Insights

Navigating the Path to Savings: Exploring Least Cost Debit Routing (LCR) Strategies

In today’s fast-paced business environment, organizations are constantly seeking ways to optimize their operations and reduce costs. When accepting debit card payments, one effective strategy for achieving this goal is least cost debit routing. By intelligently routing transactions through the most cost-effective payment networks, businesses can potentially optimize their payment processing and unlock significant savings.

The Debit Card Journey

The customer swipes their debit card with the merchant to make a purchase.

The merchant sends the transaction to be processed.

Eligible networks are identified and cost calculated.

Least cost network is selected for routing transaction.

What is Debit Routing and why is it so important?

A debit card will have multiple networks available to route transactions. Card network costs can vary among the networks on a per transaction basis as illustrated below.

Transaction without Least Cost Routing

without-lcr

Transaction with Least Cost Routing

Low Ticket Value

low-ticket-with-lcr

High Ticket Value

high-ticket-with-lcr

Understanding Least Cost Debit Routing

Least Cost Routing refers to the practice of intelligently routing debit card transactions through the most cost-effective payment networks. Debit card transactions often involve multiple payment networks, each with its associated costs and fees. The Federal Reserve mandates that merchants have routing choice and that there must be at least two unaffiliated networks available to route debit volume. By selecting the optimal payment network based on factors such as card brand, transaction amount, and network fees, businesses can minimize interchange fees and network assessments, ultimately reducing their overall cost of acceptance.

Benefits of Least Cost Debit Routing

Implementing a LCR strategy allows businesses the opportunity to reduce interchange fees and network assessments associated with debit card payments. Dynamic LCR looks at the characteristics of each individual transaction (e.g. transaction size, eligible networks on a card, interchange and network fees for each eligible networks, merchant negotiated incentives, merchant preferred routing) and selects a network that optimizes for cost and other desired outcomes. By strategically routing transactions through the most cost-effective networks available, businesses can unlock substantial savings, resulting in improved profitability.

Cost Reduction

Competitive Advantage

One of the most significant benefits of LCR routing is the potential for cost reduction. By utilizing this strategy, businesses can optimize their cost of accepting payments in the following ways:

Implementing Least Cost Routing strategies can provide businesses with a distinct competitive advantage:

Interchange Fee Savings

Different payment networks charge varying interchange fees for processing debit card transactions. LCR allows businesses the ability to route debit volume to the lowest cost network available. Additionally, large merchants can leverage their routing ability and negotiate lower than published rates with the global networks (e.g. Visa, Mastercard, Discover) and U.S. debit networks (e.g. Interlink, Maestro, Pulse, STAR, NYCE). By leveraging least cost debit routing, businesses can capitalize on these discounts and reduce their overall cost of accepting debit payments.

Competitive Pricing

With reducing the cost of accepting payments, businesses have the flexibility to be more aggressive and adjust pricing if needed. This advantage can attract price-sensitive customers and position the business as a leading cost-effective option in the market, resulting in increased sales and market share.

Network Fee Savings

Visa, MasterCard, Discover and each of the regional debit networks charge different network fees per transaction. These differences, coupled with interchange differences can yield savings.

Avoiding Processors’ Non-Preferred Networks

In certain cases, businesses may unintentionally route transactions through networks with higher fees due to default settings or limitations in their payment infrastructure. LCR enables businesses to avoid these non-preferred networks, ensuring that transactions are processed through more cost-efficient methods.

Cost Efficiency

By reducing the cost of accepting debit payments, businesses can offer more competitive pricing, thereby attracting cost-conscious customers. This competitive edge can help businesses stand out in the market and win customer loyalty.

Value Proposition

When businesses can provide cost savings to their customers that have minimal impact, if any, to the customer experience, it enhances their value proposition. Customers are more likely to choose a business that can deliver cost-effective solutions, and LCR enables businesses to meet this expectation.

Investment in Customer Experience

Reducing the cost of accepting debit payment , allows businesses the opportunity to invest in enhancing the overall customer experience. Whether it’s by improving service quality, streamlining processes, or introducing new features, businesses can differentiate themselves from competitors and foster customer loyalty.

Flexibility and Control

LCR provides businesses with greater control over their payment processes. It enables them to choose the most advantageous payment networks based on their specific business needs and priorities. This flexibility allows businesses to adapt to changing market dynamics and optimize their payment strategies accordingly.

