What is smart routing and how it helps reduce failed transactions

If you manage an Ecommerce store, you are probably too familiar with the world of failed transactions and are likely on the look-out for new ways to reduce their number and make sure each payment is successful.

When we talk about failed payments, what falls under the umbrella are the ones rejected by the acquirer or the issuer in the payment flow, due to reasons like incomplete or incorrect card or contact information, authentication tools and insufficient funds on the account. Some of these problems cannot be tackled by the merchant because they are related to issues on the customer’s end. However, what we are going to focus on here are failed transactions due to technical problems and lack of back-ups or options in the payment processing infrastructure. In fact, the number of these failures can be significantly reduced by implementing the right payment processing platform based on dynamic routing.

Payment failures landscape

Firstly, let’s look at the world of failed transactions and how they are affecting Ecommerce at the moment. A study by Accuity, a LexisNexis® Risk Solutions company, estimated that failed payments have cost the global economy $118.5 billion in fees, labor and lost business in 2020. Not only, on average the impact of failed payments amounted to just over $200,000 for corporate firms.¹

Moreover, research suggests that failed transactions have a strong impact on customer experience. In fact, 37% of organizations reported that there was a severe impact on customer service and nearly 50% indicated that customer service was in some way affected.¹

The solution: dynamic transaction routing

In order to minimize the number of failed transactions due to technical problems, choosing a payment infrastructure based on dynamic routing is certainly a great way to start.

But what is dynamic routing? Firstly, we need to start by looking at static routing and how payment processing works.

Payment processing is what happens after the customer clicks on the “pay now” button of the check-out page, for Ecommerce purchases. From that moment the transaction “route” entails different steps:

• Authentication
• Authorization
• Clearing
• Settlement

These are taken care of by payment service providers, acquirers, issuers and fraud prevention services. If you want to learn more about the payment process you can watch our video explaining the four-party model.

When we look at static routing, transactions’ routes are directed to the acquirer via manual configuration by following a pre-determined route. This means that transactions are sent to determined PSP for processing and directed to a specific acquirer, following one pathway. In the case of a company working with only one PSP and acquiring bank this process is linear and the reconciliation is simple. The downside is that in case of technical failures on the one payment route there is no back-up to redirect the transaction to. Moreover, there is less flexibility with geographical regions, because the merchant is dependent on the chosen payment gateways, PSPs and acquirers, which may be available in some countries but not in others.

However, companies can choose static routing and work with a number of different payment gateways, PSPs and acquirers. In this case payment routes are still pre-defined through rules in the transaction flow from the merchant Ecommerce to the acquirer. However, this approach comes with some problems and difficulties. Static routing lacks the flexibility to switch providers in case of issues with the PSP and does not take into consideration all the multiple variables that can lead to needing to change the routing path. In fact, when choosing routing rules based on one parameter, e.g. fee cost, other important ones are ignored, like availability in the region, authorization or approval rates.

We can therefore say that the main disadvantages of static routing are:

• Lack of flexibility in geographic regions for transactions
• Lack of back-up to redirect failed transactions
• Inability to take into account changing parameters and adapt to a specific transaction
• Manual reconciliation made difficult by having to reconcile different providers’ data from different points of access

These problems are solved with dynamic or smart routing, which automatically directs your transactions to the most performing and cost-effective route at the time of the purchase. This flexibility allows you to minimize your failed transactions due to technical errors, because it automatically switches to a different route in order to get the transaction approved.

This allows you to get the best performance in terms of costs, time and availability of payment methods. Moreover, smart routing engines, run by machine learning algorithms, mean that the routing performance becomes increasingly accurate the more transactions are carried out.

Dynamic routing efficiently allows you to sell internationally by providing local payment methods and faster approved transactions, on the acquirer that has the highest approval rates with the parameters of the specific transaction in that geographic region. But the list continues. In fact, smart routing also works with fraud prevention services increasing your authorization rate.

So, by looking at smart routing and how it works we can see that among its benefits there are not only reduced failed transactions, but:

• Saving in fees and costs
• Faster transactions
• Availability in different geographical regions across the globe

Payment orchestration and smart routing

Finally, smart routing is at the core of payment orchestration platforms, which orchestrate multiple payment gateways within the same infrastructure. Axerve’s solution Payment Orchestra™ not only handles payment flows by redirecting them to the most performing provider via machine learning: it also integrates all finances, offering automatic reconciliation and allowing you to have control of your payments from one single point of access.

As we said, when making the choice over which payment infrastructure is best for your business, routing is an important part of the equation. Whether your business is local and your budget is limited or you are scaling internationally and want to invest in a more cost-effective solution, smart routing may be the key to minimize your failed transactions while cutting costs of expensive integrations and manual reconciliation. If you want to learn more about Axerve Payment Orchestra™ you can find all the information here.