Payments Dialog: How Payments Success Rates Increase when Transacting with Multiple Gateways

The team at Spreedly has been diving into the billions of data points living behind the scenes of our Payments Orchestration solution. On this episode of Payments Dialog, we will provide you with some insights in to two trends in two key areas: gateway diversification and smart routing.

We interview Lee Jacobs, director of product management and Meredith Tomblin, business analytics manager, who led the research initiatives we discuss. The session includes insights into trends and market forces driving the need for gateway diversity and intelligent routing of transactions. We also look at the direct impact of both strategies to success rates and financial return.

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Questions about your multiple gateway strategy and how Spreedly can help with Payments Orchestration? Reach out to us here.

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Rough transcript of How Payments Success Rates Increase when Transacting with Multiple Gateways

Peter:

Hi everybody and welcome to another edition of Payments Dialogue. It's great to have you here. I'm joined today by two folks from Spreedly. First off Meredith Tomlin and also with Lee Jacobs. So welcome to you both.

Lee:

Hi.

Meredith:

Hi.

Peter:

Terrific. Today we're going to be talking about some of the data analysis that we've done, particularly around the addition of new gateways. So adding gateways to a merchant and what that does to success rates and overall performance for merchants. Before we kick off, maybe Meredith, Lee, can you just give a quick introduction to yourselves?

Meredith:

Oh, sure. My name is Meredith Tomlin. I'm a business analytics manager at Spreedly.

Lee:

And I'm Lee Jacobs, director of product management at Spreedly.

Peter:

Great. So recently, Meredith, you had an article that was published in the papers, a magazine, that looked at this notion of gateway diversity. And so perhaps I could ask both of you to just take a take on gateway diversity and what does that really mean?

Meredith:

Certainly. Thank you, Peter. Gateway diversity is part of the company's payments orchestration or the way that the period of their payments infrastructure is set up or at least it should be. When you rely on one gateway, you decrease the chances for a successful payment. Having more than one gateway can introduce the chances that the merchant will get paid and it also helps to mitigate any potential points of failure that could be associated with the payments process.

Peter:

Okay, great. And so this idea of adding or switching between gateways. Lee, what are the main reasons of why organizations would decide to choose that path versus a single gateway?

Lee:

Yeah. The main reasons kind of reach back or met back to Spreedly's core value propositions. So reach is the primary driver. We're looking to gain geographical advantages by selecting additional gateway partners. That plays into the mix of payments, with local payment methods and different card brand relationships. Also the ability to accept payments and pay out in different currencies and also optimizing for metrics like latency, to ensure a smooth checkout process and optimize conversion. Merchants are also looking for resilience, so they're looking for fault tolerant networks to avoid costly outages. And finally, they're looking for an ROI on their investment in multiple gate processors.

Lee:

So they're both looking to optimize costs, improving the bottom line, decreasing the overall cost of payments by working with multiple providers, and also looking to improve their top line, by optimizing success rates. And that's really today's focus, I think, is how do you use multiple providers to increase your transaction success rates?

Peter:

That's great. Yeah. And one of the things that I think is really interesting about this is there's a number of things that are business value that come in. So the idea of reducing risk, because you have that redundancy that's there, so that if one provider goes out or goes out of business or is perhaps under stress due to maybe an on demand or on sale, that you have the backup. But there's a lot of other things that are more quantifiable. And I think the ROI one that you mentioned, so the ability to have higher success rates, is a particularly good one to look at. And so Meredith, you've done research on this topic and that was the subject of your interview on the papers. Can you tell me a bit more about what that research was and what you were focusing on?

Meredith:

Oh, certainly. We wanted to see what happens to a company's success rates when they add a gateway and to determine what exactly this means for their revenue. What is the monetary value of optimizing their payments orchestration?

Peter:

Okay. That's interesting. And so what kind of questions were you trying to answer, as a result of that analysis?

