Blog November 15th 2021

Achieving True Least Cost Routing in Australia

In October 2021, the Reserve Bank of Australia announced the biggest shake-up to Australian payments in years. One area its Conclusions Paper identified was the provision of Least Cost Routing and ensuring merchants can secure its benefits. But what is LCR, and how can merchants take advantage of the new rules?

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Alex Ellwood

VP, Strategic Growth

We sat down with CMSPI’s Head of Asia Pacific, Robbie MacDiarmid, to get the answers Australian merchants need.

Why routing, and why now?

You’ve probably seen routing talked about in the media – at least in payments circles – a lot recently. We estimate that Australian merchants are currently paying $67 million every month in excessive fees due to a lack of routing availability. The RBA have now released a Conclusions Paper that tries to address some of those problems, so the landscape is changing, and it’s made routing a very hot topic in Australia.

For those of us who don’t know, in the Australian context, what is routing?

If you haven’t heard of routing before, it starts with the debit card that you, as a customer, today, have in your wallet. It’s likely branded with a Visa or MasterCard logo, and you’ll also see the Eftpos badge on the reverse or the bottom right corner. That means your card is ‘co-badged’ – or is a ‘Dual Network Debit Card’.

Having both of those badges means there are two options for any merchant you pay with. The merchant gets to choose which of the two payment rails (the global scheme’s, or Eftpos’s) they would like to instruct their acquirer to send the transaction via. Because that drives competition between the badged schemes, there can be huge cost benefits from sending a particular transaction down the chosen route.

Sounds simple enough. What’s the problem for merchants?

There are a number of issues when it comes to routing, and the first is probably the scope of what is truly routable. To route a debit card transaction, the card needs to be co-badged. The transaction also has to be contactless, and in-store, and it can’t be made through a digital wallet like Apple Pay or Google Pay.

Even if it satisfies those requirements, the merchant must be working with an acquirer that allows them to route transactions optimally. Particularly where a merchant has multiple relationships, there are often technical issues between different hardware providers and the acquiring banks themselves that limit routing ability.

So, ultimately, there are multiple hoops that merchants need to jump through in order to access Least Cost Routing. In fact, today, we estimate that only around 18% of card transactions are truly routable in Australia.

Is there a way to resolve those challenges?

For a long time, what we’ve been supporting merchants in campaigning for is competition. Routing is the pinnacle of competition within payments, and it hands the power back to the merchants which ultimately benefits consumers.

A number of trade bodies – including the likes of and COSBOA and ACAPMA – have been campaigning for mandated Least Cost Routing for years, particularly for small businesses. Why is that? Well, every month your average small business gets their merchant statement, pays their invoice, and has little-to-no interest in card fees and all of the various components that underpin them. Mandated LCR would mean that those merchants could still benefit from routing without necessarily having to instruct their acquirer to turn it on. For some businesses – even small, independent stores – that could reduce costs by thousands of dollars every year.

Our ideal scenario is therefore a strict mandate that provides merchants – in all circumstances and scenarios – with the opportunity to route transactions optimally, or an easy way to request it from their provider. Even if routing stayed limited to the current transaction types, that would still provide merchants leverage and negotiating power in discussions with the schemes.

In their latest update, have the RBA delivered those solutions?

No. The RBA have encouraged all providers to support in-store routing, which is good. It’s a step in the right direction, but it falls short of a mandate, or any real regulatory pressure on the supply chain to provide that capability. There are a number of ways in which we see the RBA’s encouragement being avoided, leaving merchants without access to true LCR.

The RBA gave a similar message in the online space, although that was positive because previously there had been no discussion around routing availability in the ecommerce environment. Again, we’ve only seen encouragement from the RBA for the supply chain to support routing online by the end of 2022. So while it’s great for online merchants to have the opportunity to route transactions, if we see the same level of availability online that we do in-store, then there will be significant issues for merchants in accessing the true value of routing when it when it does eventually come into play.

What about encouraging LCR on the issuer side?

The RBA have made one very good step forward, and that’s in promoting the issuance of Dual Network Debit Cards. Previously, we had seen certain banks begin to issue Single Network Debit Cards to their customers, giving merchants no choice over scheme for those transactions. In the RBA’s Conclusions Paper, they’ve set out very clearly that the top eight issuing banks in Australia – which cover over 90% of cards issued – must continue issuing DNDCs. This ensures that merchants that route today, and those that are planning on routing in future, will continue to have the opportunity on those contactless transactions that qualify.

With all these new announcements, what do merchants need to be doing?

If you’re not already routing transactions, then now is the time to fully understand the business case. Firstly, that means undertaking in-depth analysis of your transaction profile today – especially your card scheme mix – and working with your acquirer to determine exactly how many of your transactions are routable. Then it’s a case of reviewing your EFTPOS fees in particular, especially if you’re on a blended pricing structure. You need to make sure you’re benefiting from some of the interchange reductions that you can receive from routing via EFTPOS, and build those optimized rates into your routing schedule. Finally, using all that data, you need to calculate what your net position would look like with routing in place. And that’s not just routing in one direction; LCR can mean routing purposefully towards the global schemes, or purposefully towards Eftpos, depending on the individual transaction.

What if you’re already routing optimally? Are you all set?

If you’re already routing – even if you already have strategic rates with one or more schemes – then the RBA’s changes still have an impact on you. The easiest example is when routing becomes more prevalent in the online space, which will require you to re-analyse your net position and think carefully about your relationships going forward.

There are more immediate considerations, too. In their Conclusions Paper, the RBA have also decided to lower the maximum interchange on debit cards from 15 cents 10 cents. That could transform a merchant’s strategy even if they’re routing optimally now. Say, for example, you have a strategic rate with one scheme. Currently, if you were to route away from that scheme, your interchange fee may return to 15 cents. That increase could completely negate the benefits of routing. However, with the caps at 10 cents, you may end up with a net position that is much less intimidating.

A movement from 15 to 10 cents could therefore be the difference between seeing no benefit from routing and a seven-figure benefit. So even if you have routing agreements in place today, the overall value of those partnerships to your business has completely changed, and there is new analysis to be undertaken in order to find what your true optimal position will be.

And finally, what are the next steps for merchants reading this?

The RBA have highlighted a number of issues in Australian payments relating to routing, and they’ve taken some steps to make it more widely available for merchants. However, they’ve stopped short of mandating routing in any setting. That means if you’re a merchant who wants to actually see some of that $60 million+ benefit, you must seek it out yourself. And you’ll need to do that by thoroughly analysing your net position, using benchmarks to support a renegotiation of your strategic rates, and creating a data-driven routing strategy that is fit for the long-run.