How Payment Routing Works: Types of Payment Routing

When a customer enters their credit card information in a payment gateway, the next step in the process—where to send the transaction information—can determine whether the purchase is declined or accepted. This is the process of payment routing, which functions like GPS guidance, leading to a complete transaction.

With payment routing technology, you can make sure payments are sent to the best possible payment provider each and every time. The result is lower transaction costs, better approval rates, and happier customers. Learn more about how payment routing works and why it’s a must for your checkout process.

What is payment routing?

Payment routing is the process of sending an order’s payment information from the payment gateway to the appropriate payment processor. A payment gateway is the portal where a customer enters their information; this service encrypts it and hands it over to the processor. A payment processor is an intermediary, facilitating the transfer of funds between bank accounts, communicating with the customer’s bank and the merchant’s bank.

Depending on variables like payment method, card network, purchase amount, and currency, certain payment processors may be better options than others. Payment routing evaluates each possible processor and selects the option that charges the lowest fees, given the circumstances, and is most likely to approve the payment.

For example, one processor might charge an extra percentage for a certain card network, so in this case, the system would route payments to a lower-cost processor. Or, if a customer is from a region where a processor commonly declines due to fraud, the payment routing system will choose a processor more likely to approve the transaction.

Payment routing allows you to work with multiple payment processors to offer customers more options when it’s time to pay. They can use a range of credit or debit cards, digital wallets, or payment services like PayPal or Venmo, and you won’t have to do anything special to make sure these options are viable. Payment routing functionality may be built-in to the payment service provider’s gateway, custom-built, a third-party integration, or part of an overarching payment orchestration platform.

Static vs. dynamic routing

The two main kinds of payment routing are static and dynamic. Static routing uses a predetermined configuration of routing conditions to decide which payment processor is best suited to handle the transaction. For example, if a customer is paying with a specific card network like Visa or American Express, your payment gateway might always send it to a particular processor. It doesn’t take into account payment processor downtime or high traffic. So, if there’s a problem with the service, the payment simply won’t go through.

Dynamic routing, on the other hand, is more intuitive. It also uses predetermined routing rules for what should happen when transactions meet conditions, but it can adapt under pressure. If the ideal processor is suffering performance issues, it can route transactions to the next provider in line to avoid failed transactions.

How payment routing works

1. Customer enters payment information
2. Payment router analyzes the information
3. Payment router sends the transaction to the best payment processor

From start to finish, payment routing takes mere moments. In that short span, a lot happens. To help you better understand, imagine you sell tie-dyed t-shirts online and at local flea markets using Shopify POS. Every time a customer purchases a shirt, payment routing happens behind the scenes.

Here’s how it works:

1. Customer enters payment information

First and foremost, you’ll need to collect your customer’s information. They’ve picked up the perfect spiral tank top, and now it’s time to pay. If you’re selling it to them from your in-person stall at the market, collecting their payment info is as simple as having them swipe or tap their card or phone on your card reader.

If they’re buying it from your online store, they’ll input their billing info on the checkout page. Either way, the information is fed into a payment gateway, which encrypts the data before routing it to the processor.

2. Payment router analyzes the information

As soon as that information is submitted, it’s game on. The gateway’s payment routing system analyzes the transaction based on predetermined routing rules.

It will typically consider factors like:

• Payment method

• Currency

• Country

• Amount

• Card network

The goal is to determine the payment processor that will have the greatest chances of approval and the lowest processing fees. You might think of this stage like an “if this, then that” equation. 

Your payment router might start broad by determining what country the customer is from. Next, it might rule out specific card networks or purchase amounts processors charge higher fees on. For example, Stripe charges 2.9% of the transaction plus 30¢ for payments on an American Express card, but Adyen charges 3.3% plus 10¢. On a $100 transaction, that would be $3.20 in Stripe fees or $3.40 in Ayden fees, so the processor would choose Stripe. But if the transaction was only $10, Ayden would have a lower fee.

3. Payment router sends the transaction to the best payment processor

Hopefully, the payment provider will accept and process the transaction. Outside of customers not having enough funds for the transaction, payment processing might lead to declined transactions because of fraud risk algorithms. There might also be technical problems on its side, such as an overloaded server, which prevents the payment from going through.

If there are any hiccups, the payment routing service recalibrates and chooses a backup provider instead. This continues until the transaction is complete.

The customer can walk away, happy they’ve found the perfect shirt, and you know the payment transaction went through successfully.

What is smart payment routing?

Smart payment routing uses real-time payment routing data and historical performance to make routing decisions for better payment acceptance. It’s similar to how a GPS might analyze your route for real-time traffic and send you an alternate way to avoid it. Smart payment routing analyzes current network conditions with certain providers. It does all of this automatically, so you don’t have to configure anything on your end.

Here’s how intelligent payment routing works: Your customer makes a purchase, and the intelligent payment routing system starts processing based on algorithms and live data. For example, it might have the ability to get real-time updates from the processor’s server to know if it’s experiencing downtime. It can even see recent decline statistics to know how likely a transaction is to be accepted or not. It processes this data in mere seconds to calculate the best choice.

Overall, using intelligent routing has many advantages over traditional routing, including:

• Better approval rates. In 2023, 56% of US shoppers had an online payment declined. Sometimes this is due to the customer or issues on the processors’ end, like an overloaded server or automated fraud detection denying a legitimate payment. Payment routing sends the transaction to the payment service provider most likely to approve it to prevent failed transactions.

• Improved revenue recovery. Since roughly 8% of customers abandon their cart if their credit card is declined during checkout, intelligent routing can help increase sales by raising transaction success rates.

• Improved customer experience. When their payment goes through without a hitch, customers will be much happier with the checkout experience.