Merchant Card Payment Costs and Surcharging – Consultation Paper –
July 2025 Least-cost Routing of Debit Card Transactions

LCR gives merchants the ability to route dual-network debit card (DNDC) transactions via whichever of the two networks on the card costs them less to accept. Around 90 per cent of debit cards issued in Australia are DNDCs, which allow domestic payments to be processed via either eftpos or one of the international debit networks (Debit Mastercard or Visa Debit). LCR can directly reduce card payment costs for merchants while also increasing the competitive pressure on debit networks to lower their wholesale fees, thereby putting downward pressure on payment costs across the economy.¹

The RBA has been strongly encouraging the payments industry to provide LCR to merchants since 2017. In 2021, in response to slow industry progress, the RBA set an explicit expectation that PSPs offer and promote LCR in both the in-person and online environments. In 2022, the RBA set a further expectation that the industry make LCR available for mobile wallet transactions by the end of 2024. To provide greater transparency on industry progress, in 2023 the RBA started publishing a table on LCR availability and take-up across the major acquirers. The share of merchants with LCR enabled for in-person transactions had risen from 50 per cent in June 2022 to 76 per cent at the end of 2024, whereas LCR for online and mobile wallet transactions is at a much earlier stage of progress.

The sophistication of LCR implementation varies across PSPs. Most PSPs use a simple ‘binary’ approach (routing transactions to eftpos, as the cheaper debit network on average) or the slightly more sophisticated ‘threshold’ approach to LCR (routing transactions above a value threshold to eftpos). The RBA is aware of very few PSPs that offer ‘dynamic’ LCR, which seeks to maximise savings by routing each individual transaction to the cheapest network for that particular transaction.

Issues related to LCR for online and mobile wallet transactions are outside the scope of this consultation due to limitations to the RBA’s regulatory remit. Any formal intervention in these areas would benefit from reforms to the PSRA to broaden the definition of ‘participants’ in payment systems to include service providers such as mobile wallets and payment gateways.

The question for this consultation is whether further regulatory intervention is warranted to realise the full benefits of LCR for in-person transactions, since:

• some merchants do not have LCR enabled
• it is unclear whether the savings from LCR are being fully passed on to merchants, particularly to those merchants on ‘single-rate’ payment plans
• very few PSPs offer a fully dynamic LCR solution that evaluates and routes each individual transaction to the lowest cost network.

7.1 Policy options

Option 1: Status quo

The RBA would continue to:

• set expectations that providers enable LCR (at any level of sophistication) for in-person transactions for merchants that could benefit from it and pass on the savings to merchants
• provide transparency on the extent to which major acquirers are supporting LCR by publishing LCR availability and take-up every six months.

Option 2: Introduce a formal requirement for LCR for all in-person transactions

The RBA would issue a standard requiring acquirers to enable LCR for in-person transactions for all merchants by default, with merchants able to opt out if they wish.

Option 3: Introduce a formal requirement for dynamic LCR for all in-person transactions

The RBA would issue a standard requiring acquirers to enable dynamic LCR for in-person transactions for all merchants by default, with merchants able to opt out if they wish.

7.2 Considerations

Stakeholder views were mixed on whether acquirers should be required to enable LCR for in-person transactions by default (with merchants able to opt out). Merchant groups and several PSPs supported such a requirement, arguing that the rollout of LCR had been slow to date, acquirers that also issue cards have less incentive to support LCR, and there was potential for increased uptake to further reduce merchant costs, with many merchants still unaware of the potential savings. By contrast, most PSPs and the international card networks did not support such a requirement, arguing that uptake of LCR had increased recently and was working well, price competition between PSPs will drive further uptake, and LCR is not viable for all merchants.

While LCR uptake was slow between 2017 and 2022, significant progress has been made over the past two years. LCR for in-person (physical card present) transactions is now available for all merchants and has been enabled for 76 per cent of merchants. The gradual expansion of LCR to mobile wallets is also a significant step forward and will result in a much larger pool of transactions that can be least-cost routed and hence greater savings for merchants.

The PSB acknowledges that LCR for in-person transactions is not necessarily suitable for all merchants. PSPs have indicated that a sizeable share of merchants – possibly between 10 and 20 per cent – do not have LCR enabled for arguably good reasons, including:

• routing through the international debit networks is cheaper in some scenarios (which is relevant where the PSP chooses to implement LCR by sending all transactions to eftpos)
• eftpos, while often the cheaper debit network, does not have the functionality required for the merchant’s business (such as the ability to take pre-authorisations)
• the merchant is sufficiently large and sophisticated to make their own routing decisions.

