22 June 2020

Reduce your Merchant Service Payment Fees

Save $000’s by speaking with your bank to implement LCR

A FAQ’s guide for Supermarket, Timber & Hardware and Liquor store owners

What is Least Cost Routing?

• Least Cost Routing (LCR), also known as Merchant Choice Routing, is a system that enables retailers and merchants to choose the payment network that delivers the lowest costs for accepting most contactless transactions from dual network debit cards, in most cases eftpos.*

Why does it matter?

• Reducing costs is an important part of business, especially given the impact of COVID-19 and other challenges.
• According to the Reserve Bank of Australia (RBA)*, you could save up to 40% on contactless debit fees upon implementing LCR.
• These savings could help you reduce prices, hire more staff, or invest more in your business.

What are the typical savings?

• Using RBA data to assess potential annual savings, it’s estimated that an independent:
  • supermarket with an average basket size of $44 could save $26,391.
  • petrol station with an average ticket size of $44 could save $13,196.
  • newsagency with an average ticket size of $36 could save $3,167.
• eftpos is implementing significant wholesale fee relief from July 2020 in the Point of Sale (POS) environment, in an effort to help small businesses and retailers into and through the recovery phase of COVID-19, which is linked to LCR.
• These changes intend to have the potential to further amplify the cost savings for merchants and retailers, particularly for small businesses, if the pricing is passed on by the merchant’s acquirer/bank.

Which retailers already use LCR?

• A growing number of companies are switching to LCR. Among them are some of the most famous names in Australian retail.
• Many other smaller businesses use LCR too – it’s not just for the large operators.

How does it work?

• LCR is designed to help reduce payment costs for supermarket, timber & Hardware and Liquor store owners. At its simplest level, LCR means whenever someone taps their debit card to pay, that payment is routed to the option which costs the least for the business.

What does it mean for my customers?

• Not much in actual practice. They can still wave their cards and pay you normally, and the money will come out of the same bank account linked to their card.
• Note that consumers can still dock their card and select their preferred network if they wish, so they retain the ultimate choice of how transactions are routed just as they do today.
• Some very large retailers in Australia have been using LCR for some time.  In fact, the first large retailer to implement the service has reported no customer issues.
• If a customer does for some reason experience any issues, they should contact their bank.

Will least cost routing affect credit card payments?

• No, it currently only applies to dual network debit cards in Australia.

How do I get LCR?

• Talk to your bank and ask them to give you a proposal that incorporates LCR into your current arrangements.
• If you’re not happy with the proposal provided, it is always within your rights to seek information from other banks.

What happens if the bank changes my pricing when I ask for LCR?

• Remember that LCR is designed to save you money, and this will be the case for many business owners. If your bank’s LCR proposal looks more expensive in total, it is always within your rights to seek information from other banks.

Who do I talk to if I’m having an issue with my bank?

• You have the right to talk to your industry association – MGA/TMA in the first instance.

Which banks currently offer LCR?

• Most banks have varying LCR offerings, with several differences between them.

Does LCR work online?

• Regarding online functionality, an online trial has been underway since October 2019, and the results are good.
• In the first instance, online LCR will work best for merchants who process a lot of recurring card-on-file payments, such as food delivery services, childcare centres, gyms and sport-related activities, as well as florists and other businesses.
• To find out more about LCR online, ask your bank.

Are there any security concerns?

• eftpos has the lowest card fraud rates in the country and wants to continue its focus on security into the online environment for LCR.

Are chargebacks available?

• Yes they are. For eftpos transactions, chargeback rights cover the full range of losses required by the ePayments Code.

Will LCR experience technical difficulties?

• LCR is already operational across thousands of merchants in Australia, with no discernible difference in technical or payment outcomes. It has also been introduced in a number of other countries without known, overt technical issues. 

Will consumers lose any insurances (extended warranty, purchase protection) offered on a purchase from using the card if the merchant is routing transactions?

• No they will not. While insurances on debit cards are very rare, currently available information suggests all the insurances offered are done so at an account level rather than a network level. Consumers should therefore still be eligible for insurance benefits offered on dual network cards.

Does the Reserve Bank support LCR?