Benefits of Least-Cost Debit Routing

Implementing LCR strategies can bring several benefits to businesses

Implementing a LCR strategy allows businesses the opportunity to reduce interchange fees and network assessments associated with debit card payments. Dynamic LCR looks at the characteristics of each individual transaction (e.g. transaction size, eligible networks on a card, interchange and network fees for each eligible networks, merchant negotiated incentives, merchant preferred routing) and selects a network that optimizes for cost and other desired outcomes. By strategically routing transactions through the most cost-effective networks available, businesses can unlock substantial savings, resulting in improved profitability.

Cost Reduction

One of the most significant benefits of LCR routing is the potential for cost reduction. By utilizing this strategy, businesses can optimize their cost of accepting payments in the following ways:

Interchange Fee Savings
Different payment networks charge varying interchange fees for processing debit card transactions. LCR allows businesses the ability to route debit volume to the lowest cost network available. Large merchants can leverage their routing ability and negotiate lower than published rates with the global networks (e.g. Visa, Mastercard, Discover) and U.S. debit networks (e.g. Interlink, Maestro, Pulse, STAR, NYCE). By leveraging least cost debit routing, businesses can capitalize on these discounts and reduce their overall cost of accepting debit payments.
Competitive Pricing
With lower debit cost of acceptance expenses , businesses have the flexibility to be more aggressive and  adjust pricing if needed. This advantage can attract price-sensitive customers and position the business as a leading cost-effective option in the market,  resulting in increased sales and market share.
Network Fee Savings

Visa, MasterCard, Discover and each of the regional debit networks charge different network fees per transaction. These differences, coupled with interchange differences can yield savings.

Avoiding Processors’ Non-Preferred Networks

In certain cases, businesses may unintentionally route transactions through networks with higher fees due to default settings or limitations in their payment infrastructure. LCR enables businesses to avoid these non-preferred networks, ensuring that transactions are processed through more cost-efficient methods.

Competitive Advantage

Implementing Least-Cost Routing strategies can provide businesses with a distinct competitive advantage:

Cost Efficiency

By reducing the cost of accepting debit payments, businesses can offer more competitive pricing, thereby attracting cost-conscious customers. This competitive edge can help businesses stand out in the market and win customer loyalty.

Value Proposition

When businesses can provide cost savings to their customers that have minimal impact, if any, to the customer experience, it enhances their value proposition. Customers are more likely to choose a business that can deliver cost-effective solutions, and LCR enables businesses to meet this expectation.

Investment in Customer Experience

Reducing the cost of accepting debit payment , allows businesses the opportunity to invest in enhancing the overall customer experience. Whether it’s by improving service quality, streamlining processes, or introducing new features, businesses can differentiate themselves from competitors and foster customer loyalty.

Flexibility and Control

Least-cost debit routing provides businesses with greater control over their payment processes. It enables them to choose the most advantageous payment networks based on their specific business needs and priorities. This flexibility allows businesses to adapt to changing market dynamics and optimize their payment strategies accordingly.

Challenges and Considerations

Regulatory and Network Limitations

This article and framework is specific for the United States. There are also limitations on ability to route certain debit cards like prepaid and commercial cards. It’s crucial to stay updated on regulations and network rules to understand limitations.

Technical Integration

Merchants must decide if they want to build least-cost routing logic internally or leverage a solution from their acquirer. Also, not all acquirers have a robust and dynamic least-cost routing engine. Make sure you understand the features, costs and limitations of any solution you consider.

Transaction Routing Logic

Determining the optimal network for each transaction can be complex, as it involves considering factors such as network fees, transaction volumes, card issuer preferences, and routing capabilities. Businesses should work closely with their payment service providers or consultants to design and implement an effective routing logic.

Keys to Implement Effective Least Cost Debit Routing Strategies

Leverage Data Analytics

By leveraging transaction data, businesses can gain valuable insights into the cost performance of different networks. Analyze historical transaction patterns, volume, and associated costs to identify trends and optimize routing decisions. Regularly review transaction data, cost savings, and customer feedback to assess the effectiveness of your routing decisions. Identify any inefficiencies, patterns of high-cost transactions, or opportunities for further cost reduction. Consider implementing sophisticated data analytics tools or partnering with payment service providers that offer comprehensive reporting and analysis capabilities.

Utilize Real-Time Routing Logic

Implementing real-time routing logic can significantly enhance the effectiveness of LCR strategies. Real-time routing allows businesses to make routing decisions based on the latest information, such as network fees, transaction volumes, and card issuer preferences. Integrate intelligent routing algorithms into your payment systems to dynamically select the most cost-effective network for each transaction. Collaborate with payment processors or technology providers that offer real-time routing (versus static routing tables) capabilities to ensure seamless implementation.

Balance Cost and Performance

While cost reduction is important, it should not compromise the overall performance and reliability of the payment system. Strive to strike a balance between cost optimization and ensuring a seamless payment experience for customers.

