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International Perspective: Australia Payments Update – Regulatory reforms and merchant routing (MAG Quarterly- Volume Five, Issue Two)

Dhun Karai headshot
By Dhun Karai, Partner - Payments Advisory, Grant Thornton

June 1, 2017

The challenge for merchants globally is to have the tools available to strengthen their contract negotiating power with the card networks and processing banks that are significantly bigger than all but a few merchants. Not accepting certain cards, forming buying groups, steering and/or surcharging, are all ways in which merchants address the negotiating imbalance. From time to time however sympathetic regulators also provide merchants with a structural lever to assist in these negotiations.

In Australia, the payments regulator, the Reserve Bank of Australia (RBA), has undertaken a series of reforms to reflect the changing needs of Australia’s mature payments market. In 2001 the RBA introduced structural reforms including the regulation of interchange fees, abolishment of the “no surcharge” rules, removal of the Honour All Cards rules, transparency of costs to merchants and lowering the access barriers of the card networks. 

Again in 2003 the RBA intervened by directly regulating interchange fees, and therefore indirectly regulating merchant service fees with a weighted average of 0.54% for credit card transactions and 12 cents per transaction for debit cards (from an average of 44 cents per transaction). Card scheme fees were also regulated to ensure that there was no re-balancing of the fees charged and rebates provided to cards issuers. 

An inability to compete on price jump-started a decade of intense innovation and focus on card security not seen since the inception of electronic payments acceptance in the mid-1980s. Chip security, PIN-only authorisation and NFC (near field communication) contactless all were introduced. In fact, Australia leads globally with over 60% of all card transactions at merchants being “tap” within three years of a large retailer’s implementation of such technology. 

Recently the RBA again intervened. From 1 July 2017, new interchange fee limits come into effect with credit card transactions at a weighted average of 0.5% and a hard limit of 0.8% of the transaction value. Debit and prepaid debit transactions reduce to a flat fee of 8 cents per transaction with a hard limit of 15 cents per transaction or 0.2%.  

The net result of this series of changes is a positive relationship between merchants, card issuers and networks focused on innovation and security. While consumers will no longer have the same level of credit card rewards programs that were funded by merchants, those that pay by more efficient and cost-effective methods are no longer subsidising high credit card merchant service fee costs.

Whilst these changes have been positive for Australian merchants the market is still far from perfect. The transparency of acceptance costs and simplicity of reporting and contracts has not eventuated. Many retailers still do not know their payments costs in detail and therefore find it difficult to manage a key cost of doing business. The RBA requiring acquirers to provide on request the cost of the different payment methods, so as to assist retailers make informed decisions, was a long stretch. The outcome of transparent cards acceptance costs was intended to be that merchants could initiate routing of transactions to the lowest cost network. With no “must carry” provision or obligation in contracts stipulated, as mandated by the Durbin Amendment in the USA, merchant routing does not occur in Australia. Consequently, the domestic PIN-only debit network has been in decline with the issuance of dual network cards. 

Retailers globally are concerned about domestic debit schemes/networks closing down, or merging, and costs increasing. Domestic debit networks provide negotiation strength and a discussion item for merchants with their acquirers, which is important when the global networks have very similar technologies, prices and fee structures. Hopefully regulators the world over recognise the value of these domestic debit networks to the merchant community in managing their payment costs and provide a means for them to continue. 


Dhun Karai is a Partner at Grant Thornton. Dhun leads the Payments Advisory team which provides clients with the ability to streamline and optimize their payments processing arrangements to significantly reduce one of their top five costs of doing business while enhancing the customer experience and driving loyalty. The team has extensive experience in both the retail operations and banking sectors. They negotiate payment solutions with payments providers on behalf of retail clients and implement payments technology solutions.


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