The secret payment routing tweak saving businesses millions

In the relentless pursuit of efficiency and profitability, businesses are constantly seeking ways to shave costs and optimize operations. While many focus on marketing, sales, and supply chain efficiencies, a surprisingly impactful area often overlooked is payment processing. Hidden within the complexities of payment networks lies a powerful, yet often underutilized, strategy: payment routing optimization. 

For those in the know, this isn't really a secret, but for many businesses, effectively leveraging payment routing is the "tweak" that can unlock significant savings – potentially millions for larger enterprises.

This article will pull back the curtain on this lesser-known tactic, revealing how strategically optimizing your payment routing can dramatically reduce your processing fees and boost your bottom line. We'll explore the mechanics of payment routing, the types of savings achievable, and provide a practical guide to implementing these cost-saving strategies in your business.

Unveiling the "secret": least cost routing (LCR)

The core of this payment routing tweak is Least Cost Routing (LCR). At its simplest, LCR is the process of automatically directing each payment transaction through the most cost-effective payment rail or processor available at the moment of the transaction. Think of it like GPS for your payments – it intelligently navigates the complex network of payment options to find the cheapest route to authorization.

To understand why this is so powerful, it's essential to grasp that not all payment processing paths are created equal. When a customer pays with a card, the transaction travels through a complex chain involving multiple entities: the merchant, the payment gateway, the payment processor (acquirer), the card network (like Visa, Mastercard, American Express), and the issuing bank. Each of these entities levies fees, and these fees can vary significantly depending on factors such as:

• Card Type: Is it a debit card, credit card, rewards card, or corporate card? Visa's guide to card types outlines how different card types carry different interchange rates.
• Interchange Rates: These are fees set by card networks and paid to the card-issuing bank. Mastercard's interchange guide details the complexities of interchange. Interchange fees are typically the largest component of processing costs and fluctuate widely.
• Network Fees: Card networks themselves charge fees for using their infrastructure.
• Processor Fees: Payment processors add their markup for their services.
• Transaction Type: Card-present (swiped or chip) transactions generally have lower fees than card-not-present (online or phone) transactions due to lower fraud risk.
• Geographic Region: Cross-border transactions often incur higher fees.

LCR systems are designed to analyze these variables in real-time and dynamically route each transaction to the processing path that results in the lowest possible cost for the merchant. This automated optimization can lead to substantial cumulative savings over time, especially for businesses with high transaction volumes.

How LCR actually saves millions: dissecting the cost benefits

The savings generated by LCR are not from a single dramatic reduction, but rather from numerous small optimizations across a high volume of transactions. These savings primarily accumulate through reductions in:

Interchange fees

As mentioned, interchange fees are the biggest piece of the payment processing pie, often accounting for 70-90% of total processing costs. LCR systems are adept at targeting interchange optimization by:

• Debit vs. Credit Routing: Debit card interchange rates are typically lower than credit card rates. LCR ensures debit card transactions are always routed as debit to capture these lower rates when possible.
• Network Preference Optimization: Within the same card type (e.g., Visa credit), different networks or processing paths may have slightly varying interchange rates. LCR algorithms can identify and prioritize the lowest available rates within network rules.

Large Ticket Optimization: For high-value transactions, certain routing paths or card types might offer more favorable interchange rates. LCR can identify these opportunities based on transaction amount. Discover, for example, offers resources on large ticket interchange programs.

massive savings when multiplied across thousands or millions of transactions annually.

Transaction fees and markups

Beyond interchange, LCR can also impact other per-transaction fees:

• Processor Markup Reduction: Some LCR solutions can intelligently route transactions through different processors based on volume commitments or negotiated rates, potentially reducing the processor's markup.
• Gateway Fees Optimization: If using multiple gateways, LCR could potentially route transactions to minimize gateway-specific per-transaction fees, although this is less common and often less impactful than interchange optimization.

Reduced downgrade fees

"Downgrades" occur when transaction data doesn't meet specific requirements set by card networks, resulting in higher interchange fees. Common causes for downgrades include incorrect or missing data fields in the transaction authorization request. NerdWallet provides a helpful explanation of common downgrade reasons. Sophisticated LCR systems can help minimize downgrades by:

• Intelligent Data Routing: Ensuring that transaction data is formatted and transmitted optimally to meet network requirements and avoid downgrades.
• Real-time Data Validation: Some advanced LCR solutions can validate transaction data in real-time, correcting errors before submission and preventing downgrade triggers.

Cross-border and currency optimization

For businesses operating internationally, LCR can extend savings to cross-border transactions by:

• Local Acquiring Optimization: Routing transactions through local acquiring banks in different regions where the business operates, potentially reducing cross-border fees and improving authorization rates.
• Dynamic Currency Conversion (DCC) Management: If offering DCC, LCR can help ensure competitive FX rates and transparent fee structures, maximizing revenue and customer satisfaction.

