The Reserve Bank yesterday warned that it could force the country’s four major banks to offer least cost routing to all Australian merchants that accept contactless payments over the counter.
In a speech to an online conference organised by Morgan Stanley, RBA assistant governor Michele Bullock panned the big banks for their slow rollouts of least cost routing, saying that the practice of automatically sending contactless debit transactions through the international payments schemes was contributing to higher acceptance costs for retailers.
“While least-cost routing has been available for a couple of years, it has not been widely promoted by the major banks which account for most of the acquiring market in Australia,” Bullock told the conference.
“So, with many customers switching to contactless in response to COVID-19, some merchants are finding their payment costs rise as debit card payments are automatically routed to the international schemes.
“It is therefore important that merchants be given the option of least-cost routing.”
Bullock’s comments come as senior ministers in the Morrison Government, led by small business minister Michaelia Cash, are increasing pressure on the major banks to expedite the delivery of least cost routing services to small businesses.
Least cost routing, which was pioneered in Australia two years ago by challenger bank Tyro, enables retailers to select the cheapest network to process contactless payments instead of the banks pushing transactions to Visa and Mastercard.
Payments experts and the Australian Retailers Association estimate the major banks collect an extra A$500 million a year in fees from merchants by denying access to Eftpos Australia’s cheaper processing service.
Bullock said the RBA would consider imposing an obligation on the banks as part of the wide-ranging review of payments that has been delayed by the COVID-19 lockdown.
“So far, the RBA has not mandated that acquirers explicitly offer least-cost routing to all their merchants,” she said.
“Ultimately though, if market forces are not generating competition to lower the cost of debit card payments, we may need to consider lowering the benchmarks that serve as a cap on average interchange fees.”
The banks could be digging a big hole for themselves by not rolling out least cost routing to most customers because one of the RBA’s policy options is to slash to zero the interchange fee allowed to be collected on debit transactions.
That would transform the economics of providing merchant services to retailers and force banks to drive up the cost of controversial “scheme fees”.
The RBA has previously raised concerns about the transparency of payment plans marketed by the banks for offering merchant services.
Merchant service fees paid by retailers include special payments known as scheme fees for providing access to services operated by Visa and Mastercard.
Even though merchants bear the cost of scheme fees, their value is not disclosed by banks in the monthly statements they issue to retailers.
Bullock also indicated that the RBA was monitoring other segments of the payments system where industry players might be tempted to use digital technology to lock out competition.
“If banks or other stakeholders are acting in ways that prevent downward pressure on merchant fees, we may need to consider regulatory options for keeping the cost of electronic payments low,” she said.