Merchants across Australia are faced with constant pressure on margins. Given that payment costs can be significant, it’s not surprising that merchants are paying increasing attention to them.

New least-cost routing functionality will help merchants save on fees, but not all banks and payments service providers have enabled this service.

We’ve done some homework to help you understand least-cost routing, the benefits, considerations and list of service providers offering the service in Australia.

What is least-cost routing?


Least-cost routing is where a merchant chooses to route a debit card transaction to the lowest cost network for that transaction, which in many cases will be the eftpos network.

‘Least-cost routing’ is sometimes also referred to as ‘tap and save’, ‘merchant choice routing’, ‘wave and save’, ‘lowest-cost routing’, ‘low-cost routing’, ‘merchant routing’, or ‘smart routing.’ However, these terms are not always interchangeable because how this functionality is applied by service providers can vary. It is important to understand the differences – read on as we explain this in more detail.

Why does it matter?

The merchant service fees charged by a payments service provider for accepting payments can vary according to the different payment methods used by a cardholder. 

Most debit cards issued in Australia (i.e. cards that draw funds from a bank account) are dual-network cards, i.e. support both an international network (Visa or Mastercard) and the domestic eftpos network. This means that debit card transactions can be routed through either of those networks.

Typically, when a dual-network card is inserted into a point of sale terminal, cardholders determine how the transaction will be routed by selecting either CHQ or SAV for eftpos or the CR button for the international network.

However, for a contactless or ‘tap-and-go’ transaction, the cardholder is not given that option and presently the transaction is usually routed to the international network for processing. 

Data collected by the Reserve Bank of Australia (RBA) highlights that merchant service fees on eftpos cards are roughly half that of fees on Visa and Mastercard debit cards:



Because international network transactions are typically more expensive for merchants, merchants report that the shift from contact to contactless transactions has resulted in a significant increase in payment costs for debit transactions.

Let’s unpack how least-cost routing can help you.

Merchant Benefits 

Can least-cost routing benefit my business?

Typically yes, but it depends upon how the payments service provider has enabled least-cost routing, if your business is on a pricing plan that has differential pricing for eftpos and international network transactions, and the average transaction size (value).

Will every business save?

Savings will depend on your card mix, transaction volume, transaction size, industry, and pricing plan.  

It is important that you ask your service provider how they have implemented least-cost routing, i.e. are eligible transactions individually routed to the lowest cost network, or does enabling this functionality mean that ALL eligible transactions are routed to the eftpos network? This can have implications when Visa and Mastercard merchant service fees are ad valorem (i.e. a percentage of the transaction value) while eftpos merchant service fees are based per transaction. 

For example, if the Visa and Mastercard merchant service fee is 1% and the eftpos merchant service fee is $0.15 per transaction, then at an average $50 transaction size, the average merchant service fee if all eligible transactions are routed to Visa and Mastercard would be $0.50, compared to an eftpos fee of $0.15. 

In the scenario above, if instead all eligible transactions are routed to eftpos, there would be lower merchant service fees for each transaction above $15, but a higher fee for transactions below $15. Some service providers that enable all eligible transactions to be routed to the eftpos network label this functionality as ‘merchant choice routing.’ However, this differs from when a service provider has enabled true ‘least-cost routing’ where a merchant would save regardless of the transaction size as each individual transaction would be routed to the lowest cost network for that transaction. In this example, that would mean any transactions above $15 would be routed to eftpos while any transactions equal to or below $15 would be routed to Visa or Mastercard.

One bank, Tyro, has reported that eligible merchants have saved on average over 8% on total merchant service fees since the launch of the functionality, while some Tyro merchants have saved on average around 20-30% on routed transactions. 

For merchants that already add a surcharge to pass on the costs, the cost saving should be passed on to the cardholder as the surcharge should be in line with the cost of acceptance for the network to which the transactions are routed.

Considerations

Are there any transaction amount limits for least-cost routing?

The amounts will depend on your provider. Some will only allow least-cost routing when transactions are above a certain dollar amount while others will apply it to all eligible transactions. Debit contactless transactions above $1,000 may sometimes continue to be processed via the original network due to the common daily purchase limit on eftpos transactions with some banks.   

Will least-cost routing also affect credit card payments?

No. In Australia, 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 and cards that only support one network will always be routed over that network. 

Will my customers realise the difference with least-cost routing?

The customer experience at the point of sale remains the same, with the customer tapping or inserting their card to pay as they do today.
Your customers may notice that the transactions processed through eftpos are automatically deducted from their account, whereas the transactions processed through Visa and Mastercard can be reported as pending for a longer duration.

Are protections against fraud and disputed transactions the same for eftpos, Visa and Mastercard?

Chargeback rights are the same for eftpos, Visa and Mastercard debit authorised transactions. These cover the full range of losses required by the ePayments Code, such as fraud, unauthorised transactions, goods not received and equipment malfunction or processing errors.
There is also no difference between the security of eftpos and Visa and Mastercard debit transactions though different daily limits may apply. 

Should my customers be able to choose how their transactions are processed?

They still can. Customers that want to select the network through which their transactions are processed are still able to choose by inserting their card.