Meredith:

Well, we know adding gateways helps companies by increasing their chances for a successful transaction, but we wanted to put a financial value behind this. In other words, what do companies have to gain when they add a gateway.

Peter:

Okay. Now, one of the things that I think is particularly interesting about Spreedly, and Lee, feel free to jump in here, is the fact that because Spreedly has this central role and is able to connect to hundreds of different payment services, virtually any gateway, then the result is that we have an incredible amount of data in-house that is across geographies, across currencies, across gateways. So this very broad perspective on the market that a single provider is just not going to have and alleviate. Any other thoughts on that?

Lee:

Yeah. Yeah. Spreedly is in a really unique position, because we have not just an individual merchant's worth of data, but we have really thousands of merchants, if you count our customers and the platforms that are connected to Spreedly. And so that breadth of data helps us make really informed decisions about the optimal routing paths for transactions.

Peter:

Okay. Great. So as a business analytics manager, Meredith, this must be pretty exciting to have that kind of data set at your fingertips.

Meredith:

It's been great.

Peter:

So maybe tell me a bit about the methodology that you took, in order to do this research.

Meredith:

Oh, certainly. We looked at some larger companies who had a transaction history of at least a year with Spreedly and who had added gateways during this time with Spreedly. We looked at their success rates, both before and after this gateway addition. To avoid any kind of confounders of currency and geography, we limited the scope to U.S. and Brazilian currency, which we analyzed separately. Also, we used pre-COVID numbers for most of the merchants.

Peter:

Great. So taking a case study-like approach, where you're looking at individual merchants and seeing what the impact was for them from an ROI perspective.

Meredith:

Exactly.

Peter:

Okay, great. So now you crunched the numbers. Tell me a bit about the results that you saw.

Meredith:

Oh, certainly. Well, in aggregate, you can't really say that there's a perfect number of gateways for a merchant to have. Every company is going to be different and they're all going to have different results. And their success will depend on a lot of different factors, as well. This is why we looked at the individual companies.

Meredith:

There were four companies that we profiled in this analysis. The first company had a success rate of 88% initially. When they added a second gateway, they were able to increase their success rates in 93%. And, because of this, that resulted in an incremental $2 million per week of revenue that the company could have missed out on had they not made this change to their payments orchestration.

Meredith:

The next company increased their success rate by 8% by adding more gateways and this helped them to gain an additional $354,000 a week that they also could have lost out on.

Meredith:

The third company gained an additional $50,000 per week. And that was when they increased their success rates from 88% to 92% by adding some more gateways to their payments orchestration mix.

Meredith:

The last company was a little bit different. We helped this company to optimize their infrastructure. They started out with success rates of 78%. Then they added a second gateway and that took their success rate up to 90%. The second gateway was so much more successful, they were able to drop the first gateway. And so, by doing this, we helped them to optimize their payments orchestration mix.

Peter:

Yeah. That's super interesting. Those are pretty incredible results. But let me just go back to one thing that you mentioned in the beginning, which was there's no perfect number of gateways. I think that's something that Lee, if you have any thoughts on this, really interesting to jump into, is I think that's one of the core things about this idea of orchestration is that notion of flexibility. So you have a set of business goals that you're trying to achieve. Well, what kind of priorities should you be doing with them from a technical perspective on your payments orchestration, to select the right services in order to optimize for your business results? And that's what it sounds like these customers were doing, was they were choosing what is the right mix for them.

Lee:

Yeah, it's definitely very merchant specific. Every different merchant is going to have different success on various different aspects. So if you have a very homogenized transaction-based, if you're transacting entirely in U.S. dollars, one gateway may be the best gateway for you. Now that doesn't mean every gateway would be the best one for you and there's definitely other ways to optimize around that to increase your success rates.

Lee:

Likewise, if you're transacting in Europe versus Latin America versus North America, Asia, Pacific, different providers are going to have different specific success rates in those regions. And so, there may be four gateways if you're transacting in all four of those regions, there may be 10, depending on the intricacies of where exactly your payments are being processed, where the acquiring and issuing banks are located on most of those payments.

