Mastering Fintech: The Art of Payment Routing and Cascading
In the world of digital payment solutions, understanding the ins and outs of payment routing and cascading is vital for the success of online businesses and financial institutions.
Exploring innovation in finance, this article delves into the basics of cascading payments, intelligent payment routing and how they contribute to payment optimisation strategies.
Routing and cascading basics
Let's clarify the meaning of routing and cascading in financial technology.
Intelligent payment routing definition
Payment routing is a technology for payment processing, built for online businesses and institutions that accept payments by working with multiple payment service providers (PSPs). It implies sending each transaction to the most suitable PSP or acquirer based on selected parameters.
Let's consider an example. When a customer initiates a payment, it must travel from a bank or credit card company to the merchant's account. This is where payment routing comes into action, determining the fastest or cheapest route for the payment to go through. This could be through a bank's payment gateway, a third-party payment processor, or even a cryptocurrency network.
Cascading payments overview
Now, what is cascading in finance? Cascading is a type of payment routing that involves using multiple payment processors in a sequence to process digital payments. The aim here is to increase the chances of a payment being approved by routing it through multiple processing channels.
Imagine the first PSP that the transaction goes to according to your routing scheme declines the payment for some reason, be it risk assessment, authorisation error, provider’s downtime or anything else. With cascading enabled, the failed transaction will be routed to another PSP for a retry. It allows merchants to increase the acceptance rate and improve customer experience.
Advantages of routing and cascading
Payment routing helps merchants working in a multi-provider setup address three main challenges:
- Increase transaction success rates. By routing each transaction to the gateway offering the highest authorisation rates for such type of transactions, you can significantly increase your approval rates. Routing engines also allow merchants to implement retry strategies for “soft declined” transactions, restoring otherwise lost sales. On average, businesses face a 10-20% increase in conversion rates.
- Reduce transaction costs. By leveraging multiple PSPs and smart routing capabilities, you can send each transaction to the provider that offers the best price. The ability to find the lowest-cost way for each transaction can save you up to 30% in payment fees.
- Maintain payment process redundancy. Integration of multiple payment gateways ensures a robust and redundant payment process. By utilising both payment routing and cascading, businesses can maintain a seamless transaction flow, irrespective of potential failures or disruptions in one payment channel. This not only safeguards customer experience but also ensures operational resilience.
Thus, a smart routing system acts as a true payment optimiser for business owners, maximising payment performance and optimising costs.
Technical aspect of routing and cascading
The intricate process of intelligent payment routing occurs seamlessly for customers while involving a complex system of connections behind the scenes.
How does the payment routing process work? It involves analysing transaction data in real time to determine the best payment provider to handle the transaction. This decision is based on predetermined rules such as the provider's success rate for the payment method, transaction amount, or currency. These rules are created and adjusted by the business to meet their specific needs.
Once the best payment provider is identified, the transaction is sent to them for processing. If the transaction fails due to reasons like an expired card or insufficient funds, the system will automatically try to route the payment to another cascading processor until it is successful.
To enable this process, businesses must establish relationships with multiple payment providers across different regions and methods. They also need to develop advanced algorithms to handle large amounts of data in real time and make quick decisions. Alternatively, they can choose a turnkey solution that allows them to benefit from payment routing without the need for extensive development efforts.
The future of routing and cascading in fintech
Payment routing and cascading may appear complex, but they are essential elements in today's digital payments ecosystem. The future of payment systems is driven by technological advancements, such as advanced algorithms, enhanced data analytics, and greater collaboration among payment service providers. As the fintech landscape evolves, payment routing and cascading remain key trends in financial technology.
