Review of Merchant Card Payment Costs and Surcharging – Phase 3 7. Least-cost Routing of Debit Card Transactions

7.1 Issues for the Review

LCR gives merchants the ability to route DNDC transactions via the network on the card they prefer, based on cost and other considerations. 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.⁶⁸

The RBA has been strongly encouraging the payments industry to provide LCR to merchants since 2017, but progress has been uneven. 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.⁶⁹ The share of merchants with LCR enabled for in-person transactions had risen from 50 per cent in June 2022 to 84 per cent at the end of 2025.

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 were outside the scope of this consultation. These issues will be considered as part of another public consultation, planned to commence in mid-2026, following the 2025 amendments to the PSRA.

7.2 Options presented in consultation

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 large 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 set 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 set 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.

7.3 Stakeholder views⁷⁰

Some stakeholders argued that the RBA’s existing expectations was working and that further intervention was unnecessary (Option 1) because:

• LCR is already widely available and adopted. Around 84 per cent of large acquirers have enabled LCR for their merchants processing in-person transactions and it is available to nearly all merchants at these acquirers.
• competition between the debit card networks is already strong. Some noted that the interchange rate on DNDCs was around 6 cents and below the benchmark of 8 cents due to strong competition between networks.
• the high costs of further intervention would not be justified by the incremental benefits of an LCR mandate. Some acquirers and PSPs submitted that the current approach provides PSPs flexibility in how they implement LCR.
• LCR may not benefit all merchants. Some stated that mandating LCR also would not guarantee that savings are passed on to merchants by acquirers, particularly for merchants on single-rate and blended plans.
• concerns that eftpos may not have functionality for some transactions, for example, for transactions requiring pre-authorisation under dual-messaging systems, such as for transit services.
• the benefits of dynamic routing were limited and did not outweigh the costs. Some submitted that the incremental benefit of dynamic routing over binary or threshold routing was minimal and did not justify the implementation costs involved. One reason cited for this was that scheme fees were difficult to determine in real-time, particularly when accounting for rebates or incentives.

Some PSPs, industry bodies, merchant associations and consumers supported a formal requirement to mandate LCR for in-person transactions as a default with merchants retaining the ability to opt-out (Option 2), stating that it would:

• increase 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.
• mostly benefit small merchants because large merchants are more likely to benefit from strategic merchant arrangements.

Several merchant groups, a few PSPs and some government or regulatory agencies supported a formal requirement to mandate dynamic LCR on all transactions (Option 3), arguing that it would:

• maximise savings for merchants by ensuring cost is minimised on every debit transaction. Some highlighted the limitations of binary LCR 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 single-rate plans.
• increase competition between networks by incentivising networks to charge lower fees on a per-transaction basis rather than on average as would be the case under binary or threshold-based LCR.
• lower set-up costs for merchants by reducing the need for merchants to access or configure complex manual settings.
• be warranted given the inconsistent rollout to date. Several merchant groups stated that some acquirers and PSPs had made it difficult for some merchants to access and turn on LCR, and/or applied LCR unevenly across channels (e.g. online vs in-person).
• increase resilience by automatically re-routing transactions during an outage.

Several submissions supported extending LCR expectations 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 all form factors, citing slow progress by acquirers and PSPs in meeting the RBA’s expectations for online transactions, with inconsistent implementation limiting efficiency gains.

Some stakeholders also suggested that the RBA should further promote the benefits of LCR for merchants by:

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

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

• some consumers may prefer eftpos-only debit cards. A few consumers submitted that they preferred to have eftpos-only debit cards and not have transactions routed through the international card networks.
• it would lower the associated compliance burden for issuing DNDCs. A few submissions from issuers argued that the threshold where issuers are expected to issue DNDCs should be raised (the threshold is currently set where an issuer’s share of transactions rises above 1 per cent of all debit card transactions).
• concerns about the eftpos network. Some issuers argued that the cost of supporting the eftpos network were greater than the international networks, citing costs associated with processing transactions and remediating network errors.
• LCR was no longer needed because interchange rates were sufficiently low for debit cards. Some submissions argued that any further reductions in interchange on debit transactions would not be sustainable or attractive for issuers and would prevent new entry and hinder innovation.
• it would support innovation. A network stated that the status quo entrenches eftpos as the default network on the back of debit cards. Its view was that LCR has led to reduced incentives to innovate, operational complexity and increased risk to security as routing decisions are based purely on cost rather than considerations of functionality, fraud protection capabilities and services levels.

