Least Cost Routing – Part 1

25 Feb

I did a google search on least cost routing and found very little written about payments (much  telecommunications). LCR seems like a rich blog area.. however today is just a tickler for a future part 2 (I’m slammed). LCR in payments is similar to telecommunications.. how do I route information through an optimized route that considers speed, cost and risk (a pmts only consideration)…

My jaw dropped as a start up CEO sent me this link below. This is a brilliant business patent… It also provides a very interesting “future view” on Bank’s plans with respect to Tokens and Routing http://www.google.com/patents/US20120265680 . Author of Patent is a good friend Dickson Chu, and former product manager of PayPal. Tokenized least cost routing.. Dickson seems to have designed LCR for the bank side… from his PayPal experience…

…  eligible payment transactions are routed, using the payments interface processor, to an internal payment transaction processing path of the first party. In such cases eligible transactions are settled without routing the transaction to external card processing networks. Alternative payment processing paths are identified for non-eligible payment transactions. In addition, transaction costs of such alternative payment processing paths are determined. Non-eligible payment transactions are routed, using the payments interface processor, to a payment processing path other than the internal payment transaction processing path.

From a bank perspective this is brilliant… enabling cross border, cross network clearing and settlement.  My top question: how can banks get tokens adopted by consumers, merchants and processors in the first place? My guess: Banks will work to influence consumers directly through a new brand and capability. Similar to the V.me, and google wallet API, banks will work to push consumer tokens into mobile wallets. In other words there will be  a button in online banking where you push your payment account into selective wallets.. as opposed to consumers entering the card information directly into the merchant’s platform. Remember this model is 100% analagous to how cards were “provisioned” into NFC wallets.. but we are replacing encrypted card emulation with a unique token and a common interbank token directory. This model continues current card “merchant anonymity  by abstracting from merchant consumer identity.

There would seem to be significant implications to the Visa/MA relationships if this one works out…