RBA considers regulation to enforce least-cost routing access for merchants

The Reserve Bank of Australia (RBA) has issued a new warning to banks that make it difficult for merchants to access cheap debit card transaction fees, saying it will consider regulation banning ‘default’ transaction routing.

Most debit cards issued in Australia operate on a dual-network basis, allowing shoppers to pay using the eftpos network when they select ‘savings’ or ‘debit’, or the Visa or MasterCard network when they choose ‘credit’.

Merchants may pay a higher fee to their bank or payments provider when they process a payment through the Visa or MasterCard network, compared to the lower-cost eftpos system.

However, contactless payments, by far the most common type of in-person debit card payment, automatically route through the card’s ‘default’ pathway, potentially exposing businesses to higher fees than when customers manually select the eftpos pathway.

The RBA has long championed least-cost routing (LCR), an initiative that allows the merchant, not the customer, to decide which payment processing route to use.

LCR is especially beneficial for small businesses, the RBA says, as they tend to pay far higher transaction fees to card issuers compared to big businesses, which may be able to negotiate cheaper rates.

Nine out of ten of payment providers do offer the LCR system to their merchants, but “the take-up of LCR by merchants remains disappointingly low, with just over half of merchants on plans with LCR enabled,” RBA head of payments policy Ellis Connolly said in March.

“Regulatory action” on the table

The central bank has previously issued an “expectation” that banks meaningfully expand access to the LCR scheme.

However, the RBA strengthened its language on Thursday, as its Payments System Board resolved to investigate a tougher course of action.

“The board is considering taking regulatory action to prohibit card schemes and issuers from setting a default routing network on dual-network debit cards,” meeting minutes state.

“This would ensure that merchants can choose which network processes their debit transactions.

“The bank will consult on the costs and benefits of such action.”

While regulation is no sure thing, the timing of that statement is notable, given the recent emergence of both Apple and Android payment acceptance in Australia.

Unlike traditional point-of-sale (POS) offerings and hardware card readers, both systems allow merchants to use their smartphone as the POS.

The schemes present new questions for LCR.

Instead of separating payment costs into merchant fees and bank ‘interchange’ costs, Westpac, the first Australian bank to offer Apple Tap to Pay on iPhone, sets a flat 1.4% transaction fee for payments made through its new EFTPOS Air app system.

Westpac told BankingDay it offers LCR within its suite of payment options.

However, the publication notes that the 1.4% EFTPOS Air flat fee is up to 300% higher than the standard eftpos transaction processing fee faced by merchants.

Given the potential scope of on-phone payment acceptance, and the existing growth of mobile wallet payments, any RBA review is sure to investigate the potential costs of LCR accessibility through those fresh Android and Apple systems.