a purchase ^[2].

When a business accepts a payment method, like a credit card, the transaction typically goes back and forth through this ecosystem in three main stages:

1. Authorize
2. Authenticate
3. Clearing and Settlement.

The primary goal of payment routing is to maximize transaction success rates and ensure efficient processing. It’s important to note that payment routing isn’t a one-size-fits-all solution.

It can look vastly different across industries, business models, and organizations of various sizes. As companies grow and the payments industry evolves, routing strategies often need to adapt.

Payment routing addresses three key challenges for businesses:

1. Higher success rates in the transaction process
2. Lower transaction costs
3. Ensuring service continuity ^[3]

The complexity of payment routing can vary significantly. For some businesses, it might be relatively simple, while for others, it can be incredibly complicated.

Factors that influence this complexity include:

• Size of the business
• Growth goals
• Focus on payments in the customer experience ^[2]

As businesses expand and deal with more diverse payment scenarios, they might need to consider more advanced routing strategies to optimize their payment processes and improve overall efficiency.

Types of Payment Routing

Payment routing has evolved significantly over time, adapting to the changing needs of businesses and the payment industry. There are two main types of payment routing: static and dynamic.

1. Static Payment Routing

Static routing is based on preconfigured routes that are set up manually. This approach has been around since the second generation of payment routing when merchants began working with multiple acquirers ^[4].

Here’s what you need to know about static routing:

1. It follows fixed, unresponsive paths for transactions ^[5].
2. Routes are hardcoded into the backend systems, often requiring developer expertise ^[6].
3. While it can flow smoothly, it’s not optimized for cost-cutting, efficiency, or improving authorization rates.
4. If one part of a static payment route becomes inoperable, the whole route breaks down.

2. Dynamic Payment Routing

Dynamic routing, also known as smart or intelligent routing, has become increasingly popular, especially for large companies with complex networks.

This approach offers several advantages:

1. It uses algorithms to find the most efficient path for payments ^[7].
2. The system adapts to changes and selects the best way to ensure each transaction’s successful completion.
3. It automatically routes transactions to the provider with the highest probability of success ^[8].
4. Dynamic routing can change course when it encounters issues with the initial payment path ^[9].

3. AI-Enriched Smart Routing

The latest evolution in payment routing incorporates AI and machine learning:

1. These solutions analyze billions of data points from millions of transactions to determine the optimal route for each transaction ^[10].
2. They can provide an automatic boost in authorization rates, with some solutions offering up to a 5% uplift ^[11].

How Payment Routing Works

Payment routing is the process of determining the most efficient and secure path for a transaction once a customer initiates a payment. This process considers various factors, such as the transaction’s location, value, and the items purchased, to find the best route.

In the past, implementing payment routing was a manual and resource-intensive task. It required development teams to build integrations with different payment processors and then create routing logic on top of these integrations.

However, recent innovations in the payment space have transformed this landscape.

Today, merchants can implement advanced payment routing strategies using payment orchestration platforms.

These platforms allow businesses to:

1. Consolidate various payment integrations through a single API
2. Standardize payment processing across their payment stack
3. Create a unified view of payments, regardless of the processor

Payment orchestration platforms have simplified the process of creating payment routing workflows. They offer drag-and-drop functionality and the ability to add conditions with just a few clicks, enabling rapid iteration and easy maintenance.

The basic concept of payment routing is straightforward: merchants select which processor to send an authorization request to when a customer initiates a payment. However, beneath this simplicity lies a complex system of logic, strategic decision-making, and data flows.

Smart routing takes this process further by dynamically routing transactions based on real-time data and predetermined rules. The payment router analyzes transaction data in real time and determines the best payment provider to handle the transaction^[11].

This decision is based on a set of rules, such as the provider’s success rate for a particular payment method, transaction amount, or currency.

By implementing smart payment routing, businesses can improve their success rates, reduce transaction failures, and enhance the overall customer experience ^[12]. It’s a powerful tool that allows companies to optimize their payment processes and adapt to the ever-changing landscape of digital transactions.

