Can Payments Orchestration Help Business Sing? Here Are 10 Questions That Merchants Must Ask Themselves

Payments orchestration is the process of working with - or orchestrating - multiple payment providers, acquirers and banks to optimize customer experience and conversion, enhance cost savings, ensure regulatory compliance, improve fraud prevention processes and enable global coverage. In the simplest terms, orchestration is about maximizing payment conversion in the most cost-effective way. As discussed below, the benefits to merchants are significant.

1. Why is payments orchestration needed?

Until recently, payments orchestration was the sole province of the largest merchants, which typically had contracts with multiple processors and could afford to build and maintain complex back-end payment systems. However, as a result of developments over the last decade, including the emergence of strong automation tools, the growth of cloud infrastructure, and the proliferation and growing sophistication of payment service providers (PSPs), payments orchestration platforms that bundle essential payment functionalities together in an efficient, streamlined way are now available to merchants of all sizes. They serve as the entry point and core of a merchant's payments system - eCommerce platforms and online service providers no longer need to integrate every PSP or acquirer separately.

Not surprising, payment experts agree that payments orchestration is becoming increasingly important and will achieve widespread adoption regardless of business size. This is expected as a result of the continuing growth of global eCommerce, payment methods, customer expectations, competition and increased regulations such as PCI DSS and PDS2 (in Europe) as well as the need for security.

2. How can payments orchestration benefit the business?

Payments orchestration helps manage multiple payment providers while putting in place a framework for optimization, enabling payment managers to shift their focus from operational to strategic tasks. The core benefits include streamlined connectivity into multiple payment partners, optimized routing rules/decisioning to lower transaction costs, reduced risk and boosted acceptance. Enhanced cost savings (reduced authorization and chargeback costs), improved checkout conversion (up to 50% of eCommerce customers abandon their cart for reasons related to payment) and improved fraud prevention processes are additional benefits.

As a result, payments orchestration can help businesses be more agile and scale faster; it simplifies the process of moving into new markets, for example, integrating region-specific payment providers and currencies, and ensuring regulatory compliance. In addition, it prevents vendor lock-in and makes it easier to collect and analyze payments data.

3. Is it too difficult for customers to authenticate or not difficult enough? Will 3D Secure lead to lost revenue?

If the authentication process is too easy, fraudulent buyers may slip through. Conversely, if the process is too strict, it may turn away good customers. The challenge for payments orchestration is finding the perfect balance between the two.

Today, though not yet required in the U.S., the world is moving toward strong customer authentication (SCA), which authenticates buyers based on three criteria:

• Something they possess, for example, a mobile device SMS

• Something they know, such as a password

• Something that they inherently are, for example, a Touch ID

SCA should not be confused with two-factor authentication.[1]

3D Secure 2[2] (3DS) is the latest version of SCA, developed in Europe as a part of the Second EU Payment Service Directive (PSD2), where its use is mandatory for online transactions. However, the PSD2 standards allow for two important exemptions that can be dynamically applied to individual transactions through payments orchestration. The first is for low value transactions - for example, purchases less than €50. The second exemption allows the merchant to exclude "white list" buyers who are otherwise able to be identified by their profile information. For example, airlines frequently apply this exemption to purchasers of first-class tickets - not surprisingly, higher value "white-listed" customers tend to get better treatment.

There is a considerable incentive for merchants to adopt 3D Secure. Once applied, the liability for the transaction is shifted from the merchant to the acquiring bank. The bad news, however, is that 3D Secure results in additional "friction," such as further requirements placed on the buyer, which could potentially result in a lost sale. The solution is to use customer profile data to identify, and thereby white list the buyer, thus eliminating the friction.

And here's the eye-opener: simply by implementing SCA with exemptions as a part of payments orchestration, ACI has seen merchants achieve a 25 percent improvement in authentication on average.

Unfortunately, many merchants without robust payments orchestration lack the technology or expertise to identify legitimate buyers through profiling. Others aren't able to, or don't take advantage of the ability to dynamically apply exemptions.

