Most e-commerce merchants don't know this tool is directly available in their CRM and payment gateway.
Load balancing or transaction routing is one of the most underrated merchant account management techniques out there. Some high-risk merchants are unaware this exists at all. However, it’s an excellent way to reduce risk that can cripple your business. It’s also great for improving your transaction approval rates, be they domestic or cross-border sales.
This blog post will delve into what load balancing is and how to set it up. We’ll then explore why it’s so advantageous for high-risk merchants with multiple merchant accounts. Finally, we’ll give you a couple of examples to prove it.
So, if you’re never heard of load balancing, now is the time to learn. You are about to discover the secret to increasing your merchant accounts’s performance. Payment diversification is key to ensure you can scale without bottlenecks or volume restrictions.
What is transaction load balancing?
Load balancing goes by a few different names. Terms used often are “transaction routing”, “volume distribution” or “cascading routing.” But no matter its name, the basic premise is the same. In short, it’s the process of routing specific transactions through different merchant accounts.
What are the benefits routing transactions?
There are several reasons to use load balancing to route transactions. For example, risk may be your biggest concern as a high-performing merchant. If your turnover is US $125,000 per month and you only have one merchant account, this is a big risk to your payment channel.
That means you’re routing all transactions through one place. That includes Visa and Mastercard debit and credit cards, plus other card brands and types. It also includes domestic and international sales. Should an issue occur (e.g. the recent delays with USPS), you might find yourself with delayed packages. The result is an increase in chargebacks. This is one of the key indicators that your merchant account may very well blow up.
However, by altering the processing volume between two different merchant accounts equally, you can lower the risk burden held by just a single account. If one payment provider suspends your account, its important to have a back up in place to avoid your business going into limbo while a review takes place.
Higher conversions and approval rates
Approvals are another considerable factor in pursuing a load balancing strategy. According to research from Ethoca, $145.9 billion in sales are declined each year. A significant proportion of those declines involve poor transaction routing. For instance, a domestic transaction has a higher chance of facing a decline when routed to an offshore merchant account with a foreign acquirer.
With load balancing, you can determine rules for your payment gateway to route transactions to the best possible acquirer. This action can dramatically improve your transaction success rate.
For instance, you can try routing all of your EU-based payments through your merchant account based in Europe. Since customers likely have debit and credit cards from a European bank, approval rates are going to be much higher.
This is because local acquiring banks will have an easier time processing and communicating with banks in their own region. Also, EU providers will be more familiar with currencies used within the region (such as the Euro), local customs, and location-specific payment networks.
Lastly, high-risk merchants like yourself can grow and scale faster. As you’ll already know, your merchant account processing faces limitations such as monthly sales caps. There are often maximum transaction amount limits too. This is done to protect acquiring banks from risk.
Greater control over transaction volume
But by routing transactions through multiple merchant accounts, you can overcome monthly volume limits imposed by different payment providers.
You also gain the added benefits of fewer declined sales, lower chargeback ratios, and fewer returned payments. You can then begin to apply for higher limits based on solid processing performance.
One merchant account should not be responsible for processing the bulk of your payments. Just imagine if your aquiring banking relationship is jeopardized. You open up your account to all kinds of risks.
Additionally, payment processors can encounter financial difficulty. A payment provider can be closed through no fault of your own. A perfect example of this type of instability is the recent Wirecard scandal. Therefore, load balancing provides the answer.
Are you relying on just one merchant account to process all of your payments? It’s a risky strategy. Find out why you almost always need more than one merchant account with our guide to multiple merchant accounts.
How to set up load balancing for volume distribution across multiple merchant accounts
Load balancing can be set up a few ways. The most common method is to go through your CRM or payment gateway setup. Whatever system you are using to accept payments, it must be compatible with the actual payment gateway. The gateway will handle the routing across multiple merchant accounts.