What do I need to disclose to my customers?

There are no specific regulations covering what needs to be disclosed to customers. However, your service provider may have specific requirements. 

How can I enable least-cost routing?

Here is a list of payments service providers offering least-cost routing in Australia as at 11 July 2019: 

ANZ Bank: Merchant Choice Routing - an optional feature which, when activated, means that all contactless transactions made when cardholders present multi-network debit cards are processed through the domestic eftpos network and not through the international card network (i.e. Visa or Mastercard).
CBA: Merchant Choice Routing is an optional feature for CBA and Bankwest merchant customers which, when enabled, allows contactless payments made with multi-network debit cards to be processed through either the domestic eftpos network or the multi-network debit card schemes.
St.George Bank: Merchant Choice Routing - an optional feature which, when activated, means that all contactless transactions made when cardholders present multi-network debit cards are processed through the domestic eftpos network and not through the international card network (i.e. Visa or Mastercard). 
Suncorp: Wave & Save - an optional feature which, when activated, uses least cost routing to process contactless transactions made when cardholders present multi-network debit cards. Based on the merchant's pricing plan, the Wave & Save transaction limit is set to a default position, where transaction fees are the same via both the eftpos and international network (i.e. Visa or Mastercard). Scheme debit card contactless transactions valued over the transaction limit are routed through the eftpos network. Any scheme debit card contactless transaction valued equal to or under the transaction limit continue to be processed via the international card network and the credit card transaction fee charged.
Tyro : Tap & Save - an optional feature which, when activated, means that all contactless eligible transactions made when cardholders present multi-network debit cards are processed through the domestic eftpos network and not through the international card network (i.e. Visa or Mastercard). A new pricing category to reflect the new fees for Tap & Save transactions will apply.
Westpac : Merchant Choice Routing - an optional feature which, when activated, means that all contactless transactions made when cardholders present multi-network debit cards are processed through the domestic eftpos network and not through the international card network (i.e. Visa or Mastercard).  
How can I easily compare payments service providers?

An annual membership to Merchant Pricing Hub provides access to our service provider profiles, pricing calculator and benchmarking tools.

You can sign up for a FREE annual membership by 30 September 2019 by using the discount code: LEASTCOST1 (only available to the first 2,000 merchants using this code).

To sign up for an annual membership you first need to create an account to login and then subscribe, following the process below:
  1. On the home page, under the Annual Membership box, click "SIGN UP NOW" to go to the login page.
  2. On the login page, click "Sign up Now!" to take you to the create an account page.
  3. On the create an account page, enter your contact details and business details, then click "CREATE MY ACCOUNT."
  4. Check your email inbox for a verification email. Click the "verification link" to go back to the login page.
  5. Login, which will display your account Dashboard.
  6. Go back to the home page and click "SIGN UP NOW" again to take you to the payment page.
  7. On the payment page, enter the discount code in the "COUPON" field and click "Apply coupon". Enter your payment card and  billing details, then click "SUBMIT". Note that an initial $1 fee will be charged to your card, but this will be refunded within 5 business days.
  8. Once you see your successful payment confirmation screen you have full access to all our website tools and resources!
Our pricing calculator tool helps businesses doing less than $30,000 in monthly turnover compare the fees of different service providers. As service providers update us with new pricing structures related to least-cost routing we will add these to the pricing calculator.

If you are a large business with more complex needs and require more in-depth support, please send an email to info@paymentsconsulting.com providing your contact details, a brief description of your business (type, transaction volume and value), issues and requirements. One of our consulting team will then get in contact to discuss how we can assist.

Sources and Useful References 

RBA reveals fee gouging on tap and go payments continues to skyrocket Posted on: 10-07-2019

RBA reveals fee gouging on tap and go payments continues to skyrocket

Even with the heavy fees that comes with it, the ‘tap and go’ trend on debit and credit cards continues to grow , as cash transactions seem to be becoming a thing of the past.

Read More

Banks roll out cheaper tap-and-go payments for business Posted on: 03-06-2019

Banks roll out cheaper tap-and-go payments for business

Small and medium businesses could possibly save money by changing how their customers’ tap and go payments are processed.

Read More

After 13 years, banks make routing choices on tap 'n go debit available Posted on: 29-03-2019

After 13 years, banks make routing choices on tap 'n go debit available

ANZ this week became the first major Australian bank to offer merchants a choice as to how contactless (Tap and Go) debit card transactions are processed, and Westpac is expected to follow with similar functionality next week.

Read More

Westpac to Offer Cheaper Tap and Go Payments for Retailers Posted on: 05-04-2018

Westpac to Offer Cheaper Tap and Go Payments for Retailers

Westpac has joined its rivals in committing to give small businesses a choice by 2019 on whether they want contactless dual network debit card payments to be sent through the lower-cost eftpos network, rather than via the international card schemes.

Read More

Tyro First-to-Market Ahead of Government Deadline on Contactless Payments Posted on: 13-03-2018

Tyro First-to-Market Ahead of Government Deadline on Contactless Payments

Tyro is first-to-market with least-cost routing for merchants on debit contactless payments with its 'Tap & Save' solution.

Read More