The failure of local banks to improve the efficiency of debit card processing for Australian merchants since 2017 has prompted the Reserve Bank to widen its payments reform agenda.
In an issues paper released on Friday, the RBA said it was considering a swathe of fresh reforms to speed up the banking industry’s roll out of so-called “least cost routing” services to retailers across the country, including a measure that would prohibit banks from automatically directing contactless debit transactions to Visa and Mastercard.
Separate independent research on the contactless debit market collated by CMSPI and QI Insights show that Australian merchants are paying extra fees of up to A$900 million a year because the major banks deliberately route the processing of contactless payments to the international card schemes.
While the domestic scheme - Eftpos - is generally able to process contactless debit transactions more cheaply than its international rivals, banks such as CBA, NAB and ANZ continue to route such payments to Visa and Mastercard as a default setting on millions of debit cards.
Least cost routing is a service that allows merchants to decide which network processes the contactless debit payments they receive from customers.
Most bank-issued debit cards are designed to support competition in the debit payments market because they are embedded with technical functionality that allows transactions to be processed by either of the international schemes or Eftpos.
These “dual network” cards could potentially deliver big savings on fees paid on contactless transactions if retailers were given convenient ways to route payments away from the default networks set by the banks.
After spending almost six years trying to encourage the major banks to expedite access to least cost routing services for merchants, the RBA’s Payments System Board is now looking to mandate a set of measures that would significantly loosen the banking industry’s control over the payments processing market.
Among the key proposals floated in the issues paper is a measure that would remove the right of banks to program debit cards with default instructions that direct debit transactions to the Visa and Mastercard networks.
The reform envisaged by the RBA would result in retailers and other merchants making that decision, with banks only required to facilitate their customers’ network selections.
“The Bank is exploring the feasibility, and the associated costs and benefits, of preventing any one debit network from being given routing priority at issuance for domestic transactions,” the RBA said in the issues paper.
“Instead, the merchant would choose the routing network, with the merchant’s payments service provider responsible for identifying and implementing the merchant’s routing network preference.
“Importantly, this would provide for competitive neutrality between the networks on dual network debit cards.
“In effect, the Bank would be mandating that merchants are provided with at least a basic form of LCR, where the merchant nominates the routing network.”
The proposal is set to attract vigorous support from small business groups such as COSBOA and the Master Grocers Association, which have been campaigning in the last decade for meaningful access to least cost routing services for their members.
While the Australian Banking Association might advance arguments against the measure, it will be hard-pressed to characterise a prohibition on default routing as controversial.
The measure is already widely deployed by regulators in Europe and is gaining traction in Asian jurisdictions, including Malaysia.
Beyond that is a powerful argument that the banks should not be permitted to short-circuit or suppress price signalling in the payments market, especially when innovations such as least cost routing offer efficiency benefits to customers and the broader Australian economy through lower acceptance costs.
The RBA’s shift in approach from jawboning to mandating reform on payments has been prompted by a lethargic industry response to LCR.
According to official data only 14 per cent of NAB merchants and 23 per cent of ANZ merchants had least cost routing enabled at the end of December last year.
Suncorp and Tyro Payments were the only licensed banks to enable the service for most of their business customers on merchant plans.
The RBA is also mulling other reforms to enhance payments competition, including prospective changes to the way tokenisation of debit and credit card transactions is regulated in Australia.
Tokenisation is a relatively new digital process through which card schemes limit the amount of sensitive customer data that is transmitted when a cardholder initiates an electronic payment over the internet.
The RBA is concerned that the full benefits of tokenisation are not being realised because merchants and other stakeholders continue to capture and store sensitive banking details about customers on proprietary databases.
This practice has magnified security risks in the payments system and the RBA is considering the introduction of new standards to rein in the types of banking information businesses can retain about their customers.
“Despite tokenisation becoming more widespread, there continues to be extensive retention of sensitive card details by merchants and payment service providers, which undermines the security benefits of tokenisation,” the RBA observed.
“There continue to be high-profile examples of databases that store customer card information being breached by cyber criminals.”
The RBA also highlighted that it was looking at policy measures that would prevent card schemes and industry participants from using tokenisation to stymie competition.
“The Bank expects tokenisation to be implemented, since it can substantially reduce the amount of sensitive card details being stored – sometimes with minimal security – across the payments ecosystem,” the RBA observes.
“However, it needs to be implemented in a way that does not impede the adoption of LCR or competition in the acquiring market more generally.”
Eftpos is expected to roll out a tokenisation platform for ecommerce transactions early next year that will compete against similar services already available from the global card schemes.
Banks and other payments industry stakeholders have until 12 July to lodge written submissions in response to the regulator’s issues paper.