LCR strategies offer businesses a viable opportunity to reduce payment processing costs and enhance profitability. By carefully evaluating available networks, understanding regulatory limitations, and collaborating with knowledgeable partners, businesses can implement effective routing strategies that yield substantial savings. However, it is essential to remain vigilant in monitoring changing regulations and network dynamics to ensure compliance and the continued success of the routing strategy. With proper implementation and ongoing monitoring, businesses can gain a competitive edge by optimizing their payment processing costs and redirecting resources towards growth and innovation.

Understand Network Fees Structure

To implement LCR effectively, it is essential to have a deep understanding of the fee structures associated with various payment networks. Different networks charge different interchange fees and have distinct pricing models. Conduct thorough research and analyze the fee schedules of available networks to identify the networks with the lowest fees for your transaction volume and types.

Collaborate with Payment Processors

Working closely with payment processors is essential for effective LCR. Payment processors have expertise in navigating the intricacies of payment networks and can provide guidance on optimizing routing decisions. Engage in regular communication with your payment processor to understand their routing capabilities and any network-specific requirements. Collaborate with them to develop customized routing rules based on your specific business needs, transaction patterns, and fee structures.

Stay Informed and Adapt

The payment industry is dynamic, with evolving regulations, network updates, and emerging payment technologies. Stay informed about industry trends, network changes, and regulatory developments that may impact least-cost routing strategies. Adapt your routing strategies accordingly to capitalize on new opportunities for cost savings.

Developing a Robust PINless Strategy with Analytics Support

Developing a PINless strategy is extreamly complex as there are many factors that must be considered to maximize the benefits of PINless debit.

These factors include the federal regulations, issuer participation, networks, processors, gateways, average ticket size, and much more.

At Optimized Payments, we have a proven track record of success building out debit strategies for large enterprise merchants resulting in savings of millions of dollars annually.

Optimized Payments Debit Optimization analytics are best in class and the perfect complement to proactively manage and monitor your debit volumes.

Watch a video on Regulation II and its Potential Impact to PINless Savings
imac-white-front

Click on the link below and contact Optimized Payments to schedule a demo and develop or fine-tune your debit strategy today.

How Optimized Payments Can Help

Optimized Payments can play a significant role in facilitating and enhancing least cost debit routing strategies. We’ve worked with some of the largest retailers and e-commerce merchants in the U.S., with the largest processing of over 1 billion debit transactions per year, and we understand all the nuances that can impact card network incentive agreements. In addition, we have sophisticated analytics that can evaluate risks, investigate different transaction routing scenarios, and recommend an optimal solution that delivers the greatest cost savings—sometimes tens of millions annually.

Here are several ways in which Optimized Payments can help businesses implement and leverage LCR effectively:

Network Optimization

Optimized Payments’ Harmonize analytics platform has analyzed tens of billions of debit transaction records from over 700 clients. Harmonize can analyze a client’s specific debit transaction data and recommend specific routing strategies and potential for negotiating network incentives.

Validate Current Routing Logic

Whether built internally or using a solution from a gateway or acquirer, routing logic should be regularly reviewed and validated to ensure it is achieving desired results. The payments ecosystem is dynamic, and changes occur at a fast pace and no routing solution is perfect 100% of the time…even from the largest acquirers. Optimized Payments found an issue with one acquirer’s logic that cost the merchant an incremental $1.2M over two months. The merchant was able to get the logic updated and obtain a refund for the over charges.

Data Analytics and Insights

Optimized Payments Harmonize platform provides comprehensive reporting and analytics capabilities, allowing businesses to gain valuable insights into their payment processing costs and performance. By analyzing transaction data, businesses can identify trends, patterns, and opportunities for optimization. Optimized Payments platforms can generate detailed reports and dashboards that provide visibility into transaction volumes, costs, and savings achieved through LCR, empowering businesses to make data-driven decisions and continuously refine their routing strategies. Harmonize can also run various ‘what if’ routing simulations with different assumptions to understand which routing strategy will yield the greatest value.

Consulting and Technical Support
Optimized Payments can help merchants implement an optimal LCR strategy, including assistance with build vs. buy, benchmarking/negotiating LCR pricing if buying an acquirer/gateway solution, negotiating network incentives, and creating reporting/analytics to track performance of LCR.

Get Started with Optimized Payments

Unlock the full potential of your business with first-class payment analytics and consulting services from Optimized Payments. Our experts can provide tailored solutions to optimize efficiency and profitability. Don’t wait any longer. Reach out today to get started!

Verified by MonsterInsights