Peter:

That's great. Yeah. And that's just a fascinating thing, because what Meredith is revealing is here are some very quantifiable numbers, improvements in success rates leading to improvements in revenue. And then there's this other qualitative benefit. So risk, as I mentioned at the beginning with that redundancy, but then also this notion that you're talking about here, the flexibility to adapt as you're adding new markets or going into new locations, adding new products perhaps, or acquiring new companies and wanting to standardize across those acquired companies.

Peter:

Great. So Meredith, so Spreedly actually produced an eBook that looked at the various success rates across geographies. Is this study that you've been doing, do you expect that to be used to refresh that eBook?

Meredith:

Oh yes. Definitely. We'll include this research and other research, as well.

Peter:

Great. All right. Great. Well, that's great to hear about the research, Meredith. So tell me what are the needs that these customers are facing that are driving those gateway adds?

Meredith:

Sure. Well, a lot has changed in the last few months. We're seeing an accelerated shift to online card-not-present transactions, instead of the traditional in-person transactions. Companies often will add a gateway as a backup to their primary gateway. Companies may not know they have the option to add multiple gateways or they may fear it's going to be too difficult or costly. Sometimes, if a company wants to do it themselves, they may not have the developers, or their developers just might not have the time or the skills that are needed to create and maintain these connections.

Lee:

Yeah. And I think one other area we're seeing, along with the growth in card-not-present transactions, the transition from brick and mortar to eCommerce, is growth in platforms and online marketplaces. And, with that growth, a lot of merchants who participate in the marketplaces bring their own gateways. And so, those platforms and marketplaces need a way to quickly scale to bring on their new merchants and have upwards of 15, 20, 25. We've seen over 30 gateways for a single platform integrated to process all of their payment needs.

Peter:

Great. Now Meredith, you mentioned earlier about some of the data being filtered based on COVID and the impact of COVID. One of the things that we're really seeing is, as a result of COVID, the switch from card-present transactions. So in-person, brick and mortar, to card-not-present. How does that affect the merchant's level of interest in improving success rates for card-not-present transactions?

Meredith:

Well, these changes are happening fast. Merchants are forced to shift their business to keep serving their customers in the way they did before. People are moving toward order ahead, curbside pickup, or home delivery models. And online transactions are becoming more common, including these card-not-present transactions. When an online transaction that should have succeeded fails, the merchant risks losing the customer to a competitor.

Lee:

Yeah. And a lot of the merchants don't have sophisticated eCommerce payment strategies, especially those who are using a single processor for their ... process their card-present transactions, with a small minority of transactions going through that same processor. It could really benefit from optimizing across, possibly, a different gateway for their larger card-not-present volume that's growing with the advent of COVID.

Peter:

Yeah. Yeah. That's interesting, yeah. Because, as a percentage of your total business, as that percentage grows, that cost becomes that much more obvious or that loss of revenue becomes that much more obvious. So Lee, you are doing some research right now. Your team has been doing some research on smart routing. Can you tell me a bit more about that?

Lee:

Yeah, sure. So we've been constructing probability models to determine the success rate lift using Spreedly's smart routing solution.

Lee:

So smart routing determines the optimal path for a transaction, based on some of the specific criteria, the issuing bank for the card and the transaction, the card type, the card branch, and the currency, which is a proxy for the country that a transaction is being processed in. And using the breadth of Spreedly's transaction data that I mentioned before, we're able to select the gateway with the best transaction success rate, delivering the best probability of success for those merchants. And so, based on the smart routing model, we've seen an overall aggregated success lift of about 3.9%. And that's the equivalent for the merchants we've studied to your $13 million in a single month. For this model, we analyzed about 400,000 real transactions for 11 Spreedly customers. We used the known probability of transaction success to calculate the expected value of each transaction and then we aggregated and averaged those numbers across many merchants, to come up with that success rate lift of 3.9%.

