The RBA’s Conclusions Paper brought a few surprises, and the updates could signal huge changes to the payments landscape and to merchants’ strategies across the country. We spoke with Robbie MacDiarmid, CMSPI’s Head of Asia Pacific Advisory, about what merchants need to do next.
What are the key updates from the RBA’s announcement?
Well the RBA’s 108-page report covers lots of areas, but initially I think there are four key updates that retailers need to be aware of:
- Dual Network Debit Cards (DNDCs)
There’s been a rising concern about the issuance of Single Network Debit Cards (SNDCs) limiting competition in Australia. To tackle that, the RBA has now set an expectation that all debit card issuers with over 1% of the debit market will issue Dual Network Debit Cards (i.e. cards that are badged with both Eftpos and one of the global schemes). That’s a broader mandate than they first proposed, and it helps to ensure merchants have the opportunity to choose the cheapest card scheme for every transaction. Truly optimal Least Cost Routing (LCR) is complex, but it’s a great opportunity to generate innovation, promote competition, and drive significant cost savings for merchants.
The RBA have said they’ll also be encouraging mobile wallet providers to make multiple networks available for their transactions, but for merchants that isn’t the main problem: multiple networks are generally available, but often only consumers (rather than merchants) can choose their default scheme within the wallet app. Because merchants face competitive pressures not to surcharge, consumers rarely have the incentive to choose the lowest-cost option.
- Least Cost Routing (LCR)
Even with DNDCs, the functionality to route optimally isn’t always made available to merchants by their payments partners, particularly online where Eftpos is building its capabilities. The Bank have therefore set expectations that acquirers will offer and promote LCR functionality both in-store and online, although they haven’t yet explicitly regulated them to do so. It’s a step in the right direction, but the proof will be in the ongoing governance and enforcement of those expectations.
- Card Fees
To further encourage multiple schemes being made available on each card, the Bank is setting a ‘sub-benchmark’ interchange cap of 8 cents for SNDCs. That means banks issuing SNDCs will receive lower interchange revenue, incentivising smaller issuers (to whom the official expectation to issue DNDCs does not apply) to issue cards with multiple brands. They’ve also said that the cents-based interchange cap on all debit transactions will fall from 15 to 10 cents.
That’s just interchange though, and while there is no proposal to cap scheme fees yet, the Bank is requiring full access to fee schedules, scheme rules, and fee revenues from the card schemes. It’s an area merchants would have liked to have seen more on – as advocates have been calling for fair regulation to stop scheme fees spiralling out of control globally for years – but hopefully this is the first step towards greater transparency for all.
Australian merchants have been pushing for surcharging rules to be applied fairly across the market for some time – particularly for Buy Now Pay Later providers who have been allowed to implement their own ‘no-surcharging’ rules despite being some of the most expensive payment methods in the market. The RBA have finally removed these ‘no surcharging’ rules, bringing BNPL in line with all other transaction types where surcharging is available.
How transformative will all of this be for merchants?
Even separately, these announcements have the potential to shake up every Australian merchant’s payments strategy. Every retailer will need to review their arrangements in light of the updates – from developing a surcharging strategy for BNPL to updating their routing capabilities and rulesets.
And whilst merchants will welcome a reduction to interchange caps, implementing the new rates will require banks with legacy systems to apply new fees across billions of transactions, which often leaves room for error. It’s really important – even before addressing their strategy – that merchants are quantifying the impact of these changes on their invoices and making sure every update is being passed through correctly.
What should merchants do next?
We’ve only covered the announcements at a high level there, but there are already some key next steps for merchants. There are also areas that the RBA hasn’t yet addressed, particularly for smaller merchants who may struggle to see benefits from regulation without mandated ‘interchange plus plus’ pricing.
We’ll be doing a deeper dive into each of the changes soon, as well as hosting a merchant-only roundtable on Thursday 28th October at 1pm AEST.