Covid-19 is still making headlines for what we believe to be wrong reasons and has had a devastating impact on Australia's retail trade.
By Mangala Martinus, Managing Director of the Merchant Pricing Hub.
Persistent lockdowns, state border closings, and a general cut in overall spending have put significant pressure on businesses across the country. There are few options available to the industry to contain the financial damage it collectively suffers. One way to reduce the larger impact is through least cost routing.
What is it?
When a customer makes a contactless (“tap-and-go”) payment with their dual network debit card, the merchant has the option of sending the transaction between the debit network that least accepts them. Therefore, the transaction is forwarded where the lowest costs are incurred (also known as "merchant routing").
Implementing Least Cost Routing is expected to generally lower payment costs.
This is to be achieved by increasing competitive pressure between debit card payment systems – it is believed that this will create a greater incentive for all systems to lower their fees; an important part of the price business owners pay to accept card payments.
How much could be saved through least cost routing?
According to EFTPOS Australia, an independent supermarket with an average cart size of $ 44 could save $ 26,391 per year in the cost of debit transactions. Similarly, an independent gas station with an average transaction size of $ 44 per year could save $ 13,196, and an independent newsagent with an average transaction size of $ 36 per year could save $ 3,167 annually.
The Victorian Chamber of Commerce and Industry (VCCI) says that implementing Least Cost Routing will produce different savings that vary from company to company. A business could save up to 40% (based on the March 2020 RBA bulletin figures) on contactless debit card service fees if their bank passes the benefits on.
Attitude of the RBA
In a recent keynote address, RBA Deputy Governor Michele Bullock said, “Least-cost routing gives merchants some power by allowing them to route a two-network debit card transaction over the network they use least accepted. . In Australia, for many retailers, this is the EFTPOS network.
"Although Least Cost Routing has been around for a few years, it hasn't been widely adopted by the big banks that make up most of the acquiring market in Australia," she continued.
“With many customers switching to contactless in response to Covid-19, some merchants are finding that their payment costs are increasing as debit card payments are automatically routed through the international systems. It is therefore important that retailers are given the option of least cost routing. "
The RBA's position on merchant selection, or least cost routing, is that it makes a significant contribution to promoting competition in the debit card market and helping to reduce payment costs in the economy. It is something that all retailers and industries should embrace as a cost-saving measure. Businesses can make these decisions with confidence knowing that some of the largest distributors in Australia are already using this process and the RBA is ready to offer their full support.
Above Mangala Martinus
Mangala Martinus is the Managing Director of the Merchant Pricing Hub (merchantpricing.com). He has more than 28 years of industry experience in the payment and financial services sector and founded the Payments Consulting Network (paymentsconsulting.com) in 2013. He is currently focused on helping commercial and nonprofit organizations optimize payment acceptance and achieve significant fee savings.
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