Lee:

So the conclusion, looking at just some of the individual merchants in the bunch, the first one we focused on is a North American focused ticketing service. They're doing about $80 million in revenue per month. That's pre-COVID, obviously. Sorry. But they're using two gateways today and 90% of their traffic is on gateway A and they have about a 91% success rate on that gateway. Using the smart routing model, we predicted they would have better success rates by routing almost all of their traffic to gateway B, which would deliver an expected success rate of about 98%, a 7% lift in success rates. For them, that's about $12 million in revenue per month.

Lee:

A more modest example, looking at merchant number two in the sample, which is a global media delivery platform, they're doing about $900,000 in revenue per month on Spreedly, also using two gateways, and today they have about 70% of traffic on gateway A, with about a 79% success rate. Using the smart routing model, we would swap to about 89% of their traffic on gateway B. And with that, they would see an 82% success rate. So more modest, 3% success rate lift. That still results in about $290,000 revenue per month for this merchant.

Lee:

So overall, aggregated across all 11 merchants in our sample size, we see an average success rate lift of 3.9% and that's $13 million across all of those merchants.

Peter:

Wow. That's pretty astounding. And you think, too, that number is revenue that's being forgone right now, but there's also an impact on long-term customer relationships that come in. So if someone's [inaudible 00:15:28] coming in and being declined and it's a false decline, they may or may not come back and work with that merchant in the future. Or if it's a subscription, then they may not subscribe and then there's all that loss of that monthly or annual revenue.

Lee:

Yeah. Yeah. Exactly. With customer conversion, you have the one-time revenue that's obviously important, which we're measuring here. But we're not even considering the long-time, customer lifetime value that's lost from that initial decline.

Peter:

Great. What other conclusions do you draw from? These are astounding numbers that you're seeing, but there must be other conclusions that you're drawing from the research, as well.

Lee:

Yeah, yeah, absolutely. So, and first thing to note is that this is a model, so it's based on probability theory. It assumes all else being equal. But across the population, it says that there is likely a transaction success rate lift for most merchants, by selecting optimal gateways using smart routing. And the mean of that estimated success rate is 3.9%.

Lee:

That means it's not always true for individuals. The model did fail for some merchants in our sample size. Those who have exceptionally high success rates already predicted actually lower success rates. So the solution is not for everybody. But on average, across the population, our merchants would be better off using smart routing than not using it.

Lee:

So, based on the limited sample size, we plan to actually productize this smart routing model, to test it at scale, so that we can have the breadth of Spreedly's customers predicted. And then really average it out to see an even more impactful number on overall revenue.

Lee:

And then we also have customers who are beginning to test smart routing live today. So it's available for early adopters and soon it'll be generally available. And for any customers who are interested, we can actually run the model today, using the manual model that we built on an actual set of your transaction data, to show the potential benefit from adopting smart routing.

Peter:

Terrific. Well, this has been fascinating. There's just so many benefits here from orchestrating payments, so using the payments orchestration platform from Spreedly. Not only the returns that Meredith and Lee, both of your studies have shown, that payments orchestration delivers, but also the other aspects. The redundancy, the ability to get into new markets faster, and the ability to just reduce risk when it comes to peak times. So really fascinating to hear these numbers.

Peter:

And Meredith, it sounds like there'll be more data coming in the eBook. And, as well, you've published a number of studies up on the Spreedly blog already that talk about improvements, not only when people add merchants, but also just across regions, as well.

Meredith:

That's right. Yeah. There are several studies out on the blog that talk about success rates by region and different improvements that can happen when people add gateways.

Peter:

Great. Well, again, thanks very much. Really enjoyed the conversation and looking forward to the next edition of the payments dialogue. So Lee, Meredith, thank you.

Meredith:

Thank you, Peter.

Lee:

Thank you, Peter.

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