John Durie: Least cost routing in the spotlight as ACCC pursues Mastercard over misuse of power

Visa and Mastercard form a $1 trillion global duopoly in the payments system whose impact is shielded from most consumers, but it raises the cost of everything you buy, from coffee to clothes to a fridge, and in the process increase the cost for small business.

There are others in the payments game with technology opening the door to Apple and the digital platforms, but the US-listed giants are ubiquitous and cover the credit and debit card markets globally, working the regulations to their advantage.

This may explain why the two are constantly in the news around the world fighting anti-trust regulators.

This week the Australian Competition and Consumer Commission (ACCC) joined the party with its second-ever section 46 case since the law was amended five years ago, alleging Mastercard misused its market power.

The only other section 46 case was in Tasmania, where the state government port and towage company Tasports attempted to block the entry of a rival towage company, Engage Marine.

More cases should follow, which will be welcomed by the small business sector, which tends to be on the losing end of such behaviour. 

Last year Visa offered undertakings to the ACCC to avoid a separate action.

Least cost routing to the fore

The ACCC case will be argued by competition law veteran Aldo Nicotra from Johnson Winter Slattery, who is a relative newcomer to ACCC prosecutions.

After a poor run in competition law cases, this one, although commenced under the old guard, is important for the new regime at the competition watchdog under chair Gina Cass-Gottlieb and enforcement boss Liza Carver.

And it deals with a key concern in the small business community: least cost routing, which was nominated by COSBOA CEO Alexi Boyd as one of the most important reforms for the sector during the last federal election, along with skills shortages and the need for simpler industrial laws.

Least cost routing is where a merchant has the ability to direct a debit card transaction to the lowest cost network for that transaction.

This was suggested by the RBA five years ago and the ALP has promised to mandate the rule in law.

The fees, while absorbed by the retailer, are passed on to consumers and small businesses are disproportionately affected because they don’t have the market clout of the big retailers.  

In round terms, if you buy a $100 pair of jeans the payments fee for the retailer will be roughly $2.70 for a credit card payment, $1.10 for a Mastercard debit transaction and 25 cents for Eftpos, although Visa and Mastercard are cheaper in fee terms for transactions under $15.

Eftpos is important to the availability of least cost routing, as it is currently the only alternative to the Visa and MasterCard networks through which debit transactions can be routed.

It is owned by the banks and among others Coles and Woolworths, with the latter two likely participants in the Mastercard case. 

The case centres on the actions taken after the RBA changed the payments rules towards the end of 2017. At the time, Visa and Mastercard attempted to exploit their market power to minimise the commercial impact on their business.

The ACCC is alleging Mastercard approached 200 big retailers in the supermarket, fast food and clothing sectors with a deal. 

If the retailer directed payments to Mastercard debit cards then it would still get sweetheart deals on credit card payments but it didn’t, higher fees would be payable.

Smaller retailers were ignored.  

Mastercard had substantial market power because Mastercard-branded credit cards are a ‘must have’ form of payment for many merchants given their ubiquity among cardholders and their widespread acceptance by other merchants. 

Rivals like American Express charge higher fees.

There is limited rivalry between Mastercard and Visa for merchant credit card acceptance, given their revenue complementarity for merchants. 

The ACCC case alleges Mastercard targeted the retailers that were at a greatest risk of going down the low cost route, which is generally those with the biggest transaction volumes. The ACCC declined to say which retailers were involved in the alleged deals.

Now the new Labor government is settled, the new regime at the ACCC is working through its agenda after last week’s start of the investigation into NBN regulation.

Cass-Gottlieb’s stance on the digital platforms will become clearer in September when she files her latest report with new Treasurer Jim Chalmers.

Her views on merger reform remain a work in progress at least as far as their public release, although in her previous role as a competition lawyer, she had made clear she did not support the sweeping mandate sought by former ACCC chief Rod Sims.