InsightsArticlesWhat smart routing is and how it helps reduce Ecommerce failed transactions

What smart routing is and how it helps reduce Ecommerce failed transactions

Publication date: 31 May 2023Reading time: 5 minutes

When it comes to Ecommerce, failed transactions have a strong impact on the profitability of the business and therefore a frictionless and smooth payment process becomes extremely important.

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
  • issues during the authentication phase
  • insufficient funds on the account

Some of these problems cannot be directly tackled by businesses because they are related to issues on the customer’s end. However, businesses can focus on reducing 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 narrowed 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. Moreover, 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 minimise 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
  • Authorisation
  • Clearing
  • Settlement

These are taken care of by payment service providers, acquirers, issuers and fraud prevention services.

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 PSPs 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 company 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  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, authorisation 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 to minimise failed transactions due to technical errors, as smart routing can automatically switch the transaction pathin order to get the transaction approved.

This results in getting 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 increases its accuracy 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 authorisation rate.

So, by looking at smart routing and how it works we can see that reduced failed transactions are only one of the benefits:

  • 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. 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 for control over each payment from one single point of access.

As mentioned before, when making the choice over which payment infrastructure is best for a business, routing is an important part of the equation. Whether the business is local with a limited budget or scaling internationally with the need to invest in a more cost-effective solution, smart routing may be the key to minimise failed transactions while cutting the costs of expensive integrations and manual reconciliation. If you want to learn more about payment orchestration you can find all the information in our page.


Accuity, LexisNexis® Risk Solutions.

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