Business, customers ripped-off without least-cost routing, RBA research finds

With Australians ripped off every time they use their credit card, the RBA is considering a crackdown.

Beers, pizzas and other everyday items are cumulatively costing Australians an additional $1bn, with new Reserve Bank research revealing how much businesses, and their customers, can save, as major banks and payment service providers charge exorbitant transaction fees.

The transaction fee rort, which forces many businesses to recoup costs by charging customer surcharges, has also prompted RBA governor Michele Bullock to step in, with the central bank threatening a regulatory crackdown unless uptake in least-cost routing (LCR) is boosted.

LCR refers to the practice where payments default to the least expensive processing network, rather than the pathway set by the bank or payment service provider.

Transaction costs for businesses without LCR enabled were 20 per cent higher, the RBA found. Picture: NCA NewsWire / Gaye Gerard

According to the fresh RBA research, the cost of accepting debit card transactions — Australia’s most popular payment method — is nearly 20 per cent lower for businesses that have LCR enabled.

Businesses, and their customers, with annual debit payments between $100,000 and $10m receive the most benefit from having LCR enabled, the RBA’s analysis found.

Small businesses, with annual payments less than $100,000 will also benefit, the RBA’s research found, but to a lesser extent.

However, the cost benefits of LCR is far lower for big businesses, and their patrons, with networks offering lower fees to businesses they view as “strategic” so that they are more competitive.

Despite LCR being made available to 99 per cent of businesses by June 2023, only 64 per cent have it turned on, even as previous RBA research has shown fees are costing more than $1bn a year.

RBA data shows that EFTPOS transactions are the cheapest, costing an average of 0.3 per cent – or 30c for a $100 purchase – to process.

MasterCard and Visa transactions cost approximately 0.9 per cent per purchase, while American Express and Diners Club card users are charged an 1.3 per cent and 1.7 per cent, respectively.

Reserve Bank governor Michele Bullock has threatened a regulatory crackdown, but has not mulled a mandate. Picture: NCA NewsWire / Martin Ollman

Not all transactions made online and with mobile wallets, which are rapidly growing in popularity, are compatible with LCR. However the RBA expects cheaper payments will soon be made available for these purchases.

“Once LCR for online and mobile wallet payments is widely available and taken up by merchants, the potential cost savings are likely to be even larger,” the RBA’s research found.

With the RBA finding that greater competition between the payment networks will “lead to savings for both merchants and consumers”, the RBA’s Payment System Board has given industry a mid-year deadline to encourage the uptake of LCR among businesses.

“If providers do not make substantial progress by June 2024, the bank will explore a formal regulatory requirement to enable LCR,” the RBA said.

However, a mandate of LCR is considered unlikely, with the central bank citing the risk of failed transactions and the high costs associated with reissuing debit cards.

Australian Banking Association boss Anna Bligh said that merchant fees had fallen significantly, while LCR uptake had similarly increased.

“Use of least cost routing is a choice for merchants to make. 65 per cent of merchants have now made this choice, with the number increasing by 10 per cent in the last six months,” she said.

Ms Bligh added that banks were proactively promoting LCR, with some offering it as a default option for new customers, however the decision was ultimately up to up to individual businesses to make the choice on whether they wish to utilise it.

“Banks stand ready to support those who wish to do so.”