After 13 years, banks makes choices on Tap ‘n Go debit

George Lekakis
Friday, 29 March 2019

Competition is finally arriving in the market for processing contactless payments, with ANZ becoming the first major bank in Australia to give retailers and other merchants a choice as to how Tap and Go debit card transactions are processed.
In a move that could dramatically lower the acceptance costs of retailers, ANZ has begun to offer its merchants the option of having contactless debit transactions processed by Eftpos Australia.
Since contactless payments were introduced to Australia around 13 years ago, the major banks have automatically routed debit card transactions through higher-cost Visa and Mastercard processing platforms.
ANZ has taken a low-key approach to marketing the new service to its merchants but a spokesperson confirmed on Thursday that the bank began promoting Eftpos processing of contactless payments on its website earlier this week.
“I can confirm we have launched the service to our merchants,” an ANZ spokesman said.
Banking Day understands that Westpac is also preparing to offer Eftpos processing functionality for contactless payments to its retailers from next Monday.
The Westpac launch will include the group’s regional banking subsidiaries – St George, Bank of Melbourne and Bank SA – after each updated their standard merchant service agreements this week to include provision of “merchant choice routing”.
The longstanding practice of routing contactless transactions through the Visa and Mastercard platforms meant that merchants have been copping hefty fees of around 1 per cent of the value of over-the-counter sales.
However, in 2018 Eftpos Australia began competing against Visa and Mastercard in the contactless processing market when its service was adopted by the startup business bank, Tyro.
Tyro reports that it has saved millions in fees for 4000 of its business customers after entering a deal to direct contactless debit payments to Eftpos’ cheaper processing service.
The success of the Tyro hook-up has put pressure on the major banks to add the Eftpos processing capability to their merchant service offerings.
ANZ charges retailers around 25 cents to process a contactless debit card payment through Eftpos, while Visa and Mastercard levy a fee set at 1 per cent of the value of the transaction.
On a $90 retail purchase, the Visa and Mastercard systems rake in up to 90 cents from merchants for processing the transaction.
The savings are likely to be significant for merchants such as supermarkets, petrol stations, fashion boutiques and appliance retailers that have a high volume of transactions above $25.
While Westpac has not yet published details of how its new service will be offered to merchants, ANZ’s is offering Eftpos processing only on an opt-in and all-in basis.
When merchants request the service all of their contactless debit card transactions will be processed through Eftpos, rather than Visa and Mastercard.
That looms as a sore point for the Reserve Bank’s Payments System Board, which has been urging the banks to move to a pure “least-cost routing” processing model.
Under the PSB’s preferred model, the banks should be building systems which automatically rout transactions to the lowest cost processing platform.
Under ANZ’s pricing, the Visa and Mastercard platforms are cheaper than Eftpos for handling low value contactless transactions.
The PSB envisaged a scenario where banks such as ANZ could program merchant terminals to detect the cheapest processing system before a contactless payment was routed.
That has not happened in the case of ANZ and the PSB’s response to the business model the bank has developed is likely to be guided by the reactions of merchants and industry bodies such as the Australian Retailers’ Association.
ANZ argues that it has had to overcome significant programming and technical challenges to get its new offering to market and that the rollout would have taken considerably longer had it decided to adopt a pure least cost routing model.
Banking Day understands that the bank remains committed to migrating to a genuine least cost routing model in the future.
The immediate test for ANZ’s commitment to the service will probably hang on how actively it promotes and educates merchants about the benefits of the new service.
In the post-Hayne world in which banks are promising to rebuild trust with their customers, ANZ will come under pressure from business peak bodies to promote the appropriate processing option to merchants.
Retailers want more from banks on new Eftpos offer
01 April 2019
George Lekakis
Australia’s peak retail group is warning the major banks to give all retailers equal access to the Eftpos processing of contactless debit transactions after ANZ acknowledged that thousands of its merchant terminals were not yet programmed to deliver the service.
ANZ last week became the first major bank to allow some merchants to choose whether contactless debit payments are processed through the international schemes (Visa and Mastercard) or the comparatively low-cost Eftpos platform.
However, not all ANZ merchants currently have access to the Eftpos service, with the bank disclosing on its website that payments facilities located at medical practices and multi-merchant terminals were not offering “merchant choice routing”.
ANZ manages a diversified fleet of merchant terminals, but only five models are currently offering Eftpos processing of contactless payments.
In a revised merchant services contract published on its website, ANZ warns its business clients that access to the Eftpos service “may not be immediate” and could trigger additional set-up costs.
“The merchant acknowledges that ANZ may instruct the merchant to take additional steps to ensure activation is effective,” the bank tells business customers in the newly worded contract.
“For example, the merchant may need to upgrade, restart or reconnect their electronic terminals for merchant choice routing to become effective.”
The Australian Retailers’ Association (ARA), which has been agitating for the rights of merchants to decide how contactless debit transactions are processed for many years, says it is disappointed with ANZ’s decision not to offer a pure “least cost routing service”.
