AI-led fee and interchange strategies could save PSPs millions

A new white paper from global banking infrastructure innovators RS2 says that acquirers and PSPs could add value for their clients and save themselves – and their clients – millions.

This can be achieved by adopting AI-driven approaches to transaction fee calculations and scheme interchange rates as a new world focused on instant payments emerges.

Instant payments are the phenomenon of the next five years. By 2030, it’s projected that one in three payments world-wide will be real-time.[1]

While this development brings in a new era of unrivalled consumer choice and convenience, merchant acquirers and Payment Service Providers (PSPs) today continue to operate on end-of-day interchange reporting and fee calculation, stuck in the “old world” of overnight settlement.

AI-led Transaction Routing

RS2’s new white paper outlines a new, AI-led approach to transaction routing and pricing developed by the company that delivers the best prices per transaction – as well as the most efficient settlement pathways.

Before a transaction is submitted for processing, RS2 calculates the interchange and scheme fee amounts for that transaction based on the payment type, markets involved (in the case of cross-border transactions) and network rules during authorisation.

The RS2 decision engine then automatically selects the best routing path for the transaction.

This means that where a merchant uses multiple acquirers, RS2’s decision engine will select the pathway with the lowest fees.

Cross-Border Transactions

In the case of cross-border transactions, their decision engine automatically chooses between domestic or cross-border processing.

For instance, if a European merchant accepts a card transaction from a US customer and there is the option to route a transaction through an EU acquirer at 30 bps lower fees compared to a global competitor, that option will be chosen.

“Acquirers and PSPs handling $10m daily in transaction volume could save up to $3.65m in fees while generating more than $1m in new revenues.”

In Real-Time Fee Calculation and Settlement for a Real-Time World, RS2 argue that acquirers and PSPs should harness AI to enable dynamic transaction pricing and optimize transaction routing.

According to the report, acquirers and PSPs handling $10m daily in transaction volume could save up to $3.65m in fees while generating more than $1m in new revenues.

A delta of $4.65m total between static fee structures and a fully-optimized approach which routes transactions for maximum speed and lowest cost while adopting dynamic pricing to ensure margins are protected.

RS2 also demonstrate how selecting the right payment rail for every transaction – including splitting the entire value of a transaction between rails – can save clients both time and money.

Switching transactions from a payment scheme rail to a SEPA Instant rail within Europe, for instance, can save up to €8.50 per transaction on a transaction value of €500.

Likewise with fee adjustments: payment schemes operate a dynamic pricing model for interchange fees which means that costs for PSPs and acquirers can vary dependent on the time of day at which a transaction is processed.

To ensure these dynamics are reflected in their pricing to merchants and protect their margins, RS2’s transaction routing system gives PSPs and acquirers the option of changing pricing to match switches in interchange fees over the course of a day.

Real-time payments will usher in a new instant era of convenience and choice for consumers, benefitting many groups such as “gig” workers and others.

However, fee structures remain stuck in the world of overnight settlement.

The white paper demonstrates how optimizing transaction routing and deploying smart AI to pricing structures can save PSPs and acquirers millions and grow revenue while adding additional value to their relationships with merchants.

Download a free copy of the new white paper from RS2 for more on how dynamic routing and fee management AI can save you money, enhance client services and reduce risk and cost.

[1] Payments, Cards & Mobile, 23 October 2024: “Instant Opportunity: How Instant Payments Will Create New Products”