Most modern payment gateways are compatible with a range of e-commerce systems. However, it’s crucial to ensure your payment gateway provider offers at least the following:
- Enables 3DS2 authentication
- Tokenized customer vaults
- A sophisticated fraud rules engine to block suspicious transactions
Leading payment gateway providers will allow you to integrate multiple merchant accounts. Allowing you to manage them all in one dashboard. This is important for load balancing, but it also helps to you view analytics and reporting of multiple MIDs in one location. This is crucial.
The only downside of load balancing is that you have to expand the attention you’ve been paying to one or two merchant accounts, to several more. With a dashboard that centralizes this process, it negates that potential drawback.
Set up anti-fraud rules
Once you’ve integrated the merchant accounts in question, there’s usually an option in the settings to configure load balancing. Sometimes it might be labelled “volume distribution” or “transaction routing”.
Here is where you will set the rules such as where payments are sent based on their location. You should be able to set rules based on current sales volume of a merchant account and the size of the transaction.
Also, many payment gateways have a transaction cascading feature where if you encounter a transaction that declines with the reason code “issuer bank decline”, you can try another payment processor as it’s possible that this can be recovered.
A practical example of load balancing
Many e-commerce merchants use Network Merchants (NMI). It is one of the most popular payment gateway services. In fact, they have a tutorial for advanced transaction routing. This allows merchants to determine how much volume will be directed to each of their accounts. This video tutorial shows how you can even route sales by location or another defined field.
It’s worth noting that NMI has made cosmetic changes to their dashboard. But the tool is the same.
Load balancing for better approval rates
Perhaps the best way to explain the benefits of load balancing is by providing a few examples. Let’s start by imagining you’re a high-risk merchant that sells herbal and immunity health supplements. Let’s say you operate two US merchant accounts with approved monthly volume limits at $50,000 each. You then decide to integrate a third merchant account from an EU acquiring bank into your payment gateway. This one has a $30,000 monthly sales limit.
You then decide that from now on, you wish to route all EU-based orders to go through your third merchant account. You would need to set rules in your payment gateway to route all European Visa and Mastercard debit and credit card transactions to go through your merchant account in the EU.
This reduces the friction caused by non-US orders going through US banks. But the approval rate of your EU or other non-US or non-Canadian transactions will also be much higher. Your processing fees will also be lower if you process transactions from customers that in the same region as your payment processor.
Load balancing for reduced business risk
By contrast, let’s look at it from a risk standpoint. Let’s say that you are a business coach that exclusively serves the American market. You’ve had a great start to the year, but you’ve encountered a few issues.
Firstly, your primary merchant account (you’ve got two at this moment in time) is always close to the monthly sales cap. You have $50,000 monthly processing with this account and you have $30,000 available with the second. Secondly, your chargeback and refund levels have caused your processor to put your account on hold. This was due to claims made by an affiliate of yours who you no longer work with. The issue shouldn’t affect you moving forward, but in the meantime your primary merchant account status hangs by a thread.
You react by opening a third domestic merchant account with another $20,000 of monthly processing granted. Now you head over to your gateway and set up all three merchant accounts to take a more balanced proportion of sales. Now you can avoid continually running your biggest merchant account close to the limits. You can transform your other merchant accounts from overflows to better volume distribution.
Now you have three merchants accounts with $50,000, $30,000, and $20,000 monthly sales caps between them. By altering the settings in your payment gateway, you can distribute your monthly sales volume more across all three and scale without worrying. You could also cascade your issuer bank decline transactions to another merchant account to try to recoup the sale.
This gives your main merchant account the chance to recover and earn better processing limits in the future. But it also prevents the same thing from happening to your other merchant accounts. It ensures the sales caps are never in danger of being breached.
Use load balancing to both protect and scale your business
Even today transaction routing is very much an under-utilized tactic for payments success. But the benefits to merchants are clear. You can reduce risk, dramatically increase approval rates, lower your payment processor fees and protect and scale your existing processing. If you’re not making use of load balancing today, there’s no excuse. Even if your payment gateway doesn’t offer load balancing, it’s not hard to find those that do.