4. Is fraud screening required if using SCA like 3D Secure?

Though the liability for the transaction is borne by the issuer when the merchant uses 3D Secure (3DS), that doesn't let the merchant off the hook for fraud screening. Similar to authentication, a balance is needed between too strict, which adds transactional friction, and too weak.

Fraud screening is usually conducted using several different data points as part of payments orchestration-specifically, the device ID, the IP location where the transaction takes place, and any deviation from the customer's normal buying patterns. However, the issuer is not privy to this data. Instead, they see limited bank data and some new fields under PSD2 including merchant identification number (MID), amount and time. Issuers don't employ dedicated customer profiling solutions to define risk for individual merchants.

Merchants are required to control fraud metrics and perform screening under 3DS. If the merchant neglects to conduct proper fraud screening, the issuer could take a hit on merchant fraud, and consequently, place the merchant on their HOT List. The issuer could request 3DS for all future transactions from the merchant, which could result in 3DS conversion loss. In addition, both the issuer and the acquirer could also introduce strict fraud rules on the merchant that could increase bank declines. The merchant's customers could see chargebacks irrespective of liability, resulting in merchant losses.

Conversely, lower fraud rates permit more exemptions for the merchant under transactional risk analysis (TRA), a critical new part of SCA. Achieving strong key performance indicators (KPIs) generally results in less authentication friction and the highest possible acceptance rates for the merchant.

5. What is a healthy acceptance rate on transactions? How does payments performance compare to industry averages?

Transactions are sent to the bank for approval, which are authorized - or not. The challenge for payments orchestration is to send the right transaction to the right bank using so-called "smart routing," which is based on several criteria:

• Location (local, domestic, cross border)
• Value
• Whatcustomers are buying (note that changing the purchase type code can sometimes increase acceptance)

The bank then makes the call on acceptance.

The goal for the merchant is to maximize acceptance and minimize the cost per transaction. This is where a multi-acquirer strategy pays off (see below). Payments orchestration also utilizes dynamic routing - for example, if one bank declines the transaction, it is automatically sent to another. How do your acceptance rates stack up? Here is data comparing ACI payments orchestration performance data with industry benchmarks from the merchant risk council (MRC).*

*Note that Market Average International refers to cross-border. Ultimately, the MRC findings show that merchants going cross-border are achieving lower KPIs than those domestic. However, ACI maintains high KPIs on domestic as well as international levels.

6. Could using multiple acquirers help minimize costs and maximize acceptance?

Merchants can reduce transaction fees by working with multiple acquirers as part of payments orchestration. The merchant service charge is the amount charged to merchants or payment service providers (PSPs). It is made up of three parts:

• Acquirer fee

• Scheme fee

• Interchange fee (capped in certain regions)

Acquirer fees are negotiable, and the scheme and interchange fees are set by the credit card companies. The scheme fee is typically minor, but the interchange fee, which can vary from 1.4-2.5% on credit cards and as low as 0.3% for debit cards, is usually the largest portion of the merchant service charge.

The interchange fee is influenced by many factors, but the main driver of cost is the location of the shopper and the merchant. Typically, the cost is lowest when the merchant or issuer and shopper are in the same country. The costs are more when the transaction is regional or cross border, for example, a U.S. customer making a purchase from a European merchant.

If you work with multi-acquirers in multiple countries corresponding to your customer base, robust payments orchestration ensures seamless technical integration for your payments no matter how many you work with. Individual acquirers may also offer specific advantages in a given country, which could be coded into an orchestration system. What are some of the other advantages of taking a multiple provider approach to payments? In a recent study conducted by 451 Research, merchants cited a variety of advantages of a multi-provider approach in addition to cost optimization.

What are some of the other advantages of taking a multiple provider approach to payments? In a recent study conducted by 451 Research, merchants cited a variety of advantages of a multi-provider approach in addition to cost optimization.