Implementing LCR: A practical guide to lower payment costs

While the benefits of LCR are clear, implementation requires a strategic approach. Here's a practical guide to get started:

1. Assess your current payment processing landscape

Before implementing LCR, you need a clear understanding of your current payment processing costs and infrastructure. This involves:

• Analyzing Processing Statements: Scrutinize your monthly processing statements to identify current fees, interchange rates, downgrade occurrences, and overall processing costs. Visa provides resources to help merchants understand their statements.
• Mapping Transaction Mix: Understand your transaction breakdown by card type (debit/credit, rewards, etc.), transaction channel (online, in-store), geographic region, and average transaction value.
• Identifying Pain Points: Pinpoint areas where you suspect you might be overpaying, such as high downgrade rates, excessive cross-border fees, or generally high interchange costs compared to industry benchmarks.

2. Explore LCR-enabled payment solutions

Implementing LCR typically involves partnering with a payment gateway or processor that offers LCR capabilities. When evaluating solutions, consider:

• LCR Functionality and Algorithms: Understand the sophistication of the LCR engine. How dynamically does it route transactions? How many routing paths does it consider? Does it offer reporting and analytics to track LCR performance?
• Processor and Network Connectivity: Ensure the LCR solution connects to a wide range of processors and card networks relevant to your business and geographic reach.
• Integration Capabilities: Verify seamless integration with your existing e-commerce platform, POS systems, and other business applications.
• Pricing and Fee Structure: Compare the pricing models of different LCR providers. Understand their fees for LCR services, as well as their overall processing rates and contract terms. Look for transparent pricing structures, like those discussed by Square in their pricing breakdown.
• Reporting and Analytics: Robust reporting is crucial to monitor LCR performance and identify areas for further optimization.

3. Configure your routing rules and preferences

Once you've chosen an LCR solution, you'll need to configure it to align with your business needs and priorities. This might involve:

• Setting Routing Priorities: Define your primary routing goal (e.g., lowest cost, highest authorization rate, specific network preference).
• Establishing Business Rules: Configure rules based on card type, transaction value, geographic region, or other relevant factors to fine-tune routing logic.
• Testing and Optimization: Thoroughly test your LCR configuration in a sandbox environment before going live. Continuously monitor performance and adjust routing rules as needed to optimize savings.

4. Monitor, analyze, and continuously optimize

LCR is not a set-and-forget solution. Ongoing monitoring and analysis are crucial to maximize its benefits.

• Track Key Performance Indicators (KPIs): Regularly monitor metrics such as average processing cost per transaction, interchange rates, downgrade rates, authorization rates, and overall savings achieved through LCR.
• Generate LCR Performance Reports: Utilize reporting tools provided by your LCR solution to track its effectiveness and identify areas for improvement.
• Regularly Review and Adjust Routing Rules: Payment landscapes and card network rules evolve. Periodically review your LCR configuration and adjust routing rules to maintain optimal savings.
• Benchmark Against Industry Standards: Compare your processing costs and LCR performance against industry benchmarks to ensure you're achieving competitive rates and maximizing savings. The Strawhecker Group provides industry benchmarking data for payment processing.

Common LCR misconceptions and pitfalls to avoid

While LCR offers significant advantages, it's important to be aware of potential misconceptions and pitfalls:

• Misconception: LCR is free and automatic. While LCR automates routing, it's not always free. LCR providers charge fees for their services, so it's crucial to ensure the savings outweigh the costs.
• Pitfall: Focusing solely on cost. While cost reduction is the primary goal, consider other factors like authorization rates and reliability. Aggressively routing for the absolute lowest cost might sometimes compromise authorization success, leading to lost sales. Balance cost optimization with overall payment performance.
• Misconception: LCR eliminates all processing fees. LCR optimizes routing, but it cannot eliminate all payment processing fees. Interchange, network fees, and processor markups will still exist, but LCR aims to minimize them.
• Pitfall: Ignoring compliance and security. Ensure your LCR solution is PCI DSS compliant and adheres to all relevant security standards. Cost savings should not come at the expense of security. The PCI Security Standards Council provides comprehensive PCI DSS information.
• Misconception: LCR is only for large businesses. While large businesses with high transaction volumes stand to gain the most in absolute dollar terms, LCR can benefit businesses of all sizes. Even smaller businesses can achieve meaningful percentage reductions in their processing costs.

The future of payment routing: beyond basic LCR

Payment routing is continuously evolving. Beyond basic LCR, more advanced strategies are emerging, including:

• Dynamic and Intelligent Routing: Leveraging AI and machine learning to optimize routing decisions in real-time based on a wider range of data points, including fraud risk, customer behavior, and network conditions. 
• Multi-Rail and Alternative Payment Method Routing: Extending LCR beyond traditional card networks to incorporate alternative payment methods like ACH, real-time payments, and digital wallets, routing transactions to the cheapest and most efficient rail across all payment options.
• Predictive Routing: Using historical data and predictive analytics to forecast transaction costs and optimize routing in advance, proactively minimizing fees.

These advanced strategies promise even greater levels of payment optimization and cost savings in the future.

Unlock hidden savings with smart payment routing

Payment routing optimization, particularly through Least Cost Routing, is no longer a "secret" reserved for only the largest corporations. It’s a readily available and powerful tool for businesses of all sizes to significantly reduce payment processing costs and boost profitability. 

By understanding the mechanics of payment routing, assessing your current landscape, implementing an LCR solution strategically, and continuously monitoring performance, you can unlock substantial hidden savings and gain a competitive edge. 

Don't leave money on the table – take control of your payment routing and start saving millions today. Explore LCR solutions and begin your journey toward payment optimization.