Given that 76 per cent of merchants already have LCR enabled, the residual pool of merchants that could benefit from enabling LCR for in-person transactions is not large.

The RBA estimates that a formal LCR requirement for in-person transactions could lower wholesale costs by around $50 million per year. This savings estimate is based on the existing difference in wholesale fees between eftpos and the international debit networks. The estimate also includes the savings from LCR being available when mobile wallets are presented in person. The relatively small size of the savings from a formal LCR requirement reflects the diminishing pool of merchants that could benefit and the very low difference in wholesale costs between eftpos and the international debit networks for in-person transactions. There has been strong competition in recent years between the debit networks, which has resulted in reductions in wholesale costs and some convergence in these costs across the networks. The take-up of LCR is likely to have contributed to this competitive environment, with the networks offering new programs with heavily discounted interchange fees for some small merchants. In addition, the reductions in debit interchange caps proposed in Chapter 3: Interchange Fees could result in some convergence in the wholesale fees between eftpos and the international networks, particularly for small merchants, which would further reduce the potential savings from a formal LCR requirement.

A formal regulatory requirement to enable LCR would not, of itself, guarantee the pass-through of savings to merchants. Absent the RBA attempting to directly regulate acquirer pricing, the mechanism for the savings from LCR to be passed on to merchants is competition in the acquiring market. To further strengthen competition in the acquiring market, the RBA is considering measures to enhance price transparency (see Chapter 6: Transparency of Merchant Fees).

Some acquirers argue that it is impossible for them to guarantee that their routing choice will be lowest cost for merchants. This is due to merchants’ card and transaction mix varying over time, and wholesale fees set by networks changing regularly. These acquirers are concerned about potential reputational damage and the risk of merchants seeking compensation if they implement a form of LCR that ends up raising costs for some merchants. To minimise these risks, acquirers may need to revisit their routing choice for each merchant at a high frequency; while this could potentially be automated (e.g. fully dynamic), it would require significant additional investment and overhead for the system.

A formal LCR requirement would involve significant costs. There would be one-off resource costs for the RBA to develop a prescriptive standard, as well as ongoing costs to monitor and enforce compliance. Acquirers would likely incur technology and staff costs to ensure and monitor compliance. For example, given the technical nature of any routing requirement, an annual audit from each acquirer to demonstrate compliance may be required.

Stakeholder views were mixed on whether acquirers should be required to provide dynamic LCR for in-person transactions. Many merchant lobby groups and the ACCC supported the RBA facilitating the implementation of dynamic LCR and some merchant groups called for the RBA to mandate dynamic routing. By contrast, most acquirers argued that their current systems do not support dynamic routing and that significant investment would be required to do so, including in terminal capabilities. These acquirers argued that the costs of dynamic routing may significantly exceed the benefits, and that they do not have the capacity to undertake the required investment in the near term, given the wide range of large payment-related projects and system upgrades underway. Determining scheme fees in real time at the transaction level is a key difficulty, given the complexity of scheme fees. The RBA has heard that some acquirers’ systems are not able to determine scheme fees paid by individual merchants, let alone on individual transactions. In considering whether to push the industry to offer more sophisticated routing, the RBA sought industry estimates on the potential benefits and costs of developing and providing this capability. A large acquirer provided evidence that a threshold-based approach to LCR would deliver almost 90 per cent of the savings possible from dynamic routing, at much lower cost. Some acquirers have estimated that dynamic routing could be quite costly to implement, with one estimate close to $30 million to develop and implement for a single acquirer.

7.3 Preliminary assessment

On balance, the RBA’s preliminary assessment is that there is not a strong case for a formal regulatory requirement to enable LCR in the in-person environment. As at December 2024, 76 per cent of merchants had LCR enabled for in-person transactions, and LCR may not be suitable for many of the remaining merchants for valid reasons. The ongoing rollout of LCR has also put downward pressure on wholesale costs for card-present transactions, with merchants benefiting from this even without having LCR enabled. While some stakeholders continue to be concerned about whether the full benefits of LCR are being passed on to merchants, a formal LCR requirement is unlikely to directly address this issue and would involve significant implementation costs. Measures to improve transparency in the acquiring market could foster greater pass-through of LCR savings.

It is also not apparent that the benefits of mandating dynamic routing would outweigh the costs involved. Mandating dynamic LCR would involve substantial investment costs for acquirers that would flow through to higher costs for merchants. Instead, competitive pressure may be better suited to drive the development of more sophisticated routing, with some PSPs seeking to differentiate themselves on their routing capabilities.

Endnotes

For more background information on LCR, see the Backgrounder on Least-cost Routing. 1