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Least Cost Routing is a huge issue for small and medium businesses!


Some interesting comments on a recent speech by Philip Lowe that have been reported in the media as below.

Reports that the Governor of the Reserve Bank of Australia (RBA), Philip Lowe, has issued the strongest warning yet that if Australia’s big banks and credit card schemes don’t address ongoing technology outages and upgrade lethargy, the central bank will intervene through regulation. In a key speech the Australian Payments Summit in Sydney on Monday morning, Lowe made it clear that patience has now run out over collective foot-dragging within the Big Four banks over the slow pace of upgrades needed to plug in both the New Payments Platform and least cost transaction routing to push down merchant fees.

“Over recent times, there have been a number of serious operational incidents that have interrupted the payments system. On some occasions these have been caused by problems with the telecommunications companies and at other times by problems at the banks,” Lowe said. “We all need to do better here. As we rely less on cash, outages affecting retail transactions can have a significant impact on businesses and individuals. So continued effort needs to be made by all participants in the payments system to reduce operational problems. If this does not happen, then it is possible that the Payments System Board could consider setting some standards.” … Another item on the RBA’s late homework list is the implementation of least cost routing that allows merchants to dictate what rails payments made to them ride to help avoid fee gouging by banks and credit card schemes via default settings on payment terminals and merchant acquirer accounts. In simple terms, the reforms allow merchants to make the call as to whether a tap-and-go payment goes routes via the cheaper Eftpos cheque and savings route as opposed to rails run by card schemes like Mastercard and Visa – an important difference now that Eftpos has contactless card functionality. Choice of routing issue is set to become a major access and equity issue for transport authorities in NSW and other states prepare to accept contactless payment cards in addition to contactless electronic tickets across their networks because many commuters may not have a Mastercard or Visa product in their physical or virtual wallets. “Some acquirers have already completed the necessary work and are attracting new merchants. Others, including the major banks, made commitments earlier in the year regarding the timetable for this work to be completed. Partly on the basis of those commitments, the Payments System Board made a decision not to regulate,” Lowe observed, not uncritically. “Since then, I regret to say there has been slippage by some, who have cited technical problems. It is important that the banks get back on track here. A failure to deliver on commitments or to provide the payment services that the community needs will inevitably lead to calls for further regulation.”

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The Australian reports Reserve Bank governor Philip Lowe has been forced to inter- vene in the rollout of new, low- cost instant payments, after big banks failed to live up to promises over a scheme that could weaken their control of the system. Dr Lowe told an audience in Sydney yesterday that he recently wrote to the biggest banks, Commonwealth Bank, Westpac, ANZ and National Australia Bank, because of the “slow pace of rollout by the banks, and the prospect of delays” in the so-called new payments platform. He said the major banks also failed to come good on a promise to allow shop owners to route debit payments through the lowest-cost system. The RBA earlier this year chose not to step into the market and regulate the debit system after the major banks pledged to institute the changes reasonably quickly. “A failure to deliver on commitments or to provide the pay- ment services the community needs will inevitably lead to callsfor further regulation,” he said.

Banking Day reports pressure is mounting on the Reserve Bank to tighten regulatory oversight of the four major banks amid further delays on the roll out of the New Payments Platform and least-cost routing for contactless transactions. Despite a request from the powerful House of Representatives’ economics committee last December that the banks make least-cost routing available to Australian merchants by April this year, none of the major banks has yet completed a rollout of the new capability. When implemented, least-cost routing could halve the costs borne by retailers for accepting contactless debit transactions because it will allow them to direct payments through the low-cost Eftpos system, rather than the Visa or MasterCard platforms. The Morrison Government has come under increasing pressure from retail industry groups and a string of backbenchers to get the banks to fast track their rollout programs, which require their electronic point-of-sale devices to be updated with new software. Federal politicians are concerned that the banks are deliberately stalling the introduction of cheaper routing because it will punch holes in their fee revenue streams. Experts have given wide-ranging estimates on how much revenue the banks will lose from least cost routing, with the Australian Retailers’ Association arguing that it is likely to be more than A$400 million a year. Independent modelling by payments consultancy McLean Roche estimates the four major banks stand to lose more than $550 million after least-cost routing is introduced. RBA governor and chair of the Payments System Board(PSB) Philip Lowe yesterday warned that the banks faced further regulation if they continue to delay their rollouts. Some acquirers, he said, had already completed the necessary work and were attracting new merchants. The delays are occurring even after the banks gave commitments to PSB earlier in the year that the work would be completed. “Partly on the basis of those commitments, the PSB made a decision not to regulate. “Since then, I regret to say there has been slippage by some, who have cited technical problems. “It is important that the banks get back on track here. “A failure to deliver on commitments or to provide the payment services that the community needs will inevitably lead to calls for further regulation.” While the major banks try to preserve their bumper revenue take from the bumper fees levied on merchants, Banking Day understands that a second merchant acquiring institution has begun routing contactless transactions through the cheaper Eftpos system. Industry sources said that global merchant services giant, First Data, had joined national business bank, Tyro, as the only acquirers offering the low cost processing option to their business customers. Tyro, which services more than 25,000 merchants across Australia, claimed last week that it had saved its customers around $1.5 million on fees since introducing the Eftpos processing option earlier this year.

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The Governor’s speech can be found here including “The close link between interchange and merchant costs means that there continues to be significant focus on interchange and its implications for the distribution of costs between merchants and consumers. For example, there have been recent recommendations from the Black Economy Taskforce and the Productivity Commission for the Reserve Bank to consider regulatory action to lower, or even ban, interchange fees. The Payments System Board will again examine the arguments for lower interchange fees when it next conducts a formal review of the card payments system. On the competition front, one area that merits close attention is the market for acquiring services. This has come into sharper focus as a result of concerns about the costs to merchants in the debit card system, where most cards allow for transactions to be processed by either of the two networks enabled on the card. The longstanding view of the Payments System Board has been that merchants should at least have the choice of sending the debit payment through the lower cost system, whether that be eftpos or the international scheme. For merchants to be able to do this though, acquirers need to offer terminals and technical systems enabled to allow least-cost routing. Some acquirers have already completed the necessary work and are attracting new merchants. Others, including the major banks, made commitments earlier in the year regarding the timetable for this work to be completed. Partly on the basis of those commitments, the Payments System Board made a decision not to regulate. Since then, I regret to say there has been slippage by some, who have cited technical problems. It is important that the banks get back on track here. A failure to deliver on commitments or to provide the payment services that the community needs will inevitably lead to calls for further regulation.”