The Reserve Bank of Australia (RBA) has announced a marked change in its position on Least Cost Routing (LCR) – how banks and credit card companies prioritise payments in the Apple Pay mobile wallet.
RBA shifts position on Least Cost Routing
The decision means merchants will have a basic choice in what cards they want to accept.
It is estimated the RBA change could cut debit card payment acceptance costs of more than $1 billion a year for retailers. This is because mobile transactions will no longer be allowed to automatically default to only the product that the cardholder’s bank picks.
The RBA had previously ruled that Least Cost Routing, which lets merchants pick the rails a debit card payment runs on, was too hard to apply to mobile wallets because of technical challenges.
In its October 2021 Conclusions Paper for the RBA’s Review of Retail Payments Regulation, which sets payment policy and regulation, the central bank observed that “technological changes have driven a significant shift away from the use of physical (plastic) cards at the point-of-sale to the use of new ‘form factors’, such as mobile wallets, which is increasing the pool of transactions that cannot be routed.”
Now, with Apple expected to launch acceptance of payment on its devices in Australia in the near future, the RBA has been sufficiently appraised of the technology, determining that merchants may now enable Least Cost Routing (LCR) in mobile payments.
Further, the RBA is signalling LCR is not only possible but that they expect it to be implemented.
The requirement for the addition of LCR functionality for mobile is significant at a policy level because it has the potential to leapfrog regulation that results in technology lagging to the point where it becomes ineffective.
Pricing and routing regulations around debit cards, where the bulk of purchasing has moved to, have struggled to keep up with new ways to pay, like contactless or tap-and-go cards that initially excluded domestic debit provider EFTPOS in favour of force routing to Visa and Mastercard.
With the RBA now acknowledging LCR can happen on mobile wallets, Apple has a potent argument that it facilitates choice and competition for consumers rather than eliminating it, especially when it launches iPhone payments acceptance here.
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