Least-Cost Routing Explained

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The Reserve Bank of Australia (RBA) has established changes to card payments regulations banning excessive payment surcharges and providing new powers for the Australian Competition and Consumer Commission (ACCC).

This new standard affects the amount that merchants can surcharge for card transactions. The standard applies to all business/merchants that impose payment surcharges on payment transactions regardless of their size.  

If a business chooses to impose a surcharge on its customers for making a payment using a credit, debit or prepaid card, the level of the surcharge must not be excessive. 

A payment surcharge is considered excessive if it exceeds the cost of acceptance.

You do not have to impose payment surcharges on accepted payment methods. If you do not impose any payment surcharges on your customers, the ban will have no impact on you.

The full ACCC Guidelines can be viewed online.


What payments are affected?

The new law covers surcharges on typical card payment methods:

  • Eftpos (debit and prepaid)
  • MasterCard (credit, debit and prepaid)
  • Visa (credit, debit and prepaid), and
  • American Express companion cards (issued through an Australian financial service provider, rather than directly through American Express).


What costs can be included when working out a surcharge?

If you choose to impose a payment surcharge on a payment method covered by the ban, the amount of the surcharge must not exceed your cost of acceptance for that payment method.

Your costs of acceptance are provided to you on a statement from your bank (acquirer) or payment services providertypically shown as a percentage figure amount.

For most businesses, the fees include:

  • merchant service fees
  • fees paid for the rental and maintenance of payment card terminals
  • any other fees incurred in processing card transactions, including cross-border transaction fees, switching fees, and fraud related chargeback fees (but not the cost of any actual chargebacks).

You can also choose to pass on additional permissible costs, but you are required to calculate the permitted surcharge yourself.

Additional permissible costs paid to other providers are:

  • gateway fees paid to a payment service provider
  • the cost of fraud prevention services paid to an external provider
  • any fees paid for the rental or maintenance of card terminals paid to a provider other than your bank or payment facilitator
  • the cost of insuring against forward delivery risk.

These must be able to be verified by contracts, statements or invoices.

Businesses cannot include any of their own internal costs when calculating their surcharges (for example, labour or electricity costs).


Calculating your Cost of Acceptance


Source: ACCC


Can I impose a flat fee surcharge?

If your costs of acceptance are charged to you in percentage terms, it will typically be appropriate that any surcharges you impose will also be expressed as percentages.

The ban does not prevent you from imposing a payment surcharge as a flat or fixed fee, however, you will need to ensure that the amount of the surcharge does not exceed your cost of acceptance for any given transaction.

If you wish to impose a single surcharge across multiple payment methods, you must set the surcharge at the level of the lowest cost method - you can’t average across the methods.

Example

If your average cost of acceptance for Visa Debit is 1%, for Visa Credit is 1.5%, and for American Express is 2%, you would only be permitted to charge the same level of surcharge for each payment method if it was 1%, as that is the lowest of all payment methods. You would not be allowed to use an average of the three figures.


What if I don’t comply with the ban?

The ACCC is responsible for enforcing the ban and can take the following actions:

  • issue an infringement notice with penalties of up to $12 600 (body corporate) or $126 000 (listed corporation)
  • take court action seeking pecuniary penalties of up to $1 358 910 per contravention, injunctions and other orders.


More information on surcharging and cost of acceptance

More information is available from your bank, payments service provider or the Reserve Bank of Australia Questions and Answers on Card Payments Regulation.

Related Guides

How to select an EFTPOS provider: Essential criteria a small business should consider

With almost twenty banks and payments service providers to choose from, selecting an eftpos provider for a small business like a retailer or café can be difficult. 

