AUD500 million is a staggering number, made even more poignant by the additional cost being solely due to which network rails are used to process the transaction. Merchants do, however, have an opportunity to rectify this routing problem, given new and improving capabilities of merchant acquirers in the region.
Typically, when customers present debit cards for contactless payments in Australia, two card schemes will be available on the card: the local network EFTPOS and one of the global schemes Visa or Mastercard. For contact transactions, like Chip & PIN, the customer has the choice of which card scheme the transaction will be routed through; however, for contactless, the choice becomes the merchant’s.
So why would a merchant want to route transactions in a certain way? Ultimately, it’s because costs vary depending on which card scheme is used for the transaction.
The global schemes generally command fees including a percentage element, which varies with the value of the transaction – whereas EFTPOS typically sees merchants charged on a cent per transaction basis that does not vary. For larger transaction values, the global schemes become significantly more expensive to accept than EFTPOS due to this percentage element, and with the contactless limit being increased recently from AUD100 to AUD200 due to the pandemic, merchants will be seeing more of these high transaction value contactless payments than ever before.
Clearly, for transactions below a certain value, percentage fees become desirable compared to fixed cent per transaction rates, and so it is important for merchants to get the balance right. If all your volume is moved to EFTPOS, there is the potential to actually face higher fees overall than the status quo,: but, likewise, sending all your volume through Visa or Mastercard could be suboptimal and represent unnecessary costs. The answer lies in a balance between the two, with a strategy tailored to your business and the transactions that you see in-store.
Figure 1 highlights the key point of contactless routing: you can effectively implement a cap on your fees above a certain transaction amount. For transactions below $50 where a customer presents a card with Visa and EFTPOS available, the merchant should route through Visa. For anything above that, the merchant should route through EFTPOS to enjoy lower fees. The concept is similar for Mastercard, but with the critical point at $100. This simple example is complicated in reality by supplier capability, merchant transaction profile, sector, contractual fees, behind-the-scenes incentives and many more factors, however, it is clear that an opportunity exists for most merchants.
One very important thing merchants must consider is that an optimal routing strategy is only effective if your contractual rates and fees are optimal too: routing with fees that are out of line with the market could be considered akin to putting a bandaid on a broken leg.
Merchants looking to make the best use of their routing options should firstly review their current arrangements, before exploring the market for a supplier best able to support their routing needs. With varying capabilities available today, choosing the right acquirer is key to maximising the potential savings from optimal contactless routing. Merchants that have already implemented contactless routing solutions must continue to review arrangements to ensure they are optimal, particularly if it has been implemented without a thorough review of card fees as an initial step.
Regardless, contactless routing presents an exciting opportunity for merchants to realise cost savings at a time when they are needed more than ever.