Smart Routing in Payments: How It Works and Why It Matters for Businesses
In the competitive world of online payments, transaction approval rates, processing speed, and cost efficiency are critical for businesses. One way to optimize these factors is through smart routing, a payment strategy that dynamically directs transactions to the most suitable payment pathway to maximize approvals and minimize costs. This article explains how smart routing works, its benefits, challenges, and how businesses can implement it for improved payment success.
What Is Smart Routing?
Smart routing is a payment optimization strategy that ensures each transaction is processed through the most suitable payment processor. Instead of relying on a single default processor, smart routing evaluates multiple factors—such as historical conversion rates, card type, transaction amount, issuer country, and currency—to determine the best possible route for a successful payment.
For merchants, this means fewer failed transactions, lower processing costs, and faster settlement times. By dynamically selecting the best payment pathway, smart routing helps businesses reduce declines, optimize fees, and improve the overall payment experience for their customers. Whether a business operates locally or across multiple markets, smart routing enhances efficiency by leveraging data-driven decision-making to ensure payments are handled by the processor most likely to approve them.
How Smart Routing Works
The smart routing process follows a structured flow within the payments ecosystem to optimize approval rates and cost efficiency. Here’s how it works:
Customer Initiates Payment
The customer enters their card details at checkout and submits the transaction.
Payment Gateway Encrypts and Forwards the Data
The payment gateway securely encrypts the transaction data and sends it to the system handling smart routing.
This system may be integrated within the gateway or function as a separate payment orchestration platform.
Smart Routing Engine Analyzes the Transaction
The system evaluates predetermined criteria such as card type, transaction amount, issuer country, currency, and historical success rates.
Optimal Processor is Selected
Instead of automatically routing the transaction to a default payment processor, the smart routing engine selects the processor most likely to approve the transaction based on real-time analysis.
Transaction is Processed and Response is Sent
The transaction is submitted to the selected processor for authorization.
The response—approved or declined—is sent back to the merchant.
Challenges and Considerations in Smart Routing
While smart routing offers significant benefits, businesses should be aware of potential challenges and limitations:
Platform capabilities: To manage multiple acquiring channels you need a payment orchestration platform or a payment gateway that supports smart routing.
Risk and Fraud Considerations: While routing can improve approval rates, improper implementation could increase exposure to fraud and chargebacks if risk factors aren’t properly accounted for.
Cost Considerations: Routing decisions should balance not just approval rates but also processing fees, FX conversion costs, and settlement delays. If the smart routing system logic is solely based on, for example, Conversion Rate (approval rates), without cost consideration, you could experience higher processing fees if all your transactions are going to the conversation rate winner but they have higher fees than your other payment processor options.
Benefits of Smart Routing for Businesses
✅ Higher Approval Rates – Transactions are processed by the acquirer with the best success probability.
✅ Lower Processing Costs – Merchants can prioritize acquirers with lower transaction fees.
✅ Reduced Transaction Latency – Smart routing minimizes delays by selecting the processor that can relay the authorization request to the card network and issuer most efficiently for example, during times of high traffic loads experienced by the processor.
✅ Optimized Multi-Acquirer Strategy – Businesses operating in multiple regions can route payments based on performance data and issuer country.
✅ Enhanced Approval Rates with Cascading Payments – When paired with a cascading payments strategy, smart routing can further reduce declines by retrying failed transactions through alternative processors. We will cover cascading payments in a separate post.
Merchant Use Cases of Smart Routing
Smart routing is particularly beneficial for businesses that rely on high transaction approval rates and seamless customer experiences. Below are two key industries that benefit from smart routing and how it addresses their specific challenges.
E-commerce Platforms
For e-commerce merchants, especially those selling internationally, transaction approvals are a constant challenge. Many cross-border transactions are declined due to issuer restrictions, heightened fraud concerns, or regional regulatory policies that require payments to be processed through local entities.
With smart routing, each transaction is dynamically evaluated, and instead of being sent to a default payment processor, it is directed to the processor most likely to approve it based on various predefined criteria. This ensures that payments are processed in the most efficient way possible, reducing unnecessary declines and improving customer conversion rates.
Subscription-Based Services
For businesses that rely on recurring payments, failed transactions can lead to involuntary churn, where a subscriber loses access to a service not because they canceled, but because their payment was declined. These declines are often due to issuer restrictions, outdated card information, or changes in bank policies regarding recurring payments.
Smart routing mitigates this issue by identifying processors that have higher approval rates for recurring transactions—particularly those that operate in the same country as the customer’s issuing bank. This significantly improves the success rate of subscription renewals, ensuring that merchants retain customers without unnecessary interruptions in service.
How Businesses Can Implement Smart Routing
For businesses looking to optimize their payment processing, implementing smart routing requires strategic planning and the right partnerships.
Work with Your ISO for a Multi-Acquirer Setup
Independent Sales Organizations (ISOs) play a key role in helping businesses set up multiple acquiring relationships, ensuring redundancy and optimizing approval rates. Merchants working with an ISO can leverage multiple processors, allowing smart routing to dynamically direct transactions to the most efficient one based on cost and approval likelihood.
However, managing multiple processors requires a payment orchestration solution to handle the routing logic. Merchants have two main options:
A separate payment orchestration platform that connects to multiple processors and executes smart routing based on predefined rules.
A payment gateway with built-in smart routing features, which simplifies integration while offering dynamic routing capabilities.
An ISO can assist in selecting the best approach based on the merchant’s business model, transaction volume, and geographic reach. By working with the right partners and leveraging a well-designed smart routing system, merchants can increase approval rates, reduce costs, and improve the overall payment experience for their customers.
Smart routing is a game-changer for businesses looking to optimize payments. By dynamically selecting the best processor based on predefined criteria, companies can increase approvals, lower costs, and improve customer experience. Contact us if you’d to learn more – info@streampayments.com
FAQs
How does smart routing compare to traditional payment processing?
Traditional payment processing typically routes all transactions through a single acquirer, whereas smart routing dynamically selects the best acquirer based on real-time factors like approval rates, fees, and risk assessments.
Is smart routing only useful for large enterprises, or can small businesses benefit too?
While large enterprises often see significant gains from smart routing, small businesses can also benefit by improving approval rates, reducing costs, and increasing reliability, especially if they operate in multiple markets.
What technical integrations are required to enable smart routing?
Either a payment gateway with smart routing features or an orchestration platform that supports smart routing will need to be connected to the various acquirers involved. If a merchant is working with multiple ISOs, the processes are the same but the merchant must decide how they will manage the project of connecting multiple acquirers via multiple ISOs.
Does smart routing always save on transaction fees, or are there situations where it increases costs?
While smart routing can reduce fees by selecting lower-cost acquirers, in some cases, routing to a higher-fee acquirer may be necessary to maximize approval rates.
How does smart routing impact chargeback rates?
Properly configured smart routing can reduce chargebacks by directing transactions to acquirers with strong fraud detection and risk management tools. However, poor routing decisions could increase chargebacks if risk factors aren't properly considered.
