Citing Lack Of Progress, RBA Warns Of ’Formal Regulation’ On Least-Cost Routing

August 22, 2023
The Reserve Bank of Australia (RBA) has threatened to introduce "formal regulatory requirements" on least-cost routing if it does not see progress on its implementation by acquirers.

The Reserve Bank of Australia (RBA) has threatened to introduce "formal regulatory requirements" on least-cost routing if it does not see progress on its implementation by acquirers.

The RBA has published its latest figures on the availability of least-cost routing, and the results make for less than happy reading for the regulator that has heavily promoted the technology to merchants.

As of June, acquirers had made least-costing routing available to 99 percent of merchants, but had enabled it for only 54 percent of merchants.

Least-Cost Routing Of Card-Present Debit Card Transactions

Percent of merchants, June 2023

Available to merchantsEnabled for merchantsSquare100100Suncorp Bank10063Tyro10054Fiserv10051Commonwealth Bank9744Westpac10032ANZ Worldline9822Adyen10021National Australia Bank10015Total9954Source: RBA

These figures, which show the availability of least-cost routing for card-present transactions, are significantly behind where the RBA had hoped to be at this point in time, and show only “marginal” gains since the previous report.

In March, as covered by VIXIO, the RBA published its first report on the progress of least-cost routing availability for merchants.

The figures, which were recorded in December 2022, showed that acquirers had made least-cost routing available to 90 percent of merchants, but had enabled it for only 53 percent of merchants.

When a consumer pays with a co-badged debit card, least-cost routing allows merchants to take the payment using the network that will cost them the least. According to the RBA, about 85 percent of debit cards in Australia are co-badged.

On average, taking payments using eftpos, Australia’s low-cost domestic scheme, costs merchants about 23 basis points less per transaction than taking payments via Visa Debit or Debit Mastercard.

The availability figures do not include “very large” merchants or merchants that supply their own payment terminals, as they are more likely to negotiate favourable rates directly with their acquirers.

For those merchants, the benefit of these custom rates could be lost when using eftpos, so least-cost routing is not a priority for them.

Least-cost routing for online transactions: a slow-mover

In the RBA’s latest report, the central bank includes figures on least-cost routing for card-not-present transactions, i.e. online payments, for the first time.

In 2021, the RBA set an “expectation” that all acquirers and payment facilitators should offer least-cost routing to merchants for online transactions by the end of 2022.

However, as of June, only five out of 11 of Australia’s largest acquirers had begun making the technology available to their merchants.

Least-Cost Routing Of Card-Not-Present Debit Card Transactions

Percent of merchants, June 2023

Available to merchantsEnabled for merchantsStripe100100Fat Zebra10049Fiserv300Commonwealth Bank66Adyen33National Australia Bank00Braintree00SecurePay00Suncorp00Tyro00Westpac00ANZ WorldlineN/AN/ASource: RBA

Square is the leading acquirer in this regard, having enabled least-cost routing for all its merchants that take online payments.

Fat Zebra, likewise, has made least-cost routing available to all of its merchants online, but has so far only connected about half of them.

A smattering of availability, but with almost no take-up among merchants, has been achieved by Fiserv, Commonwealth Bank and Adyen, but beyond that, other acquirers have yet to get started.

The wildcard in the 12 acquirers listed by the RBA is ANZ Worldline. An RBA note states that ANZ Worldline did not consent to the RBA publishing its data on least-cost routing for online transactions, but the reason why is not given.

In its analysis of the figures, the RBA’s Payments System Board said it remains “strongly supportive” of merchants having the ability to choose their preferred debit card network through least-cost routing.

“While least-cost routing is now widely available to merchants for in-store transactions from a technical perspective, the functionality has not been enabled for many merchants,” it said.

“The Board expects providers to make faster progress on enabling least-cost routing for merchants that could benefit from it.

“If substantial progress is not made by June 2024, the RBA will explore a formal regulatory requirement for acquirers to enable least-cost routing for merchants.”

The RBA did not say how it plans to require acquirers to enable least-cost routing, but it did exclude one possible option.

No change to default network settings

Last month, as covered by VIXIO, the RBA published an issues paper suggesting that “default routing” settings on co-badged debit cards could be scrapped, to ensure merchant choice.

Specifically, the RBA suggested that issuers could be prohibited from programming debit cards to route transactions via a particular 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 least-cost routing, where the merchant nominates the routing network.”

However, following its latest meeting, the RBA Payments System Board said it has scrapped this idea due to feedback it received in response to the paper.

“Feedback indicated that such a prohibition could result in failed transactions and require a costly reissuance of all debit cards,” it said.

Having begun promoting least-cost routing in 2017, the RBA still has a long way to go before its vision of merchant choice between eftpos and the international card schemes is fully realised.

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