‘Merchant fees’ are charged by schemes, acquirers, and issuers (payment service providers) to facilitate card-based payments between merchants (businesses) and consumers. 

On average, these fees cost small businesses twice that of large businesses to process the same transactions.

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has prepared this report with insights from CMSPI Pty Ltd (CMSPI), a leading global advisory firm. CMSPI estimates Australian businesses are paying excess merchant fees of approximately $1 billion a year.

Least-cost routing (LCR) is an initiative aimed at promoting competition in the debit card market by ensuring a payment is processed via the least-cost route. Merchants could implement LCR to reduce their payment costs.

Dating as far back as 2017, the Reserve Bank of Australia’s (RBA) has taken a light-handed approach to implementing LCR; by applying ‘expectations’ that the payments industry makes LCR available for payments made in certain form factors. This approach has not successfully compelled providers to make LCR available and promote LCR to all merchant customers. 

The Treasury has proposed to update the Payment Systems (Regulation) Act 1998 (PSRA) to capture the full suite of payment entities and systems and provide the Treasurer with ministerial powers to address payment issues outside the scope of the RBA’s public interest powers. This change will be a positive step towards reducing merchant fees for mobile transactions, as transactions may no longer automatically default to the card issuer’s preferred network. However, the use of other existing government interventions can be justified to increase merchant access to LCR until these regulatory changes are made. 

The objectives of this paper are to: 

  • define least-cost routing
  • evaluate previous government payments policy efforts and inquiry recommendations
  • identify international payments policy successes and failures
  • recommend policy options to reduce the transaction costs for small business
  • propose an advocacy pathway for the ASBFEO to improve small business merchant access to LCR

Read and download the full report below.