RBA To Name And Shame FIs That Fail To Promote Least-Cost Routing

December 15, 2022
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In a new push to promote least-cost routing (LCR), the Reserve Bank of Australia (RBA) has said it will soon begin publishing “institution-level data” on its uptake and availability.

In a new push to promote least-cost routing (LCR), the Reserve Bank of Australia (RBA) has said it will soon begin publishing “institution-level data” on its uptake and availability.

In a speech delivered at the Australian Payments Network (AusPayNet) Summit, RBA Governor Philip Lowe said LCR is an important tool for promoting competition and reducing merchant costs, but its uptake is still lacking.

According to the RBA, although LCR is now available to 85 percent of merchants in Australia, only half of all merchants are currently using it.

“This low take-up suggests that the industry has more work to do in promoting the benefits to merchants,” said Lowe.

“Some financial institutions also have more work to do to complete their rollout and have not met the expected timetable.”

To provide greater transparency, Lowe said that in 2023 the RBA will start publishing data that will allow merchants and consumers to see which institutions are leading and lagging in LCR use and availability.

“LCR allows merchants to choose the lowest-cost card network to process their debit transactions,” said Lowe.

“It also increases the competitive pressure between the debit networks, providing greater incentives to lower the wholesale fees that are ultimately paid by merchants.

“This is especially important for small businesses that typically can’t negotiate discounted fees with the card schemes.”

Elsewhere in his speech, Lowe presented data showing that small businesses in Australia pay twice what large businesses pay to process the same card transaction (on average).

For merchants making less than A$100,000 per year, the average card fee can be as much as 1.5 percent of the transaction value.

Whereas for merchants making more than A$10m per year, the average card fee can be as little as 0.5 percent of the transaction value.

When using LCR, merchants can opt to route a transaction through eftpos, Australia’s low-cost debit network.

On average, merchants can save more than 0.2 percent on card fees per transaction when using eftpos, compared with routing the transaction through Visa Debit or Debit Mastercard.

However, as noted by Lowe, merchants’ awareness of this potential saving is much less widespread than the technology itself.

LCR expansion incoming

As reported by VIXIO earlier this month, LCR is a top-priority issue for the RBA Payments System Board going into 2023.

Not only is increasing uptake of the service a key aim for the RBA, but so too is increasing its coverage in terms of what payments are LCR-compatible.

Currently, LCR is only available for in-person contactless payments, but the RBA has mandated that LCR must be implemented for online debit transactions by the end of 2022.

Although the industry is “largely on track” to meet this deadline, Lowe said that some payment service providers (PSPs) are running behind, and are aiming to launch LCR for online transactions in the first half of 2023.

It should be noted that the RBA will only be publishing data on LCR uptake and availability for in-person transactions at this stage, but not for online transactions.

The “next frontier” for LCR, as described by Lowe, will be its extension to mobile wallet transactions using services such as Google Pay, Apple Pay and Samsung Pay.

By the end of 2021, according to the RBA, mobile wallet transactions had already risen to make up more than 25 percent of all card transactions.

Over the last few months, Lowe said the RBA has been consulting with the major mobile wallet providers, issuers, acquirers and terminal providers on LCR extension.

On the basis of these consultations, the Payments System Board has determined that it is “feasible and desirable” for the industry to deliver LCR functionality for mobile wallet transactions by the end of 2024.

“The next step is for the mobile wallet providers to finalise their plans and share these plans with the industry so that the necessary investments across the payments ecosystem can get under way,” said Lowe.

“Overall, we are optimistic that least-cost routing will help counter the forces that are adding to merchants’ payment costs, particularly for small businesses.”

Modernising the regulatory regime

One other avenue for improving competition and reducing payment costs is through new legislation and licensing rules.

According to Lowe, one of the RBA’s “reform priorities” is the establishment of a new licensing regime for PSPs that would provide easier entry to the Australian market.

The RBA is also working on a set of common requirements for PSPs seeking to access payment systems, as part of the new licensing regime.

Lowe said the RBA’s aim is to create a more level playing field for PSPs, payment system operators and non-authorised deposit-taking institutions (ADIs) that want to participate.

As proposed by the Farrell Review in 2021, Lowe said that modernisation of the Payment Systems (Regulation) Act 1998 (PSRA) would open up the possibility of regulating newer entities in the payments ecosystem.

Lowe also suggested that greater transparency of merchant payment costs through an expansion of the Consumer Data Right (CDR) could help drive increased competition between acquirers.

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