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September 19th 2022

Breaking: RBA Finds Substantial Cost Savings from Gap in Merchant LCR Adoption

In the Reserve Bank of Australia’s first report on Least Cost Routing (LCR), the bank concludes there are still substantial cost savings left for merchants from routing.

Despite the average merchant fee for credit cards declining in the past ten years, the cost of debit cards has slowly trailed upwards due in part to the increasing market share of global networks in Australia.[1]

The cost of accepting debit cards has increasingly become a major issue for merchants and the RBA… as debit card volumes continue to grow accounting for 58% of all card payments last year.[2] The least cost routing initiative alone is set to save Australian merchants an estimated $837 million annually in payment fees.[3]

A Routing Gap in Practice

In 2021, the RBA announced that it expects all acquirers to begin developing routing capabilities for in-store and online merchants.[4] However, since implementation, the Bank found that despite five out of nine major acquirers having LCR available to 90%+ of their merchant clients, only one had LCR enabled for 90%+.

Because of the considerable disparity in routing efficiency, LCR is available for 85% of Australian merchants but enabled for only 33% of transactions.

Figure 1. Availability vs Enablement Gap for Merchant Routing [5]

To reduce some of the barriers to routing in practice, the RBA announced the expansion of routing expectations to digital wallet transactions, which account for 27% of debit card transactions,[6] and explores the benefits generated by more sophisticated and dynamic forms of routing from acquirers. As the report concludes, the “new data reported to the bank highlight[s] that some notable gaps in LCR availability persist, and that merchant take-up of LCR remains low. This indicates that payment providers have more work to do to provide and promote this functionality.”

What’s Next?

As Australian consumers increasingly prefer using debit over credit and the cost of debit cards slowly continues to grow, optimal debit routing stands to be one of the most important ways for merchants to reduce the cost of payment acceptance. Although this remains the case, the RBA’s report reveals the many challenges that merchants may have to face with considerations of technical limitations, strategic rates, and industry benchmarks. With data-driven analysis and market expertise, CMSPI is working with Australian retailers to support these complex initiatives and fully optimize their LCR strategy.

[2] Ibid.
[3] CMSPI estimates and analysis.
[4] The RBA expects for online debit routing to be available by the end of 2022.