Merchant Payment Costs and Least-cost Routing

Least cost routing is where a merchant chooses to route a debit card transaction over the network that offers the lower cost for that transaction.

By Andy White, Chief Operating Officer at AusPayNet - 21 December 2017

At our Australian Payment Summit on 13 December, the Reserve Bank of Australia (RBA) discussed the cost of payments to merchants and the concept of “least-cost routing”.  Below we explain these topics in more detail. 

What are Merchants’ Payment Costs?

The costs to merchants of accepting payments vary according to the different payment methods used by a cardholder.  They will reflect factors such as merchant service fees charged by their financial institution (“acquirer”) – which vary by card network (American Express, eftpos, Mastercard, and Visa) – terminal rental fees, and fraud prevention fees.  Acquirers provide merchants with statements that detail these costs, split by card network/payment type, on a monthly and yearly basis (Appendix F of our Rules provides more detail).

Contactless terminal

Why is the routing of a payment relevant?

Most debit cards issued in Australia are dual-network cards:  these cards support both an international network (Visa or Mastercard) and the domestic eftpos network, and therefore have an international network logo on one side and the eftpos logo on the other.  This means that debit card transactions can be routed through either of those networks.

It should be noted that the concept of routing choice only applies to debit card transactions (and not to credit card transactions).  It also only applies to dual-network cards:  cards that only support one network will always be routed over that network. Least cost routing is where a merchant chooses to route a debit card transaction over the network that offers the lower cost for that transaction.

How has the routing of a payment been determined in the past and how is it determined today?

Traditionally, when a card was inserted into a point of sale terminal in a chip and PIN environment, cardholders determined how their debit transactions were processed, by pressing either the CHQ or SAV buttons for eftpos or the CR button for the international network, before entering their PIN. 

With the shift to contactless or ‘tap-and-go’ transactions, the cardholder experience has changed significantly. In a ‘tap and go’ transaction, cardholders no longer have to actively select their processing option. For speed and convenience, when the card is tapped, the routing of debit transactions is automatically determined by the chip configuration in the card. At present this configuration tends to mean that the international network is used to process debit transactions.

Why is least-cost routing relevant now?

Given the difference in costs to merchants of routing payments across the different networks, the RBA determined in 2015 that “where a device provides access via two different networks to the same account, schemes or payments providers should not prevent merchants from exercising choice in how they route transactions, providing there is appropriate disclosure to customers”.  

More recently (on 17 November 2017), the RBA’s Payments System 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”. In addition, the Third Report on reforming the Australian banking sector from the House of Representatives Standing Committee on Economics published on 7 December 2017 made the following recommendation:  “if the banks do not act by 1 April 2018, regulatory action should be taken to ensure that merchants have the choice of how to process ‘tap and go’ payments on dual network cards”.  

What does this mean for merchants and cardholders?

Merchants can review their costs using the statements mentioned above, and can discuss this topic with their acquirer to more fully understand how their costs in accepting different payment methods used by a cardholder may vary depending on their profile (volume and average transaction size etc.).

Cardholders should be aware that debit networks can link to the same underlying transaction account.  They should also be aware of the terms and benefits linked to the use of their card or the underlying account provided by their financial institution, including costs (if any), limits (if any), and rights and benefits.  Examples of rights and benefits include protections from fraud and disputed transactions, chargeback policies, and rewards programs. 
Importantly, the RBA has said that “it would be desirable for a merchant implementing least-cost routing to disclose this to customers” and that cardholders should be provided with the “opportunity to override the merchant's preferred network if they wish”.


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