According to 451 Research, more than 60 percent of merchants said they prefer to work with multiple vendors, while more than a quarter said enhancing payments orchestration capabilities is currently one of the most important payment initiatives at their organization.

7. What about alternative payment methods such as "buy now pay later?" How about multiple currency pricing?

Alternative payment methods and "buy now pay later" (BNPL), which are offered by third-party providers such as Affirm or AfterPay, can increase customer conversion as well as ticket size. Shoppers are more likely to abandon their cart if merchants do not have their preferred payment method available.

BNPL payments are trending right now, and are particularly attractive to millennials and Gen Z consumers, many of whom eschew credit cards. With these schemes, the third-party provider connected through the payments orchestration process provides specific credit terms to the shopper, and the merchant receives payment less a fee, typically around 3 percent.

Offering international customers multiple currency pricing and dynamic currency conversion, which can be integrated into payments orchestration, are also important to shoppers and can boost merchant conversion rates.

8. What's the best way to keep conversion rates healthy?

Conversion is all about getting the shopper to complete the payment. They need to click and pay and then the payment has to be processed successfully. This is the job of payments orchestration.

What can merchants do to improve their conversions? Offer the right payment methods, improve the user experience, for example, by including one-click purchasing, and work with multiple acquirers and banks as discussed above, making sure dynamic routing is turned on! This is where payments orchestration can mean the difference between performing like the local high school band and the New York Philharmonic.

9. How can merchants implement a payments orchestration platform (POP)

As explained above, orchestration is the key to optimizing a merchant's conversion rates and is typically accomplished through a payments orchestration platform (POP), or payments orchestration layer (POL), which helps simplify front- and back-end integration. The POL provides connectivity to a variety of payment methods and bank card acquirers (often via multiple payment gateways), as well as manipulates payments flow to minimize friction during the checkout process. This involves selecting the best acquirer to route the payment authorization request, based on the conversion rate of the acquirer for that particular card, transaction type, merchant category code, shopper location and transaction value. It might also involve locating an alternative acquirer in real time if the first request is declined.

The orchestration layer can also adapt the payment flow to call out to tokenization, fraud management and SCA exemption management solutions - all in the interest of minimizing the risk of disrupting the customer journey and losing that basket. Every aspect of the orchestrated payments flow is aimed at increasing customer conversion.

10. What role can ACI play in payments orchestration?

ACI delivers access to a vast network of card acquirers and alternative payment methods with integrated fraud management, tokenization and SCA exemption management through ACI Secure eCommerce. It

also comes complete with built-in orchestration services to optimize customer conversion: routing to the best acquirer, auto-retrying on soft declines, minimizing the impact of SCA and optimizing the payments experience with mobile-enabled payments and one-click experiences. Acceptance rates are also improved with a multilayered approach to fraud prevention, taking advantage of machine learning, positive profiling, risk analysts, business intelligence, complex rules, silent mode and consortium data.

Ultimately, a strong orchestration strategy can deliver robustness and resilience to the payments chain, reduce customer friction and increase conversion rates - selling more and losing less - which is music to the ears of merchants.

To find how the ACI payments orchestration solution can quantifiably improve your business, contact an ACI payments expert about conducting an orchestration assessment using the ROI calculator.

[1]Alternative approaches perform authentication on the acquiring side, without requiring prior enrolment with the issuer. For instance, PayPal's patented 'verification' uses one or more dummy transactions directed towards a credit card, and the cardholder must confirm the value of these transactions, although the resulting authentication can't be directly related to a specific transaction between merchant and cardholder. A patented system called iSignthis splits the agreed transaction amount into two (or more) random amounts, with the cardholder then proving that they are the owner of the account by confirming the amounts on their statement.

[2]3-D Secure relies upon the issuer actively being involved and ensuring that any card issued becomes enrolled by the cardholder; as such, acquirers must either accept unenrolled cards without performing strong customer authentication, or reject such transactions, including those from smaller card schemes which do not have 3-D Secure implementations.

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