Australian Regulator Says More Needed To Improve Card Acceptance

September 23, 2022
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In its first report on least cost routing (LCR), a feature that is intended to reduce the costs of card payments for merchants, the Reserve Bank of Australia finds limited uptake and points at the industry’s role in it.

  • Least cost routing (LCR) uptake remains low despite widespread enablement
  • Lack of information, non-dynamic approach and background processing may be hindrances

In its first report on LCR, a feature that is intended to reduce the costs of card payments for merchants, the Reserve Bank of Australia (RBA) finds limited uptake and points at the industry’s role in it.

“While considerable progress has been made, the payments industry has more work to do to provide and promote LCR,” the Australian central bank said in its latest report on card acceptance costs.

"Least-cost routing", or "merchant-choice routing" is a concept that enables the merchant to choose to send the transaction via the debit network of their choice. This involves choosing between the low cost debit network eftpos, or either of the international networks run by Visa and Mastercard.

Over the years, Australian rulemakers have called for banks and payment providers to provide merchants with LCR. As a result of this regulatory pressure, by mid-2019, most banks and payment providers had introduced some form of least-cost routing functionality for contactless debit card transactions.

In October 2021, the RBA increased pressure by setting the expectation that all acquirers would "offer" and "promote" LCR to their merchants for in-person transactions and for online transactions by the end of 2022. In August, the RBA extended this expectation to include mobile-wallet transactions too.

Merchant advisory firm CMSPI estimates that the initiative could save Australian merchants an estimated $837m annually in payment fees.

Now the RBA says the industry as a whole has made good progress on making LCR technically available to merchants. By number, LCR is available to 85 percent of merchants, which account for 88 percent of the total value of debit transactions.

Therefore, most acquirers and payment facilitators are meeting the reserve bank's expectation, “at least in regards to offering LCR for in-person transactions”, the report says.

“Having LCR technically available to merchants, however, does not necessarily mean that it is accessible in practice,” the RBA points out. It also needs to be enabled or switched on for the merchant.

By mid-2022, according to the RBA, LCR had been enabled at around half of merchants, with these merchants accounting for just a third of the total value of transactions.

Take-up is especially low for merchants on interchange plus (plus) plans, which charge the merchant the wholesale cost of each transaction rather than a fixed rate for all transactions or a set of different rates depending on the network, card or transaction type.

According to the RBA, this is “particularly disappointing given that the benefits of LCR are so clear for merchants on these plans” as there is a set acquirer margin for each transaction.

More to be done

In its report, the RBA discusses a number of reasons that could have led to limitations on LCR uptake despite its obvious benefits for merchants.

For example, merchant groups have consistently highlighted that LCR is not easily accessible for merchants and that acquirers and payment facilitators provide insufficient information and assistance.

The reserve bank points out that “overall, particularly in light of the low take-up of LCR, many acquirers' and payment facilitators' promotion activities do not yet seem to meet the needs of merchants”.

The take-up of LCR has also been significantly affected by new "fixed" or "simple" merchant payment plans. In these plans, LCR is implemented in the background where the acquirer routes transactions to reduce their wholesale costs without the involvement of the merchant.

These plans appear to have a “material contribution” to the overall take-up of LCR, particularly in terms of the number of merchants, with 85 percent of merchants on fixed plans having LCR enabled.

However, some stakeholders argue that fixed plans with LCR in the background should not be considered as having implemented LCR, partly because the savings from LCR may not be fully passed on to merchants.

In addition, the RBA highlights that some LCR solutions are “quite rudimentary”.

For instance, many providers offer an "all or nothing" approach for their merchants, whereby all routable transactions are sent to either eftpos or the default debit network, depending on which network is cheaper on average. 

In an alternative, more sophisticated approach, the choice of network for an individual transaction depends on the value of the transaction.

However, very few acquirers offer "dynamic" LCR, which maximises savings by routing each individual transaction to the cheapest network for that particular transaction, the report finds.

“A question for the industry and policymakers to consider is how much additional savings merchants could achieve by using ‘dynamic’ routing logic and how costly that would be to implement and roll out across all payment terminals,” the RBA notes.

The report overall concludes that payment providers have more work to do to provide and promote this functionality to their merchant clients and the RBA underscores that it “is taking further action” to support the adoption of LCR.

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