RBA Board’s To-Do List: Least-Cost Routing For Mobile Wallets And Further BNPL Oversight

December 1, 2022
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The Reserve Bank of Australia (RBA) has outlined its key payment objectives, which include a two-year window to implement least-cost routing for card-based transactions on mobile wallets, monitoring of Visa and Mastercard’s buy now, pay later (BNPL) platforms and support for instant cross-border payments.

The Reserve Bank of Australia (RBA) has outlined its key payment objectives, which include a two-year window to implement least-cost routing for card-based transactions on mobile wallets, monitoring of Visa and Mastercard’s BNPL platforms and support for instant cross-border payments.

The Payment System Board at the RBA has put its support behind extending least-cost routing (LCR) for card-based transactions when using mobile wallets by 2024.

In its latest meeting, the Board said it considers the extension of LCR to mobile wallets to be both “feasible and desirable” within the above timeframe.

The Board added that it has requested that mobile wallet providers inform the wider payments industry of the designs of their LCR solutions as quickly as possible to meet the deadline.

In Australia, when a consumer makes a payment using a dual-network debit card, the merchant can save money by choosing the lowest-cost network to process the transaction, usually the local eftpos network.

If the merchant chooses not to use LCR, the transaction will be sent via the default network which is programmed on the card, typically either Visa Debit or Debit Mastercard.

Until this year, LCR was available only for in-person, contactless debit card transactions. However, following an RBA mandate for its extension, LCR is now being made available for online debit card transactions, with mobile wallet transactions being the next logical stage in its evolution.

When mobile wallets become LCR-ready, the Board said it expects that the merchant's choice of network will remain the default setting, though the Board also said it has a “strong preference” for consumers to have “some ability” to choose their preferred debit network.

In general, the Board said it “strongly supports” making the debit card market more efficient and more competitive through dual-network functionality and LCR.

Elsewhere in the meeting, the Board said that in 2021-22, overall, there was a “high” level of compliance from card issuers and schemes with the RBA’s interchange and access regimes.

A close eye on Visa, Mastercard BNPL offerings

The second big-ticket item on the Board’s to-do list concerns Visa and Mastercard’s entry into Australia’s buy now, pay later (BNPL) market.

Following the unveiling of Visa and Mastercard’s respective ‘Instalments’ services in late 2021, the Board has now said that it would like to see greater protections for merchants who use these services.

Instalments allows Visa and Mastercard to process BNPL transactions from pre-approved cardholders using “trusted” lenders.

For example, Visa Instalments is currently available to ANZ bank credit cardholders only, who pay via Quest point of sale (POS) technology. Cardholders can select a BNPL repayment online or in-person from the options displayed on-screen.

In Australia, Mastercard also offers an Instalments platform which is currently integrated with BNPL lenders Qantas, Latitude Financial and hummgroup, and payment solution brand Limepay.

When a consumer chooses to pay via Mastercard Instalments - whether online or in-person - a single-use virtual card is created and this is used to pay the merchant in the same way as with a regular card transaction. Payments can be split into four instalments and are interest-free.

With the launch of these services, the RBA Board said it expects merchants to be provided with “clear information about the costs of acceptance”, and to be given a choice whether to accept Instalments transactions at all.

The Board also said it expects merchants to be given the ability to “fully surcharge” these transactions if they wish to recover the costs they incur.

“If these expectations are not met, the Board would consider the merit of taking regulatory action,” the Board said.

However, both Visa and Mastercard have said that their Instalments products do not require merchants to cover any additional setup or operational costs.

The Board said the RBA is closely monitoring the implementation of Visa and Mastercard’s Instalments services, and will continue to do so.

Australia looks overseas for instant payments volume

The final items on the Board’s agenda relate to cross-border payments and central bank digital currency (CBDC).

The Board said it discussed the work that is currently underway to make cross-border payments faster, cheaper and more transparent, and emphasised the importance of adopting new functionality and messaging capabilities over the coming years.

For example, the Board said it expects that participants of the New Payments Platform (NPP), Australia’s instant payments system, will meet their commitment to deliver an international payments business service by December 2023.

“This will help speed up cross-border payments coming into Australia, by enabling the final Australian dollar leg to be processed via the NPP,” the Board said.

Last month, VIXIO reported on the remarkable growth of the NPP since its launch in 2018.

From little over 10m transactions per month at the peak of its first year, the NPP now processes almost 100m transactions per month as of mid-2022 (excluding transactions between accounts held by the RBA for intra-government transfers).

More than 100 payment providers now participate in the instant payment service, including some non-bank providers, offering NPP services to almost 90m customer accounts nationwide.

In total, over the past year, the NPP processed more than a billion transactions worth more than A$1trn ($645bn). This represents around a quarter of all account-to-account payments.

Finally, the Board said it discussed the progress of the RBA’s CBDC pilot, which is set to launch in early 2023.

“The Board welcomed the significant interest from industry in participating in the project, with a large number of use case submissions having been received,” it said.

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