In 1943, psychologist Abraham Maslow developed his hierarchy of needs — five categories such as shelter, food, love and esteem that build on one another and ultimately motivate human behavior. The basic categories, states the theory, need to be satisfied before others … the need for food needs to be dealt with before we can deal with higher pursuits.
Maslow wasn’t a financial expert. Nor could he have foreseen the importance of capital and the variety of ways it could be deployed 60 years later. But his theory has resonated with Clay Hefner, head of vaulting solutions at Spreedly. He told PYMNTS in a recent conversation that payments, specifically card-based transactions and especially digital transactions, have a similar hierarchy of needs if they’re to operate at their most efficient (let’s call it highly actualized) level.
At the most basic level, he said, it’s critical for merchants to be able to capture the payment.
Said Hefner, “maybe you just go to one PSP, one gateway and a direct integration.” But then other needs arise, especially as merchants scale and go global and digital. Now there’s the need for redundancy and resiliency (so that if there’s an outage somewhere, all is not lost).
Which gets Hefner to his main point, which is the need for smart routing. In general, as Hefner explained, payments routing involves merchants working with multiple partners to route payments in different directions. Even beyond that, maintained Hefner, there’s the need for smart routing, as payments travel across distances and even currencies. Smart routing, he elaborated, involves using a data-driven approach to help streamline efforts to accept card payments, with specific goals in mind, such as boosting authorization rates or reducing costs.
Optimal routing uses variables such as card type, transaction, currencies and country of payment origin and destination, said Hefner, along with the “success rates” of different gateways based on those variables. With these variables and ample data, you can automate the decision of which gateway to use. To this effect, payments orchestration unlocks the ability to quickly and flexibly move payments without having to integrate on a case-by-case basis with several providers and without losing the time to value of a payment.
As commerce moves inexorably online, said Hefner, payments orchestration can help merchants leverage new technologies like network tokenization to combat fraud, offer a better customer experience and increase authorization rates. For eCommerce card on file transactions, this means exchanging the regular 16-digit primary account number (PAN) for a merchant-specific token that is issued by the card network and issuing bank. As Hefner told PYMNTS: the adoption of network tokens depends on which region in the world one looks at — the U.S. has had deep penetration and other regions like Latin America (LATAM) are rapidly expanding. Even with rapid expansion, there are still gaps as not all issuing banks offer network tokens and not all payment service providers accept network tokens yet. That’s partially because not all acquiring banks accept them, he added.
“We’re in this transition phase, and orchestration plays a role because there is value in every payment having a network token,” he said. Orchestration can recognize if there is a network token for a payment method, and route it to partner A or partner B, as the situation merits — and capturing a payment “in the moment.”
In the meantime, platforms such as Spreedly’s can operate with a wide variety of companies — ranging from the early growth stage merchant capitalizing on the pandemic and the demand for delivery, to more established firms.
Solving The Pain Points
Better authorization rates are especially attractive for merchants no matter size or vertical — they get to capture more revenue, of course. Hefner noted that legitimate card declines in 2018 alone led to about $330 billion in revenue loss — and that’s before the huge eCommerce surges seen amid the pandemic.
“There’s also an auxiliary pain point that you’re trying to solve too, from a customer experience perspective,” he said. When cards are declined, a significant percentage of would-be customers — roughly a third of them — opt not to try again with that merchant, possibly never to return.
The benefits of partnering with a provider like Spreedly (and the benefits of avoiding the in-house heavy lifting of working with large data sets), he said, are tangible. Merchants embracing smart routing and payments orchestration can see revenues increase by double digits as authorization rates improve by at least mid-single-digit percentages.
With smart routing, said Hefner, “those 3 to 5 percent [authorization] lifts are terrific from a revenue perspective. But those extra authorizations are associated with real people, and those people are now happy with your service because the credit card went through correctly — versus a possible false decline on that credit card, them getting annoyed with your service, blaming it on you and then never coming back. That long-term revenue plus the brand impact is pretty significant.”
And the urgency of digital payments presents real business challenges (and opportunities) for merchants. “Without a good orchestration strategy, there is no way to have a good routing strategy. One unlocks the other,” said Hefner.
NEW PYMNTS DATA: BUY NOW, PAY LATER CONSUMER STUDY
About: Buy Now, Pay Later: Millennials And The Shifting Dynamics Of Online Credit, a PYMNTS and PayPal collaboration, examines the demand for new flexible credit options as well as how consumers, especially those in the millennial demographic, are paying online. The study is based on two surveys, totaling nearly 15,000 U.S. consumers.