Review of Retail Payments Regulation Summary of Submissions to the Review of Merchant Card Payment Costs and Surcharging Consultation Paper

Least-cost routing

Views on LCR were split over the three main policy options, with a minority of submissions supporting the RBA continuing with the status quo with its ‘expectations’ approach. Many submissions supported the LCR initiatives in general but suggested that the RBA could do more.

Maintain status quo with ‘expectations’ approach

These submissions supported the RBA continuing with its ‘expectations’ approach because:

• LCR is already widely available and adopted. Around 80 per cent of large acquirers have enabled LCR and it is available to nearly all merchants at these acquirers. Some submissions noted that this suggested that the approach to date had been successful in achieving the RBA’s objectives and that further intervention was unwarranted.
• Competition in the debit card market is already strong and further intervention is not required. Some noted that the interchange rate on dual-network debit cards was around 6 cents and below the benchmark of 8 cents due to strong competition between schemes.
• The high costs of further intervention would not be justified by the small benefits of an LCR mandate. Instead, the current approach provides PSPs flexibility in how they implement LCR.
• LCR may not benefit all merchants. A card scheme stated that mandating LCR also would not guarantee that savings are passed on to merchants by acquirers.

Several submissions supported extending LCR to all form factors including online, mobile wallets, tokenised transactions and Click to Pay. Some of these submissions advocated for the RBA to mandate a formal requirement for LCR across these form factors.

Mandate formal requirement for in-person LCR as default

This option was supported by some PSPs, industry bodies and consumer submissions. These submissions supported a formal requirement to mandate LCR for in-person transactions as a default (with merchants retaining the ability to opt-out), stating that it would:

• Maximise merchant savings. Stakeholders cited the inconsistent rollout of LCR by acquirers, difficulties for some merchants to access LCR and the potential for greater LCR take-up under a formal requirement to mandate LCR for in-person transactions. These submissions stated that this option would reduce costs for merchants and overcome barriers for LCR take-up, particularly for merchants on blended plans.
• Mostly benefit small merchants because large merchants are more likely to benefit from strategic merchant agreements.

Mandate formal requirement for dynamic in-person LCR

This option was supported by several merchant groups, a few PSPs and some government entities. These submissions stated that this option would:

• Maximise savings for merchants by ensuring cost is minimised on every debit transaction. Some submissions highlighted the limitations of binary LCR (the most common form of LCR, where all debit transactions are directed to the network that is cheaper on average) and potential savings from a more dynamic form of LCR.
  • A group representing merchants stated that dynamic LCR could lower merchant payment costs substantially relative to fixed-rate blended plans.
• Increase competition between schemes by incentivising schemes to charge lower fees on a per-transaction basis rather than on average as would be the case under binary or threshold-based LCR systems.
• Lower setup costs for merchants by reducing the need for merchants to access or configure complex manual settings, which a merchant noted was the case with some acquirers.
• Be warranted given the inconsistent rollout to date. Several merchant groups stated that some PSPs and acquirers had made it difficult for some merchants to access and turn on LCR, and/or applied LCR unevenly across channels (e.g. online versus in-person).
• Increase resilience by automatically re-routing transactions during an outage.

Other options

Some stakeholders also suggested that the RBA should:

• Take regulatory action to ensure pass-through of LCR savings to merchants. There was particular concern around pass-through for merchants on blended plans.
• Require acquirers to report LCR savings to merchants such as via their merchant statements.
• Mandate that routing choice should always belong to merchants, rather than acquirers or consumers, because merchants pay the associated merchant service fees.
• Publish the type of LCR enabled by each acquirer (e.g. binary, threshold, dynamic).

A few submissions stated that the RBA’s current approach had gone too far and they supported more issuance of single-network debit cards because:

• Consumers may prefer single-network debit cards. A few consumers wrote that they preferred to have eftpos-only debit cards due to preference (e.g. for cash-out at supermarkets) and not have transactions routed through the international card schemes.
• It would lower the associated compliance burden for issuing dual-network debit cards. A few submissions argued that the threshold where issuers are expected to issue dual-network debit cards should be raised (the threshold is current set where an issuer’s market share rises above 1 per cent of all debit card transactions).
• LCR was no longer needed because interchange rates were sufficiently low for debit cards.
• It would support innovation. A scheme stated that the status quo entrenches eftpos as the default scheme on the back of debit cards. Its view was that LCR has led to reduced innovation incentives, operational complexity and increased risk to security as routing decisions are based purely on cost rather than considerations of functionality, fraud protection capabilities and service levels