7.4 The PSB’s assessment and conclusions

The PSB’s assessment is that there is not a strong case for a formal regulatory requirement to enable LCR in the in-person environment. The PSB is therefore maintaining the status quo with the ‘expectations’ approach, with acquirers and payment facilitators expected to continue reporting to the RBA on their LCR availability, and on merchant take-up of LCR, every six months. The PSB arrived at this conclusion for the following reasons:

• Substantial progress has been made by the payments industry to improve merchant take-up of LCR in the in-person environment. As at December 2025, 84 per cent of merchants had LCR enabled for in-person transactions.
• The ‘expectations’ approach is achieving the intended policy outcome, as the ongoing rollout of LCR has put downward pressure on wholesale costs for CP transactions. As a result of greater competition between the card networks, all merchants have benefited from this downward pressure on wholesale costs, even those without LCR enabled.
• A formal LCR requirement is unlikely to justify the additional cost, as further increases in LCR enablement in the in-person environment are not expected to generate significant additional savings for merchants. Competitive activity for routing of in-person debit card transactions has increased in recent years, reflecting the benefits of existing LCR arrangements. This is to be weighed against the significant costs of implementing a formal LCR requirement, including costs associated with some acquirers updating their systems to comply. There are also circumstances where LCR may not be suitable for some merchants for valid reasons, including non-price considerations or other factors such as transaction authorisation and clearance practices. Further, a formal requirement for LCR would not, of itself, guarantee the pass-through of any savings to merchants.
• There is not compelling evidence that the benefits of mandating dynamic routing would outweigh the costs involved. The PSB assesses that dynamic routing would only provide incremental benefits over and above existing LCR practices such as binary and threshold routing. 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 submissions argued that dynamic routing would provide significant benefits, particularly for merchants on single-rate and blended plans. The RBA accepts that the degree of incremental benefit from dynamic routing will vary from merchant to merchant, depending on how the debit networks choose to price different transaction types for those merchants and the commercial arrangements in place. The PSB also recognises that mandating dynamic LCR would involve substantial investment costs for acquirers that would flow through to higher costs for merchants.⁷¹ The PSB considers that competition between PSPs for merchant customers would be the more efficient way to drive the development and adoption of more sophisticated routing. Some PSPs are seeking to differentiate themselves on their routing capabilities and merchants can shift to those PSPs where they offer better value.

The PSB does not see a case to adopt the LCR-specific transparency measures suggested in some submissions. While these measures appear to be aimed at improving the pass-through of cost savings from LCR by acquirers to merchants, the PSB considered these measures were not warranted following an assessment of potential benefits against likely costs:

• Requiring acquirers to report their acquirer-level LCR savings to merchants via their merchant statements would require a definition of these ‘LCR savings’ and specification of what exactly needs to be reported. This would be difficult to standardise across acquirers given the variety of pricing models available across providers. It is also unclear how to effectively assess whether providers passed on those savings to merchants that already had LCR enabled at various points in time in the past via lower fees given the range of reasons that could motivate providers to update their pricing.
• Publishing the type of LCR enabled by each acquirer may provide additional information around acquirers’ LCR practices, but it is not clear to what extent this would facilitate increased competition or improve cost pass-through. Some acquirers may also offer more than one form of LCR (i.e. binary, threshold, dynamic) depending on the merchant. The RBA considers this proposal risks creating more confusion for some merchants than benefit.
• The RBA considers that the measures to provide greater transparency in acquiring pricing outlined in Chapter 6: Competition in Card Acquiring Services are likely to be more effective in helping merchants find the provider that can offer them the best value.

The RBA reiterates its expectation that large debit card issuers (with more than 1 per cent of the total value of debit card transactions) continue to issue DNDCs, and that these issuers provision both card networks on their DNDCs in all form factors offered by the issuer. While acknowledging that some stakeholders expressed views on the RBA’s approach to DNDC issuance given the relationship to LCR, the PSB remains of the view that the expectations on DNDC issuance in their current form are fundamental to the success of LCR. If issuers do not meet the expectation, then the RBA would consider consulting on a standard.

The PSB will consider issues relating to online and mobile wallet transactions in the consultation following the 2025 amendments to the PSRA, which is expected to commence in mid-2026. The PSB noted that several submissions supported extending LCR expectations to all form factors, including transactions made online and through mobile wallets.

Endnotes

68 For more background information on LCR, see the Glossary of Key Terms.

69 See RBA (2026).

70 For further details, see RBA (2025g).

71 One acquirer estimated it would cost it close to $30 million to develop and implement.