Newly released figures illustrate just how much the slow roll-out of least cost routing* is costing Australian retailers.
A study by global payments consultancy CMSPI found that, in August, Australian retailers paid $67 million in avoidable merchant fees for accepting debit card payments.
The study also found that only 18% of all transactions in Australia are routable, a significant contrast to the banking industry’s claim that they have made LCR available to 90% of Australian businesses. Routable refers to current transactions that can be routed, as opposed to current transactions where no such option exists.
By comparison, 83% of transactions in France and 61% in Germany are routable. Both countries have a domestic card scheme like eftpos (Carte Bancaire and Girocard).
What is worse is that only 7% of routable transactions in Australia are currently being routed optimally by merchants (least cost routing).
Additionally, an increase in Mastercard interchange fees introduced on 1 April this year has an estimated aggregate impact of more than $300 million.
COSBOA CEO Alexi Boyd said “These numbers show why we need regulation to mandate least cost routing as the default. Our members are telling us that the banks have been slow to make least cost routing accessible.
"There is still complexity around merchant fees and the opaque nature of the fee structures make requesting least cost routing or shopping around nearly impossible for the small business person.
"This hesitancy from the banks is putting a strain on the economy and should not be tolerated anymore. It has a huge impact, especially at a time when many small businesses are struggling to survive the impact of COVID-19.”
Ms Boyd continued “The study also highlights the importance of the part domestic card schemes like eftpos play in creating a competitive environment and putting downward pressure on card fees borne by business owners."
"Mandatory multi-network debit cards (MNDCS), or cards that work on more than one card scheme’s network, are an essential part of maintaining a healthy domestic card scheme and keeping fees fair for small businesses.”
“Unfortunately, over the last decade, global card schemes like Mastercard and Visa have increased their share of the market in many countries, even completely wiping out the domestic card schemes in Ireland, the Netherlands, and beyond. We can’t let that happen in Australia. The CMSPI study illustrates how regulation mandating MNDCS in the USA has prevented the international schemes from overtaking their market.”
Ms Boyd concluded “We have seen extremely positive developments in this space over the past few months, from the Treasurer strongly encouraging mandatory least cost routing, to the ACCC requiring eftpos to do everything in its power to promote it. Let’s continue that positive momentum and get LCR mandated as the default as fast as possible.
“COSBOA will continue to raise its voice on this issue until least cost routing has been mandated as the default on all payment types, whether a customer pays in store with their debit card, a digital wallet on their smartphone, or buys a product online.”
*What is least cost routing?
Debit card payments are processed through one of multiple networks. Domestic networks, which in Australia is eftpos, usually charge lower merchant fees to small businesses, while the international Visa and Mastercard networks charge more. When consumers insert their debit card into a point of sale (POS) machine, they can choose which network their payment goes through by pressing the corresponding number on the keypad. However, when a consumer taps their debit card, waves their smartphone, or enters their card details online, they don’t get a choice. The default setting is usually the more expensive Visa or Mastercard network, and these extra fees to small businesses add up.
Least cost routing is when the lowest cost network – usually eftpos – is the default for these kinds of payments. Debit card fees are rising, and so is the use of card and digital payments. It should be treated as an urgent issue.