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Least Cost Routing
Least Cost Routing (LCR)
What is Least Cost Routing (LCR)?
Least Cost Routing (LCR), sometimes referred to as Merchant Choice Routing, is a specific subset of smart routing logic designed to minimize payment acceptance costs. It involves the automated, real-time selection of the most economical processing path for a transaction based on variables such as the card’s issuing bank, the network (e.g., Visa vs. a local debit scheme), and the fee structures of connected acquirers. LCR is widely used to arbitrage between global card schemes and domestic rails to preserve merchant margins.
Deep Dive: The Economics of Routing
While general Smart Routing may prioritize authorization rates, LCR prioritizes Net Revenue. To understand LCR, one must understand the merchant service fee (MSF) breakdown: Interchange + Scheme Fee + Acquirer Markup. LCR attacks the first two components.
1. Technical Mechanics: The Arbitrage Engine
The LCR engine sits within the orchestration layer. When a payment request is initiated, the engine executes a rapid cost-benefit analysis before sending the data to a processor.
BIN Analysis: The system identifies the card type via the first 6–8 digits (Bank Identification Number). It determines if the card is a "Dual-Network" card (e.g., a card that supports both Visa and a local network like eftpos in Australia or Cartes Bancaires in France).
Rate Table Lookup: The engine compares the cost of processing that card via Rail A (International Scheme) vs. Rail B (Domestic Scheme). Domestic rails often cap interchange fees, making them significantly cheaper for high-value transactions.
Acquirer Selection: If the card must go through a global scheme (Visa/Mastercard), the engine checks which connected acquirer offers the best "Interchange++" pricing for that specific card region (e.g., routing a US card to a US acquirer to avoid cross-border interchange penalties).
2. Strategic Importance
Margin Preservation: For high-volume, low-transaction-value merchants (e.g., QSRs, Digital Goods), a difference of 0.5% in fees can equal millions in retained profit annually.
Negotiation Leverage: Merchants can route traffic away from acquirers that increase their markups, maintaining a competitive tension between providers.
Micropayment Viability: LCR makes sub-$5 transactions viable by routing them to rails with lower fixed transaction fees.
3. Comparison: Blended vs. LCR
Feature | Static (Blended Pricing) | Least Cost Routing (LCR) |
Pricing Model | Flat rate (e.g., 2.9% + 30¢). | Interchange++ (Variable). |
Network Selection | Default (usually global schemes). | Optimized (Local vs. Global). |
Complexity | Low (Set and forget). | High (Requires logic engine). |
Savings Potential | None. | High (10–40% fee reduction). |
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Common Pain Points Without LCR
Ignoring LCR leads to "Fee Creep," where merchants unknowingly pay premium rates for standard transactions.
Overpaying on Debit: Processing a domestic debit card via global credit rails often incurs higher percentage fees than necessary.
Cross-Border Bloat: Using a single acquirer for global traffic means paying "International" interchange rates on every transaction outside the acquirer’s home region.
Scheme Fee Inflation: Card networks regularly update their fee structures. Without LCR, merchants absorb these hikes without the ability to route around them.
The Hellgate Approach
Hellgate Hub operationalizes LCR by turning complex fee structures into simple "If/Then" logic, removing the need for manual reconciliation.
Granular Logic: Hub allows you to ingest rate cards from multiple acquirers. The engine then calculates the "Cost to Serve" for every incoming transaction in real-time.
Dual-Network Support: Hub natively recognizes co-badged cards (e.g., Visa/Dankort) and can be configured to force routing to the local scheme (Dankort) whenever available, ensuring the lowest possible interchange rate.
Dynamic Switching: Unlike static setups, Hub monitors provider health. If the "Least Cost" provider is down, it automatically fails over to the "Second Least Cost" provider, protecting revenue at the expense of a slightly higher fee.
Frequently Asked Questions (FAQ)
Q: Does LCR affect the customer experience? A: Generally, no. The routing happens in the backend. However, in some regions, customers may see the local network name (e.g., "eftpos") on their bank statement instead of "Visa."
Q: Is LCR worth it for small merchants? A: It depends on your pricing model. If you are on a "Blended" (Flat Rate) plan with a PSP like Stripe or PayPal, LCR is not possible. You must have "Interchange++" pricing agreements to benefit from LCR.
Q: Can LCR lower authorization rates? A: It is a risk. Sometimes the "cheapest" route has a lower approval probability than a premium route. Advanced engines like Hellgate Hub allow you to set "Floors," ensuring you never sacrifice a sale just to save 10 cents.
Q: What is a Dual-Network card? A: A card that carries two payment badges (e.g., Mastercard and a local domestic network). LCR engines can choose which of the two networks to process the transaction over.
