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By 2030, more than one in three payments will be instant.
However, merchant acquirers and Payment Service Providers (PSPs) remain stuck in the “old world” of overnight settlement, operating on end-of-day interchange reporting and fee calculation which costs them millions.
This is because they are not adopting a dynamic pricing approach to transaction fees, interchange rates and transaction routing, according to a new white paper from RS2.
In their new white paper, RS2 outline how companies can save as much as €18 per transaction on cross-border credit card transactions worth €1,000 by splitting that payment between a scheme’s credit card transaction rail charged at an interchange rate of 1.9% and a SEPA instant payment rail with a flat fee of €1.
RS2 have developed a new, AI-led approach to transaction routing and dynamic pricing that works out 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 authorization.
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.
In the case of cross-border transactions, the RS2 decision engine automatically chooses between domestic or cross-border processing.
In Real-Time Fee Calculation and Settlement for a Real-Time World, RS2 explain how smart transaction routing and pricing engine can prevent PSPs and acquirers from losing up to $10,000 daily on fees (or losses of $3.65m based on $10m of daily revenue) and instead increase their revenues by up to $1m annually by switching to RS2’s dynamic pricing service.
All told, this could create a delta of around $4.65m between losses incurred using the old, static overnight transaction fee calculation approach, and RS2’s new, smart AI-enabled dynamic approach.
Beyond money: less fraud, greater flexibility and enhanced reporting
Aside from saving costs and delivering optimal fees to merchants in real time, RS2’s model has the potential to enhance fraud protection.
The model works by identifying cost anomalies, which in itself creates a new parameter for risk-scoring models and improves authorization decisions.
For example, if a travel merchant in Germany that typically processes domestic debit transactions with an average total cost of 0.5% per transaction sees a transaction with interchange and scheme costs of 2.95%, this unexpectedly high fee could indicate fraudulent activity.
RS2’s system would flag this transaction as a “cost anomaly”, which is fed into a real-time risk scoring model, alongside other contextual factors such as device risk, geolocation via IP address and behavioural patterns.
If the overall score crosses a dynamic threshold, the transaction could be paused for step-up verification, routed to a secondary acquirer with more robust fraud screening, or declined outright, if other fraud indicators are present.
In the regulatory arena, reporting now focuses heavily on transparency, as seen in the requirements of the EU’s PSD2 or global interchange regulation.
By providing full breakdowns of fees charged, RS2’s system enables acquirers and PSPs to enhance their capabilities in dispute resolution, streamline their regulatory reporting and provide regulators with full transparency in the event of investigations.
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 shows 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.
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