RBA To Accelerate Least-Cost Routing For Mobile Wallet Transactions

September 6, 2022
The Reserve Bank of Australia (RBA) has announced plans to work with payments companies to accelerate the rollout of card-based least-cost routing (LCR) for mobile wallet transactions.

The Reserve Bank of Australia (RBA) has announced plans to work with payments companies to accelerate the rollout of card-based least-cost routing (LCR) for mobile wallet transactions.

In a monthly update from its Payments System Board, the RBA said it “welcomed” new findings from the industry suggesting that LCR implementation for mobile wallet transactions may be “less costly” and “more feasible” than previously thought.

The board did not mention what new information it has been provided, but it did say that it will now “consult further with industry on the approach and timeline” for delivering the implementation.

With LCR for mobile wallet transactions, the board said it believes payment costs could be reduced significantly for Australian merchants, especially among small businesses.

At present, merchants cannot access Australia’s domestic debit network, eftpos, when payments are made via mobile wallets, unless the customer alters the default network within the mobile wallet app beforehand.

However, if LCR is extended to all debit transactions, including those sent via mobile wallets, payments consultants such as CMSPI believe that Australian merchants could save A$800m ($544m) on fees each year.

As noted by CMSPI, the RBA’s focus on delivering LCR for mobile wallet transactions comes at a time of rapid growth for the country’s mobile wallet ecosystem.

Last year, Commonwealth Bank Australia (CBA) reported that the total number of monthly mobile wallet transactions made by its customers almost doubled in March 2021 to 68m, from 36m in March 2020.

As Australia’s largest bank, CBA oversees about 40 percent of the country’s total mobile wallet payments.

In May 2021, CBA also predicted that based on current trends, mobile wallets would become the most popular contactless way to pay in-store among its customers by the end of the year.

Already, at that time, CBA said that over 40 percent of its debit and credit card transactions were made via mobile wallets.

A more recent survey by Savvy, an Australian personal and commercial finance broker, suggests that CBA’s prediction is likely to be correct.

Published in May this year, the survey shows that almost 50 percent of Australians use a mobile wallet and 47 percent said this is their preferred payment option.

Among those who use mobile wallet payments, 3 in 5 said they use it “always” or “most of the time”.

Despite the potential benefit for merchants of being able to use LCR with mobile wallets, CMSPI warned that they may not be guaranteed.

“Between strategic rates, technical limitations, and negotiation dynamics, accessing the full benefit of LCR is incredibly complex, and we regularly see inefficiencies in merchants’ LCR systems,” it said.

A lifeline for eftpos

RBA’s Payments System Board is hoping that introducing LCR for mobile wallet transactions might turn around the fortunes of eftpos, whose market share has been in decline due to its lack of digital functionality.

In a 2020 trends report, the board wrote that eftpos was losing out to Visa Debit and Debit Mastercard, despite its fees being 72 percent cheaper on average for merchants.

“The decline in eftpos’ market share can partly be attributed to the increasing use of contactless payments, given that the international schemes are the default networks on dual-network debit cards,” the board said.

“In addition, the eftpos network only recently began supporting some online and other remote transactions, which have been making up an increasing share of card payments (particularly during the COVID-19 pandemic).”

Given the popularity of mobile wallets in Australia, it is hard to see how eftpos can thrive without full digital functionality for LCR.

This dynamic has not gone unnoticed at the Council of Small Business Organisations in Australia (COSBOA), which in September last year called for LCR to be mandated across all electronic payment methods.

“The ever-growing use of debit cards and the escalation of digital payments means that LCR must be pursued as a matter of priority, if SMEs are to be protected from unfettered increases in essential merchant services fees,” COSBOA said in a statement.

COSBOA added that LCR for mobile payments is currently subject to uncertainty, depending on whether Australia chooses to follow the European or US approach to its implementation.

On balance, COSBOA said the “less complex” European approach is preferred and should be mandated for all mobile wallet payments by January 1, 2023.

Noting that the majority of mobile wallet users in Australia use Apple Pay, COSBOA said it would be “prudent and reasonable” to follow the same implementation path as in some European countries for provision of LCR functionality for mobile payments.

However, given the non-committal language used in the RBA Payments System Board’s latest statement on LCR, it seems unlikely that such a move will be completed within COSBOA’s preferred time frame.

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