Best Practices for Effective Payment Routing

To optimize payment routing and enhance transaction success rates, businesses should consider implementing the following best practices:

1. Implement Intelligent Routing: Utilize smart or intelligent routing systems that dynamically select payment gateways based on predefined criteria such as currency, geographic location, and historical transaction data ^[13]. This approach helps to improve transaction success rates and reduce processing fees.
2. Set Up Routing Rules: Establish clear routing rules that define where to direct payments based on various factors like card brand or issuing country. These rules can also determine alternative routes if the initial payment gateway fails to obtain approval.
3. Utilize Transaction Retry Capabilities: Implement automated routing capabilities that reroute payments to different gateways under specific conditions, such as payment gateway outages or soft declines. This helps to maintain service continuity and maximize transaction success rates.
4. Optimize for Global Reach: For businesses expanding internationally, select payment gateways and processors optimized for specific geographic areas. This approach allows for efficient processing of transactions in multiple currencies and regions, helping to capitalize on cross-border sales opportunities.^[14]
5. Enhance Fraud Detection: Incorporate advanced fraud detection mechanisms into the routing system to identify and mitigate fraudulent transactions in real time. This helps to minimize the risk of payment fraud and chargebacks, safeguarding financial assets and reputation.
6. Leverage Data-Driven Insights: Analyze transaction patterns, customer behaviors, and payment performance metrics to gain actionable insights. Use this information to refine pricing strategies, marketing campaigns, and operational processes.
7. Ensure Compliance: When expanding globally, make sure the routing system enhances transaction security and complies with regional regulations^[15]. This builds customer trust and encourages future purchases.

By implementing these best practices, businesses can maximize the benefits of payment routing, leading to improved transaction success rates, reduced costs, and enhanced customer experience.

Payment routing has a significant impact on the success of online transactions and the overall efficiency of a business’s financial operations. By understanding the different types of routing, from static to dynamic and AI-enriched smart routing, companies can choose the approach that best fits their needs and complexity level.

As the digital payment landscape continues to evolve, businesses that stay on top of payment routing trends and technologies will be better positioned to thrive in the competitive e-commerce market.

References

[1] – frbservices – E-Payments routing Directory. https://www.frbservices.org/resources/routing-number-directory

[2] – theclearinghouse – RTP participants and Routing/Transit Numbers | The Clearing House.  https://www.theclearinghouse.org/payment-systems/rtp/rtn
[3] – eprint.iacr – SPRITE: Secure and private routing in payment channel networks. IACR Cryptology ePrint Archive. https://eprint.iacr.org/2024/122
[4] – theclearinghouse – Real Time Payments | The Clearing House.  https://www.theclearinghouse.org/payment-systems/rtp
[5] – paymentsdive – Marek, L. The Clearing House’s RTP network logs Q2 records. Payments Dive. https://www.paymentsdive.com/news/clearing-house-rtp-real-time-payments-network/721105/
[6] – Corefy – Payment routing 101: the essentials you must know. https://corefy.com/blog/payment-routing-101-the-essentials-you-must-know
[7] – spreedly – Your Guide to Intelligent Payment Routing for Optimized Payments. https://www.spreedly.com/blog/guide-to-intelligent-payment-routing

[8] – amazonaws – Payment Routing Instructions – All Currencies https://s3-eu-west-1.amazonaws.com/caymannationalbtc/payment-routing-instructions.pdf

[9] – arxiv – An AI-powered smart routing solution for payment systems. https://arxiv.org/abs/2111.00783

[10] – dokumen – Strategic Communication in EU-Russia Relations: Tensions, challenges and opportunities https://dokumen.pub/strategic-communication-in-eu-russia-relations-tensions-challenges-and-opportunities-3030272524-9783030272524-9783030272531.html

[11] – repositorio-aberto – A Payments Routing Heuristic based on Machine Learning for High Volume E-Commerce Environments Tiago Cardoso dos Santos Pinto de Sousa https://repositorio-aberto.up.pt/bitstream/10216/113823/2/276745.pdf

[12] – RippleWiki | Protocol / Introduction. https://ripple.ryanfugger.com/Protocol/Introduction.html

[13] – laweconcenter – Regulating Routing in Payment Networks https://laweconcenter.org/wp-content/uploads/2022/08/Regulating-Routing-in-Payment-Networks-final.pdf

[14] – vibhaalakshmi – High Throughput Cryptocurrency Routing in Payment Channel Networks
Vibhaalakshmi Sivaraman* Shaileshh Bojja Venkatakrishnan**, Kathleen Ruan† Parimarjan Negi* Lei Yang * Radhika Mittal ‡  Giulia Fanti† Mohammad Alizadeh* Massachusetts Insititute of Technology, ** Ohio State University, Carnegie Mellon University, ‡University of Illinois at Urbana-Champaign https://vibhaalakshmi.com/files/spider_nsdi.pdf

[15] –  arxiv – Maximizing Success Rate of Payment Routing using Non-stationary Bandits. https://arxiv.org/abs/2308.01028