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.