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February 25th 2022

Australian 2022 Interchange Changes: How Will They Impact Retail Budgets?

In 2022, Australian retail card fees are changing again in compliance with the RBA’s new interchange regulation.

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The Low Down

To process transactions in-store or online, all merchants pay a merchant service fee, a charge that can be split into the following sections: interchange fees, scheme fees, and acquirer fees. Although interchange fees are paid to by a cardholder’s bank, the routed scheme on a card such as Visa or Mastercard set both the interchange and scheme fee rates applied. Since interchange fees are often the majority of the cost paid by the merchant, shifts in interchange rates can have a substantial impact to the overall costs a merchant pays annually.

Figure 1 – Breakdown of Merchant Service Fees

To help alleviate this burden for merchants, the Reserve Bank of Australia (RBA) regularly reviews the cost and impact of interchange and determines whether additional regulatory pressure needs to be applied to the market. As part of the RBA’s review of retail payments last year, the cap for debit and prepaid fixed ($) interchange rates was reduced from $0.15 to $0.10, in effect as of February 1st, 2022.¹ For debit and prepaid interchange rates that are percentage-based (%), the cap remains at 0.20%.

Table 1 - RBA Debit/Prepaid Interchange Caps²

In response to the new interchange cap, the schemes have amended the following rates in compliance with regulation. Some of these rates have been reduced at or below the new $0.10 cap while others have been switched to the percentage-based cap of 0.20%.

Table 2—February 2022 Interchange Changes - Visa³

Table 3 - February 2022 Interchange Changes - Mastercard⁴

Table 4 - February 2022 Interchange Changes: eftpos⁵

*These rates are exclusive of GST.

How does this affect my business?

These interchange changes are a small win for the merchant community, adding up to an estimated $22 million in annual savings across the retail industry.

Industry Savings from Interchange Changes⁶

However, these results can vary dramatically depending on each individual merchant’s profile. For merchants with high ATVs over $75, the move from a fixed fee to a percentage fee for Visa CP Tokenised and Mastercard CNP Standard could result in a net increase in costs since the cost of these percentage fees will increase along with the transaction value. Unlike percentage-based fees, fixed fees will stay the same cost regardless of transaction size. Since the ATV for ecommerce transactions is slightly above $75, most ecommerce merchants will be negatively impacted by these two card types.

These changes also have big implications on merchants with strategic partnerships or merchants that are considering least cost routing (LCR). For merchants with global schemes partnerships and preferential agreements, these deals will diminish as their strategic interchange fees will now be closer in value to the newly established rates.

For merchants considering least cost routing, LCR can allow merchants to route transactions to the most cost-effective scheme for their contactless debit transactions. Since most contactless debit cards are co-badged with either Visa or Mastercard and eftpos, every transaction has an optimal scheme to route through and merchants need to understand their position for routing across all line item fees in order to properly assess this. CMSPI estimates that the implementation of debit LCR will create an additional $800 million in annual savings for Australian retailers.⁷

Will all retailers receive these benefits automatically?

Quantifying the impact of interchange fee changes for each merchant can become incredibly complicated especially for merchants with multiple considerations. With constantly shifting interchange rates, partnerships considerations, varying optimal routing structures for different rates, and even inconsistent reporting from acquirer-to-acquirer, often fee changes do not flow through correctly to the merchant.

Conducting an invoice audit is essential to ensure savings are being passed through correctly from your acquirer and that your business is not heavily impacted by mischarges. CMSPI finds that 1 in every 2 invoices contains a fee error, and often, these appear as new fee regulations are applied.⁸ Especially for large enterprise merchants, the cost of mischarges can add up for a business.

CMSPI completes invoice health checks for hundreds of retailers across the globe to ensure they are not being overcharged. Within those processes, we find that most merchants operate with non-optimal arrangements. For every business, it is important to regularly assess your current arrangement and to ensure your payment suppliers are providing solutions that are right for you.

Sources
  1. RBA’s 2021 Amendment to “Standard No.2 of 2016: The Setting of Interchange Fees in the Designated Debit and Prepaid Card Schemes and Net Payments to Issuers” (Nov 18, 2021) https://www.rba.gov.au/payments-and-infrastructure/review-of-card-payments-regulation/pdf/standard-no-2-of-2016-debit-and-prepaid-card-interchange-2021-11-18.pdf
  2. Refer to footnote 1.
  3. See Visa Australian Interchange (2022). https://www.visa.com.au/about-visa/interchange.html
  4. See Mastercard Australian Interchange (2022). https://www.mastercard.com.au/en-au/about-mastercard/what-we-do/interchange.html
  5. See eftpos Australian Interchange (2022). https://www.eftposaustralia.com.au/interchange-fees-and-principles
  6. CMSPI Insights
  7. CMSPI Insights
  8. CMSPI Insights