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August 03rd 2021

The RBA’s Review of Payments Regulation: 5 Considerations for Australian Merchants

The Australian payments market is one in a state of flux. In recent years, the country’s retailers have found themselves caught between complex fees, potentially game-changing mergers, and a payments mix increasingly dominated by high-cost options.


The Reserve Bank of Australia’s latest set of proposals aims to protect merchants from some of these developments. Responding to the consultation this month, CMSPI set out its position on the RBA’s proposals at an industry level. Here, we bring the focus back to individual merchants, and outline the 5 top considerations for retailers looking to make the most of each change.

1 – Routing Choice

The presence of a local card network means that many merchants in Australia, at least for some transactions, face a choice. They can either send transactions via the international card networks, or via the domestic Eftpos brand whose debit fees were, on average, 72% cheaper than their international counterparts in 2020 (CMSPI estimates and analysis from Reserve Bank of Australia data. See C3 Average Merchant Fees for Debit, Credit and Charge Cards. Available here).

In its Review, the RBA notes the benefits of merchant routing functionality, both in promoting competition and generating savings for Australian retailers:

"[Routing] choice can help merchants reduce their payment costs and increase competitive pressure between the debit networks. Indeed, the average cost of accepting debit card transactions has fallen as LCR functionality has been gradually rolled out over the past few years."

Reserve Bank of Australia (2021)

Unfortunately, not every payment can be routed optimally. In fact, CMSPI’s analysis suggests that just 7.3% of Australian domestic transaction value is currently available for merchant least-cost routing. This is because merchant choice is limited to a subset of debit card transactions. More specifically, LCR can generally only be accessed for face-to-face contactless transactions on Dual Network Debit Cards that don’t sit within a digital wallet. Figure 1 shows CMSPI analysis of what happens to the share of routable transaction value as each of these limitations is added.


Figure 1. Limitations to the proportion of transactions available for merchant routing in Australia

So, what can merchants do about it?

Aside from advocating for regulation to expand merchant routing choice, a key part of protecting competition is taking advantage of it. Surprisingly, in CMSPI’s experience many Australian merchants aren’t even utilising the routing opportunities that are available. That means the 7.3% figure likely vastly overestimates the value of transactions that are truly routed optimally. The RBA’s proposals, which aim to support routing choice online and reduce the issuance of single-network debit cards, will therefore increase the value of the missed opportunity for merchants who are not optimising already.

2 – Interchange Fees

In an effort to preserve the benefits of merchant routing choice, the RBA has also proposed some creative changes to their interchange fee caps. Interchange – generally the largest component of the Merchant Service Charge paid to accept each card payment – has been regulated in Australia for some time. The RBA’s latest proposals suggest lowering the caps specifically for transactions made on Single Network Debit Cards (see Figure 2). As interchange is paid to issuing banks, this increases the incentive to issue cards where both the Eftpos and international network are available to merchants.

Figure 2. RBA’s proposed reduction in the cents-based debit interchange cap.

Whilst this could be great for retailers whose routing choices are optimised (and even those paying less on SNDCs), the changes could also complicate reconciliation. Now, merchants will not only need to monitor the pass-through of new interchange rates across thousands of individual transactions, but they’ll also need to access BIN-level data that identifies the number of networks available on each card to ensure that rates are applied correctly.

3 – Scheme Fees

After interchange, scheme fees are typically the second-largest component of the MSC for large merchants. These fees – paid to the card networks themselves – have finally caught the attention of regulators globally, and the RBA is no different. In particular, the RBA’s Review notes the opaque nature of scheme fees and the resulting potential for ‘[F]ees or rules that may be anti-competitive’, and proposes that all scheme fees be disclosed to the Bank going forwards.

In the absence of explicit action, however, the introduction of new and increasingly complex scheme fees can continue. CMSPI sees scheme fee data across hundreds of merchants and billions of individual transactions, allowing accurate monitoring of the pass-through of each new fee. It is from this experience that we know, for an individual retailer, every change increases the likelihood of rates being misapplied (which CMSPI observes in 1 in 2 invoices audited) due to their increased complexity. This complexity works in favour of most actors in the payments ecosystem – apart from retailers, who may be paying more for the additional margin that is tacked on in the process.

This has raised concerns that the opacity of scheme fee arrangements may be limiting competitive tension between the card schemes, as well as between acquirers (by obscuring their margins).

Reserve Bank of Australia (2021)

4 – Buy Now, Pay Later

Although important, merchants looking to tackle their payments costs in Australia have far more to address than traditional card payments. Buy Now Pay Later, for example, made up 10% of the country’s online sales in 2020 (Worldpay Global Payments Report (2021). The home of BNPL giants such as Afterpay and Zip Co, Australia’s market for this form of retail finance is a relatively mature one by global standards. And the recent $39 billion acquisition of Afterpay by US company Square – reported to be the largest deal in Australian history (source) – only signals further growth.

For retailers, accepting BNPL may mean higher conversion rates, a broadened consumer base, or higher average transaction values. However, it typically also means higher fees – some of the highest in the payment method market (Figure 3).

Figure 3. Weighted average merchant fee by payment method in Australia

Some merchant representatives noted that there was increasing pressure on merchants to offer a range of BNPL payment options to meet customer preferences, which could dull the effects of price competition between providers.

Reserve Bank of Australia (2021)

In Australia, the largest BNPL providers are subject to voluntary regulation in the form of a Code of Conduct. However, the Code does not address merchant fees, and in recent years providers have gone one step further in implementing ‘no surcharging’ rules that mean merchants cannot (unlike with card payments) reflect their underlying costs in their pricing. These rules mean that consumers are not incentivised to choose the cheaper payment method, preventing competition from lowering prices for all. In its Review, the RBA does not propose any end to these no surcharging rules. For merchants, then, developing a future-proof strategy for BNPL acceptance – including a quantified impact on debit volumes, direct provider negotiations, and benchmarked rates against similar merchants – has never been more crucial.

5 – The Merchant Acquiring Market

The final consideration for Australian merchants, and one that underpins all others outlined in this article, is a merchant’s relationship with their acquiring bank. The RBA’s Review in particular notes a lack of transparency around acquirer fees and other impediments to competition in the market. This is a particular concern given that the largest 4 acquirers hold approximately 90% of the market in Australia, according to CMSPI’s insights.

The RBA’s proposed solution includes regularly publishing summary information on merchant service fees for retailers of different sizes. This transparency would be hugely positive for smaller merchants in particular, who often lack the transactional volume and expertise to negotiate effectively. For larger merchants, however, the Review notes itself that arrangements have become increasingly bespoke, and require complex benchmarking across additional areas such as ‘on-us’ rates and incentives. Even with an average guide to MSCs, in the absence of this detail large merchants risk lagging behind their payments-savvy competitors. 

In Summary…

Over the last few years, Australian merchants have had to navigate a whole host of challenges to their payments arrangements, from changing scheme fees to costly shifts in consumer preferences. The RBA’s latest proposals help to stymie some of the impacts of these developments. However, making the most of any upcoming changes (or lack thereof) requires additional preparation for merchants. Interchange revisions, for example, may increase the short-run complexity of reconciliation, whilst long-run proposals around merchant routing could increase the revenue that retailers are leaving on the table by failing to optimise. And in those areas the Review leaves unaddressed, it is more crucial than ever that merchants maintain visibility over their competitors whilst continuing to advocate for industry-level change.