Senior RBA payments officials, including Reserve Bank Governor Philip Lowe, will figure prominently in the proceedings of AusPayNet's annual conference in Sydney today and their overriding message is likely to focus on the need for banks and global payments schemes to reduce the cost of electronic payments.A careful reading of the RBA's recent discussion paper on retail payments shows that the major banks are pursuing strategies that are inconsistent with the Payments System Board's efforts to embed competition in electronic payment channels.The PSB appears to have lost patience with the major banks on a range of issues, including their slothful rollouts of least cost routing to small business customers.The failure of major banks to deliver least costing routing (LCR) to most retailers looms as a salient issue for the Reserve Bank as it prepares to overhaul regulation of the payments sector.In 2017 the PSB threatened the major banks with mandating LCR but abandoned the idea after they each gave undertakings they would fast-track programs to deliver the service.However, in the 24 months since making those pledges, the banks have only delivered the service to a fraction of Australian merchants.LCR enables retailers to direct contactless transactions on dual network debit cards to the cheapest processing network available, instead of having those payments automatically routed by the bank to a potentially high cost platform.The introduction of LCR has delivered large cost savings on merchant service fees for large companies such as McDonalds, Coles and Chemist Warehouse that have negotiated deals allowing them to bypass Mastercard and Visa and route contactless payments through Eftpos Australia's platform.However, most of the banks - with the possible exception of ANZ - have done very little to extend such benefits to small retailers.In fact, Banking Day has learned that several of the major banks have threatened some retailers with higher service charges and transaction fees just for requesting LCR be added to their merchant plans.Westpac, CBA and National Australia Bank have refused to include least cost routing as a service in their simple merchant plans where merchants pay a so-called "blended rate" on their fees for accepting debit and credit card payments.It's an absurd situation where the banks are leveraging an opaque pricing system to justify not giving small retailers access to a cheaper way of accepting contactless debit payments.This problem might only be resolved by the Reserve Bank imposing a mandatory requirement on the banks to deliver the cheaper service option to merchants.However, the RBA also indicates in its discussion paper that the reforms it is contemplating could upend the structure of existing merchant fee arrangements by forcing greater disclosure from the banks and payments schemes such as Visa about how they price card-based payments in Australia.The discussion paper highlights the RBA's disappointment with the industry's half-hearted rollout of LCR and also catalogues some of the alleged anti-competitive tactics adopted by the banks to impede its delivery."…there are several factors which may be limiting the overall downward pressure on merchant payment costs," the RBA states in