Will Default Lowest Cost Automatic Payment Routing Be Implemented?

The RBA published the Payments System Board Update: November 2017 Meeting on Friday.   Of  special note are comments about least-cost routing for transactions using dual-network debit cards, as eftpos routing is on average lower than the Debit MasterCard and Visa Debit systems. They fired a shot across the bow of the industry, saying if the banks won’t implement default lowest-cost routing, the RBA could regulate. The industry will continue to drag its feet.

In fact if you have a card with multiple payment functions (like credit card and eftpos) on a single card, many pay wave terminals will default to the credit card option, unless you insert the card and choose eftpos or your change your defaults. This generates higher merchant fees, and revenues to the card providers and banks. This should also be addressed.

  • Recent trends in payment card fraud and various industry initiatives aimed at tackling it. Members observed that there had been a significant increase in card-not-present fraud over recent years. Fraud is costly to merchants and other participants in the payments system and can undermine trust in electronic payments. The Board agreed that addressing this rise in fraud should be a priority for the industry. Members welcomed the various initiatives already underway and encouraged industry participants to work together to expedite an effective solution.
  • The cost of payments to merchants. The Board observed that there was a modest decrease in average merchant service fees in the September quarter, with the new interchange standards having taken effect on 1 July. The Board was briefed on data showing the distribution of payment costs for merchants. These data indicate that payment costs are typically higher for smaller merchants, and confirm that debit cards are generally less costly for merchants than credit cards, with eftpos being a lower-cost system on average than the Debit MasterCard and Visa Debit systems. The Board strongly supported calls from a range of stakeholders for acquirers to provide merchants with least-cost routing functionality for contactless transactions using dual-network debit cards. It requested the Bank staff to continue to engage with the payments industry on this issue, recognising that a prompt industry solution was preferable to regulation.
  • Recent developments in the ATM industry including the decisions by a number of banks to remove the fees charged to non-customers on ATM transactions. Members noted that ATM coverage is relatively high by international standards, and that the number of ATMs in Australia had reached a record high while the number of transactions at ATMs was declining. In this context, they agreed there may be scope for consolidation or fleet rationalisation that results in a more efficient and sustainable ATM industry while still maintaining broad access to ATMs.
  • The staff’s assessment of LCH Ltd’s SwapClear Service, a UK-based clearing and settlement facility licensed to operate in Australia. The Bank will provide the assessment report to the Assistant Treasurer and the Australian Securities and Investments Commission, as well as making its findings available to overseas counterparts with a supervisory interest in LCH Ltd, after which the assessment report will be published on the Bank’s website.

The Board also approved a minor technical variation to the interchange standards which will be published next week. Bank staff have consulted informally with acquirers and schemes who have indicated that this change may result in a reduction in compliance costs.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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