• The Reserve Bank of Australia has for a number of years continued to push for LCR to be rolled out more broadly because it supports Australian businesses by boosting competition in the payments space, driving down costs.
• In fact, the RBA has provided guidance that it may regulate LCR if the banks aren’t moving to roll it out in a timely manner.
• A senior RBA representative discussed LCR in a recent speech, saying: “So with many customers switching to contactless in response to COVID-19, some Business Owners and Operators are finding their payment costs rise as debit card payments are automatically routed through the international schemes. It is therefore important that MGA/TMA members be given the option of least-cost routing.”
• Read more from the RBA here: https://www.rba.gov.au/payments-and-infrastructure/debit-cards/least-cost-routing.html

Who else supports LCR?

• Many industry associations, including MGA/TMA , banks and regulators support LCR.
• Australia’s Small Business Ombudsman is a keen advocate, and you can read more about her position here: https://www.asbfeo.gov.au/news/news-articles/least-cost-routing-help-small-businesses-road-recovery

What is eftpos’s position on LCR?

• eftpos recently launched a new advertising campaign encouraging merchants to explore LCR’s potential savings for their businesses.
• eftpos also launched a new package of additional wholesale measures which aim to increase and expand the take up for LCR by changing the standard wholesale interchange rate for merchants who route from 1 July 2020.
• You can find out more from eftpos here: www.eftposaustralia.com.au

References

*http://www.rba.gov.au/speeches/2017/sp-so-2017-12-13.html

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Least cost routing of debit card transactions

25 July 2018

MGA TMA members have long been complaining about the dramatic escalation of merchant fee costs associated with the increase in customers use of “tap and go” credit / debit card transactions. As some members have stated, “it’s a phenomenon – just like a run-away train” that has substantially increased our costs in doing business. In some cases merchant fees have increased 5 fold in the last 4 years.

For most, if not all MGA TMA members, merchant fees are not a recoverable cost that we can impose on our customers. The hotel, rental car and airline industries do apply a credit card surcharge to their customers but in the independent grocery and liquor sector this cannot be done as customers will demonstrably protest by shopping with our larger dominant competitors.

So, what is there to do? The RBA advises that merchants that want to switch on least-cost routing can make enquiries with their banks to request “least-cost routing” facilities. Other options may be available for merchants that own their own terminals, or rent them from a third party. The RBA has noted that some banks and payment providers are making the functionality available earlier than others. MGA TMA members that would like LCR earlier than their bank is able to provide it may consider shopping around until you find a bank or payment provider able to provide least cost routing into your stores.

Least-cost routing (LCR) is an initiative aimed at promoting competition in the debit card market, and helping to reduce payment costs in the economy. Debit cards are cards issued by banks, credit unions or building societies that allow individuals to make purchases (or ATM withdrawals) from their cheque or savings account.

What is least-cost routing?
When a customer makes a contactless (‘tap-and-go’) payment with their dual-network debit card, the business owner may choose to send the transaction via the debit network that costs them the least to accept. This is least-cost routing (also known as merchant routing). If the business owner chooses not to route, the transaction will be sent via the default network which is programmed on the card, typically the Debit Mastercard or Visa Debit network.

If a business owner uses least-cost routing, it should not affect which deposit account the funds are paid from, and the three networks offer similar protections to the cardholder from fraud and disputed transactions. A customer can always select a particular debit network by inserting their card and selecting a network rather than tapping their card. And least-cost routing only applies to dual-network debit card transactions; it will not affect customers using credit cards.

Why is there a move towards least-cost routing now?
Most terminals and dual-network debit cards now have contactless functionality for eftpos, Debit Mastercard and Visa Debit. This was not always the case. Initially contactless debit card payments were only available for Mastercard and Visa. This meant that for dual-network debit cards, contactless transactions could only be processed through the non-eftpos network on the card, that is via the Mastercard or Visa network. Now that eftpos has contactless functionality, there is scope for least-cost routing to be introduced.

A number of recent government reports have called for banks and payment providers to provide merchants with least-cost routing.

Least-cost routing is expected to bring down payment costs by (1) giving business owners the ability to route dual-network debit card transactions to the lowest-cost network, and (2) increasing the competitive pressure between the debit card payment schemes such that there is greater incentive for all schemes to lower the fees – interchange fees and scheme fees – that they set on debit card transactions. These fees are a key component of the price that business owners pay to accept card payments.

How can a business owner switch on least-cost routing?
MGA TMA Members that use terminals provided by their payment services provider should ask their provider about the availability of least-cost routing. Some payment providers are making the functionality available earlier than others, and businesses that are unable to access least-cost routing from their current payment provider may choose to consider alternative providers. MGA TMA members that own their own terminals, or rent terminals from a third-party, should ask their terminal service provider for software updates to implement least-cost routing.