Payment Routing

Payment routing is how a business decides the best path for a payment to go through. Instead of relying on just one processor, it picks the fastest or cheapest option in real time. This helps keep costs down, avoids failed payments, and makes sure customers have a smooth checkout experience.

What Is Payment Routing

Payment routing is the process of determining the most efficient path for a financial transaction to take from the point of initiation to final settlement. It involves selecting the optimal payment processor, acquiring bank, or financial network to handle a transaction based on factors like cost, speed, success rate, currency compatibility, and geographic location. 

The goal of payment routing is to maximize transaction approval rates while minimizing processing fees and potential delays. This becomes especially important for businesses that operate globally or accept multiple payment methods, as it allows them to provide a seamless and reliable payment experience for customers. 

Advanced payment routing systems often use real-time data and intelligent algorithms to dynamically choose the best route for each transaction, taking into account rules set by the merchant or payment service provider. 

How Does Payment Routing Work

Payment routing ensures payments are authorized and settled as quickly, securely, and cost-effectively as possible. This is how it works:

• Customer Initiates Payment: The customer pays using a card, digital wallet, or bank transfer at checkout (online or in-store).
• Merchant Sends Payment Request: The merchant’s payment gateway collects payment details and sends them to a payment processor.
• Routing Decision: The payment processor uses payment routing logic to decide which acquiring bank or payment provider to send the transaction to.
  This decision is based on:
• Card type (Visa, Mastercard, etc.)
• Geographic region
• Currency
• Transaction size
• Success rate or cost of each route
• Authorization Request: The selected acquiring bank forwards the request to the issuing bank (customer’s bank) to approve or decline the transaction.
• Response Returned: The issuer sends back an approval or decline code, which gets routed back through the same chain to the merchant and customer.
• Settlement: If approved, the funds are eventually transferred to the merchant’s account, typically within a day or two.

What to Consider When Setting Payment Routing Rules

When setting payment routing rules, businesses aim to balance cost-efficiency, transaction success rates, and compliance. Here’s what you should consider:

• Transaction Success Rates: When setting payment routing rules, one of the most critical factors is the transaction success rate. Routing should prioritize payment providers and acquirers that demonstrate consistently high approval rates. Analyzing historical data can help identify which routes perform best based on the customer's card type, issuing bank, or location. This helps reduce the number of declined transactions and improves overall customer satisfaction.
• Processing Fees: Different payment providers and acquirers charge varying fees for processing transactions. It's important to consider the cost per transaction and weigh it against other factors such as success rates and geographic reach. Using lower-cost routes where performance is acceptable can help reduce overall payment processing expenses. However, higher fees may be justified if they come with better performance or features for specific transaction types.
• Geographic Location: Routing payments through local acquirers can significantly improve approval rates and lower costs, especially when dealing with domestic cards. Payment routing rules should factor in the location of both the customer and the acquiring bank. This helps avoid cross-border fees and increases the chances of successful authorization.
• Card Type and Payment Method: Different card networks and payment methods have unique characteristics, rules, and acceptance rates. For example, Visa and Mastercard may perform differently across acquirers, and some providers may have better support for American Express or Discover. Similarly, routing logic should consider whether the customer is using a credit card, debit card, digital wallet, or other alternative payment method to choose the most suitable route.
• Currency and FX Considerations: Currency mismatches between the transaction and settlement currencies can lead to conversion fees and added complexity. To avoid these issues, routing rules should take into account the currencies involved and choose acquirers that support settlement in the transaction’s original currency whenever possible. For international businesses, this can improve profitability and reduce friction.
• Fallback and Retry Logic: In cases where a payment route fails, have fallback and retry mechanisms. Routing rules should include logic that automatically retries failed transactions with alternative acquirers or processors. This improves the chance of recovering otherwise lost sales and enhances the customer experience.
• Compliance and Regulation: Compliance with local laws and financial regulations is non-negotiable. Some countries require transactions to be processed through domestic systems or have restrictions on data transfer. Routing logic must account for rules such as PSD2 in Europe, RBI mandates in India, or data residency requirements to ensure legal and regulatory compliance.
• Latency and Uptime: The performance of the payment route in terms of latency and availability also affects the user experience. Routing through providers with low latency and high uptime ensures that transactions are processed quickly and reliably. Delays or downtime can lead to cart abandonment and lost revenue, especially in real-time or high-volume environments.‍
• Data-Driven Optimization: Payment routing should not be static. Continuously monitor the key metrics such as approval rates, processing times, chargebacks, and decline reasons for ongoing optimization. Data insights can reveal patterns and inefficiencies that inform adjustments to routing rules, allowing businesses to stay agile and responsive to changes in performance or market conditions.