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The Reserve Bank of Australia (RBA) has outlined new plans that would abolish the use of default network settings on dual-network debit cards, but the central bank is wary that compliance costs could be high.
In a new issues paper published this week, the RBA set out several proposals aimed at promoting competition and efficiency in Australia’s debit card market by making changes to dual-network debit cards.
As described by the RBA, the “key” question is whether the bank should use its powers to bring an end to the practice of “default routing” on dual-network debit cards.
For debit card issuers, default routing refers to the practice of programming a dual-network debit card to rout payments via a particular network by default.
“This practice can reduce competition between card schemes and puts upward pressure on merchants’ debit card payment costs, which in turn feeds through into higher prices for consumers,” said the RBA.
“The bank seeks stakeholder views on the benefits and costs of actions to prohibit this practice, with merchants instead choosing the routing network.”
From chip and PIN to contactless
In Australia, dual-network network debit cards combine the functionality of one international scheme — Visa Debit or Debit Mastercard — and eftpos, the low-cost domestic scheme.
On average, merchants can save about 20 basis points per transaction when payments are routed via eftpos as opposed to Visa Debit or Debit Mastercard.
However, due to changes in payments acceptance technology and consumer habits, the RBA is “concerned” that these benefits are not being passed on to merchants.
When chip and PIN was the dominant form of debit card transaction, it was easy for consumers to select a card network preference when entering their card into a point of sale (POS) terminal.
However, when a payment is made using contactless, dual-network debit card transactions typically do not provide the cardholder with a choice of routing network, and these transactions are usually sent via an international scheme by default.
At present, debit card transactions make up about half of all consumer payments in Australia, and the percentage of contactless in-person debit card payments has risen from 20 percent in 2013 to 95 percent today.
Least-cost routing
The RBA’s previous efforts to ensure that merchants benefit from dual-network debit card functionality have centred around least-cost routing.
Least-cost routing allows merchants to choose their preferred network for accepting debit card payments, even when the consumer pays via contactless.
In so doing, using least-cost routing therefore overrides the default network setting selected by the card issuer.
However, as VIXIO has covered previously, the RBA has so far been less than satisfied with the take-up of least-cost routing among merchants.
Since 2017, the RBA has been advocating for wider use of least-cost routing, and in 2021 it set an “explicit expectation” for acquirers to offer and promote least-cost routing for device-present transactions.
But as shown by the RBA’s latest data, published earlier this year, acquirers are failing to meet the RBA’s expectations.
“The results show that after five years, least-cost routing was still not available to all merchants, and only half of merchants had taken it up,” said the bank.
In 2021, the RBA also set an expectation for least-cost routing to be made available for online transactions by the end of 2022.
To date, “only a handful” of industry participants have met this expectation, although “significant progress” is expected to be made this year, said the RBA.
Let merchants choose
To ensure that the benefits of dual-network debit cards are enjoyed by merchants, the RBA has now suggested that it could use its powers to prohibit debit card issuers from selecting any network by default.
“Instead, the merchant would choose the routing network, with the merchant’s payments service provider responsible for identifying and implementing the merchant’s routing network preference,” said the RBA.
“In effect, the bank would be mandating that merchants are provided with at least a basic form of LCR, where the merchant nominates the routing network.”
From its own research, the RBA said it believes that Europe and Malaysia provide compelling examples of where scrapping default settings for dual-network debit cards has improved costs and efficiency for merchants and consumers.
The RBA is keen to hear from industry stakeholders as to the challenges that might arise if Australia were to pursue the same policy.
For example, the RBA is seeking further information about technical challenges relating to debit card infrastructure and about the likely costs of implementation.
Stakeholders have until July 13 to respond to the RBA’s issues paper, and feedback will be reviewed by the Payments System Board at its next meeting in August.