This month we have listed the top four criteria a small business should consider when selecting a new EFTPOS service provider for in-store payments:


1. Card Acceptance

Generally, Visa, Mastercard and eftpos cards are now accepted as standard by all providers. Most service providers will also accept American Express and Union Pay cards, but often separate fee arrangements apply. Watch out for exclusions and inclusions within the standard fees as the likes of Commonwealth Bank (American Express and Union Pay) and Square (American Express) do include additional cards as part of the standard fee schedule, but most do not. Other payment types which may be relevant to your organisation but which are not accepted by all providers include Alipay (accepted by Tyro, NAB and Smartpay), Diners Club and JCB cards.


2. Fees and Transaction Volumes

Most providers have tiered fee structures based on monthly turnover. The higher the monthly turnover, then the lower the cost per transaction.

Nearly all service providers will provide customised quotes once a business averages more than $30,000 in monthly turnover, so if your business fits into this category it is always worth asking for a quote rather than just looking at the standard pricing presented on a website.

Be careful when comparing plans which include a certain volume of transactions within a fixed monthly fee (e.g. most major banks) to those that charge a fixed monthly fee per terminal and separate transaction fees (e.g. Bendigo Bank). While merchant plans that include transactions within the flat monthly fee may look simple, you may also be paying more per transaction if you do not reach the monthly turnover threshold each month.

It really is important to consider which card types are included in the standard fees and where additional fees may apply. Some service providers also treat credit cards and debit cards (i.e. those taking funds from a savings or cheque account) differently, with credit cards charged as a percentage of value, and debit cards sometimes charged as a fixed fee per transaction. Not all service providers make this distinction, so watch out for this when comparing fee structures. 

When customers tap, these transactions are typically routed via the international card schemes (e.g. Visa and Mastercard). Service providers such as Tyro allow merchants to implement “least-cost routing” which enables a merchant to direct these contactless transactions to the lowest cost provider, which for debit cards may be the domestic eftpos scheme.

Terminal fees are also factored in differently with some plans including the cost of the first terminal in the monthly fee, some having a separate monthly terminal fee, while others (e.g. Square) charge an upfront fee for the terminal but no monthly fees.

Other fees which tend to differ between service providers include establishment fees, lost/damaged terminal fees, cancellation fees and monthly account fees if settling funds into another bank’s account. 


3. Connectivity and reliability

How the terminal connects to your service provider may not sound important until you first start having connection issues when trying to accept payments, so make sure you understand beforehand what will work best for your business.

Most terminals targeted at small businesses will connect via a mobile network. Mobile network coverage can vary considerably, particularly if your payment terminal is located at the back of a shop or café. Hence, find out which mobile network is used by your preferred provider and check to ensure that you get strong mobile reception where your payment terminal will reside. If the terminal supports Wi-Fi, consider whether this is a better option as the primary means of connection or can serve as a backup.

If you run a Point-of-Sale (POS) system, then also check whether your preferred service provider is able to provide a terminal that integrates with this. Square even provides a free POS application.

Reliability or the up-time of your service provider can sometimes be an issue and if your business relies heavily on accepting electronic payments, then this becomes an important factor. Check with other business owners and social media to find out whether there have been any up-time issues. Many service providers also provide low cost mobile card readers (e.g. with a small up-front fee or monthly fee), so you may want to consider having one of these on-hand with another service provider to use if your primary service provider goes down for any reason.


4. Design

Check out whether the terminal utilised by your preferred service provider fits easily on your counter-top and works aesthetically for your type of business.

Some businesses, e.g. cafes and restaurants, may also find it useful to accept payment at the table, so check out how easily this can be done with the terminal.

How easy the interface is to use is also important. This is sometimes difficult to check beforehand, but you can ask other businesses who use the same terminal or check out the terminal user guide which the service provider can provide (some even make this available on their websites).

Finally, make sure the terminal supports all the functionality you require, e.g. tipping, automatic surcharge calculations, split bills, email receipts.


Comparing service providers (particularly card acceptance, functionality and pricing) can be a difficult task for a small business, particularly when time is limited. This is where the Merchant Pricing Hub can make life easier with our service provider comparison tool and pricing calculator. Just sign up for an annual membership for full access.


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