Least-cost Routing of Debit Card Transactions

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.

Background on debit cards and payment costs

When a merchant (eg, a shop or business) accepts payment from a customer via a debit or credit card, the merchant is charged by its bank (or payments provider). Higher payments costs for merchants feed through into higher prices for goods and services, so merchants are typically keen to hold down their payments costs, just as they try to reduce other costs of doing business.

Debit card transactions draw on a customer's deposit account with their financial institution. In Australia, debit card transactions can be processed through one of three debit card scheme networks: eftpos, Debit Mastercard or Visa Debit. Usually, the transaction draws on the same deposit account, regardless of the scheme that processes it. But the cost the merchant faces from their financial institution for accepting a debit card transaction can vary depending on which of the three networks processes the transaction. For many merchants, payments via the eftpos network can be significantly less expensive than payments via the Debit Mastercard or Visa Debit networks.

Most debit cards in Australia have a functionality that enables a payment to be processed via either eftpos or one of the two other networks. These are called dual-network debit cards. These cards have an international scheme logo (Mastercard or Visa) on one side and the eftpos logo on the other.

When a customer inserts their dual-network debit card into a terminal to make a payment, they are asked to select which network to use. For example, a customer may select the eftpos network by pressing the CHQ or SAV button, or they may select the Visa Debit or Debit Mastercard network by pressing the CR button. It should be noted, though, that in the second case it is still a debit transaction, even though traditionally the button has been labelled CR. The transaction typically draws on the same deposit account regardless of which button the customer pushes – the payment message just gets to the customers bank via a different route.

What is least-cost routing?

When a customer makes a contactless (‘tap-and-go’) payment with their dual-network debit card, the merchant 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 merchant 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 merchant 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. This includes the House of Representatives Standing Committee on Economics Third Report on the Review of the Four Major Banks, the Productivity Commission Draft Report on Competition in the Australian Financial System, and the Black Economy Task Force Final Report.

Least-cost routing is expected to bring down payment costs by (1) giving merchants 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 merchants pay to accept card payments.

What is the RBA doing on least-cost routing?

The Reserve Bank's Payments System Board is charged with promoting competition and efficiency in the Australian payments system. The Board supports the issuance of dual-network cards to consumers and the provision of least-cost routing functionality to merchants.

The Board has been monitoring industry progress on providing merchants with the ability to route dual-network contactless debit card transactions to their lowest-cost processing network. Least-cost routing requires an upgrade to payment terminal software, and in some cases a replacement of the terminal itself. Some merchants already have the ability to route transactions, other merchants may be able to access this functionality by switching their provider of payment acceptance services. Several banks and payment providers have indicated that they will have least-cost routing available for their customers in the second half of 2018, with others indicating it should be available in early 2019. The Reserve Bank will continue to monitor progress in implementing least-cost routing, and the Board may consider regulation if there are signs of material delays to its wide availability to merchants.

How can a merchant switch on least-cost routing?

Merchants 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 merchants that are unable to access least-cost routing from their current payment provider may choose to consider alternative providers. Merchants 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.