With Australian merchants paying an estimated AUD 4 billion in payment fees this past year (~USD 2.8 billion),¹ in 2022, merchant card fees have taken centre stage in Australia. Merchants are asking for relief from high card fees, and Australian regulators and politicians are paying attention. 

In February 2022, the Reserve Bank of Australia (RBA) reduced its cap on fixed debit card interchange rates by AUD 0.05 – from AUD 0.15 to AUD 0.10 – in an attempt to address these high merchant fees². In anticipation of the federal election in May 2022, the nonincumbent party – the Labor Party – has also pledged to prioritise lowering transaction costs for merchants and providing clear timelines for merchant-oriented regulation regarding Least Cost Routing (LCR) implementation.³

As Australian businesses experience the largest increase in inflation in 20 years,⁴ and businesses continue to face extreme pressures on business costs, merchants may see these changes as a light at the end of the tunnel. But in reality, not all merchants will benefit equally.

Merchant benefits – not as simple as it seems

The global schemes and eftpos have adjusted seven different interchange categories in response to the new interchange cap, reducing the rate down to AUD 0.10. Some schemes have also elected to switch the affected interchange fee to a percentage-based fee – instead, choosing to adhere to an older RBA interchange cap for percentage-based debit fees at 0.20%.⁵ CMSPI’s estimates suggest that savings as a result of the RBA’s new AUD 0.10 cap may be around AUD 22 million annually across the industry (~USD 15 million).

However, not all merchants will benefit from this change. Since percentage-based fees increase in cost along with transaction size, merchants with high average transaction values (ATVs) may actually experience a cost increase as a result of these changes.

Merchants without high ATVs may still find themselves unable to benefit from this cap. With constantly shifting interchange fees, scheme fees, acquirer fees, and ancillary fees, fee changes often do not flow through correctly to the merchant. Even for payment firms, calculating fees can be highly complex, which often leads to mischarges and inefficiencies. Due to this complexity, CMSPI finds errors in the majority of merchant invoices,⁶ making it crucial for merchants to audit for savings – especially when new changes are implemented.

Least Cost Routing as a long-term solution

These changes don't just affect a merchant's next invoice. They also transform the business case for one of the biggest opportunities in Australian payments: Least Cost Routing (LCR). To take more control of their payment costs long-term, some merchants are choosing to route their transactions based on merchant choice instead of routing transactions based on default routing rules. Merchants with LCR functionality provided by their acquirers are able to determine the cheapest routing options for their debit transactions and gain savings on more competitive card rates as shown in Figure 1.

Figure 1. Least Cost Routing Transaction Flow

Over the past few years, many payment suppliers have slowly introduced some form of LCR functionality for merchants.⁷ Under CMSPI’s estimates, the full implementation of LCR on debit card transactions may result in AUD 800 million in annual savings for the merchant community (~USD 600 million). The full implementation of LCR across the industry becomes more of a possibility as Australian politicians begin to review its benefits in the upcoming May 2022 election.

How does the cap affect LCR?

For merchants with strategic rates for specific schemes, the opportunity of routing continues to grow with the new RBA cap. Originally, these merchants were previously incentivised to send transactions down certain schemes to fulfil transaction volume requirements and qualify for strategic interchange rates. However, these same merchants may now see the value of their strategic rates decreasing and the benefit of routing other debit options increasing – now rewarding merchants with LCR functionality.

CMSPI’s analysis revealed that, for one of its partner merchants, the new interchange rates indirectly increased Least Cost Routing savings additionally by hundreds of thousands of dollars annually for the merchant alone. Since Least Cost Routing empowers merchants to respond directly to high card fees, merchants with LCR are able to capitalise on any interchange changes in the future.

Least Cost Routing – complex but high rewards

Implementing LCR is more than just reviewing regulations and strategic partnerships. Reaping the full benefit of these changes to payment costs is complicated by a number of immediate considerations. Most merchants have limited visibility into their fee data, and calculating the cheapest routing option needs to include the cost of interchange, scheme, and acquirer fees, all of which can vary between percentage-based fees or fixed fees. Because LCR is not mandated yet, functionalities and reporting also differ between acquirers, gateways, and terminals. Merchants are required to coordinate between all of their payment providers to determine if LCR is available and, if so, to what extent. Figure 2 highlights the numerous considerations merchants have to take into account when implementing LCR.

Figure 2. Least Cost Routing Considerations

Despite the short-term complexity of implementing LCR, the potential regulation for the full implementation of LCR and AUD 800 million in savings on the line both mean that merchants should – more than ever – look to integrate this strategy into their payments solution. To get the most out of their LCR solution, merchants must consider the complexity of collecting data resources, calculating least-cost options, and using sophisticated benchmarking when negotiating strategic rates.

The choice is yours

With regulators and politicians taking notice of merchant fees, the Australian payments market is set to experience a fundamental shift, and merchants have a chance to take advantage of it. As fees continue to change and merchants face mounting external pressures from high inflation, the ones that choose now to audit their invoices and optimally route their transactions can take control of their card fees and put themselves at the forefront of these changes.

About Athena Zhang

As a Payments Analyst and Insights Specialist at CMSPI, Athena Zhang specialises in analysing how payment market trends and regulatory changes impact merchants in the APAC region. Athena has experience working with merchants to deliver bespoke strategic insights related to payments optimisation strategy, regulatory compliance, and advocacy relations.

About CMSPI

At CMSPI, our payments experts provide advisory services and powerful analytics. Our ultimate goal? Supporting a more innovative and productive payments ecosystem. For hundreds of clients across the globe, our insights help improve performance and create positive change.