Under the business model recommended by the Reserve Bank’s Payments System Board, it was envisaged that ANZ would have offered a service that automatically directed contactless payments to the cheapest processing platform.
Instead, the bank’s upgraded terminals are only capable of diverting all of a merchants’ contactless transactions to either Eftpos or the international card schemes.
And the “opt-in” nature of the service offering means that cost savings will only be harvested by those merchants that request to use Eftpos.
“Although the ANZ bank has stated that it is committed to working towards “least cost routing” it is difficult to understand why ANZ was unable to achieve this when Tyro, a small acquirer, was able to accomplish this in about three months,” ARA chief Russell Zimmerman said.
“Furthermore, the ARA is perplexed as to why the National Australia Bank (NAB) and Commonwealth Bank of Australia (CBA) banks are still silent on this issue.
“While we understand that both banks will be working towards an offering, we would encourage both banks to offer least cost routing and not an opt-in model as a matter of urgency.”
Westpac confirmed to Banking Day that it would launch Eftpos processing of contactless payments from this morning.
While details of Westpac’s service offering have not yet been made public, the bank’s revised merchant contract indicates that it has also baulked at the PSB’s call for automated least cost routing.
Westpac, which describes the service in its merchant contract as “merchant choice routing”, also requires business customers to request the service before it is activated.
The revised standard contract also hints at a possibility that not all Westpac terminals are capable of offering access to the Eftpos service.
The RBA’s head of payments policy Tony Richards told the AusPayNet conference in November last year that Australian banks had been “disappointingly slow” to develop least cost routing in the local market.
“This appears symptomatic of a broader lack of competition in acquiring services,” he said.
“In many respects, the card industry seems to be dominated by the issuing side of the market, with the incentives sometimes being to push higher-cost over lower-cost payment systems.”
Mastercard slashes interchange fee as contactless war erupts
03 April 2019
George Lekakis
Mastercard Australia has slashed the interchange fee it charges on over-the-counter debit transactions under a new pricing schedule published on its website.
The decision will help the global card scheme to counter a competitive threat from Eftpos Australia as major banks such as ANZ and Westpac give retailers the right to choose how contactless payments are processed.
Mastercard has dramatically lowered the interchange fee on contactless debit transactions to 5.5 cents from around 12 cents.
That slightly undercuts Eftpos’ standard interchange rate of six cents per transaction.
While the interchange fee is only a small part of the total cost borne by merchants for accepting debit card payments, the reduction should make Mastercard more competitive against Eftpos as the two companies prepare to go to war for market share in contactless processing.
Mastercard has not indicated whether it will also cut scheme fees it charges merchants.
Reserve Bank data shows that the average total merchant service fee levied by Mastercard and Visa was around 0.56 per cent on debit transactions in the December quarter.
The RBA measured the average cost of debit transactions processed by Eftpos at 0.26 per cent for the same period.
Richard Wormald, the head of Mastercard’s Australasian business, told Banking Day that the RBA quarterly data did not accurately reflect the true domestic pricing of routing debit payments through his company’s network.
He said that Mastercard’s average merchant fee – as measured by the RBA – includes debit payments received by Australian merchants from cardholders located overseas.
“We also allow customers coming to Australia to use their Mastercard,” he said.
“That means that the RBA data is not comparing apples with apples because Eftpos only operates for physical transactions that are card-present in Australia.”
Wormald said that the cut to interchange on all card-present debit transactions followed a general review of fees across different merchant categories in the local market.
Mastercard has increased interchange fees on debit transactions handled by public transport providers and for card-not present ecommerce payments that are not tokenised.
“Our aim is to try and drive change to make the payments system more efficient,” Wormald said.
When asked by Banking Day why the interchange rate on card present (also known as over-the-counter) transactions was being slashed just as Eftpos entered the contactless processing market, Wormald dismissed the suggestion that the interchange reduction for over-the-counter debit transactions was being subsidised through other types of merchants copping fee hikes.
“We are not trying to game the system,” he said.
Wormald said the new Mastercard pricing schedule gave incentives to merchants engaged in ecommerce to “tokenise” online debit transactions, which would deliver two factor verification of a cardholder’s identity.
He indicated this would help address the online fraud problem that has become a major concern of regulators.
Under the new pricing arrangements, ecommerce merchants that adopted Mastercard’s tokenised debit service would pay only eight cents per transaction compared to 15 cents for untokenized payments.
“Merchants can halve their costs if they adopt tokenisation,” Wormald said.
“Our research shows it reduces fraud and it results in a higher transaction rate for ecommerce businesses.”
In an interview with The Sydney Morning Herald on Tuesday, Eftpos chief executive Stephen Benton warned that some banks and other providers of digital wallets were attempting to “lock-out” low cost payments players like his company.
Eftpos is now calling on regulators to take steps to thwart such anti-competitive behaviour.
The dilemma that confronts the RBA’s Payments System Board is that tokenisation of online payments has been identified as one of the most effective strategies for reducing fraud but there is also potential for it to be used as a tool to block competition.
Wormald believes the concerns over the potential for “lock out” are overdone in the Australian digital payments market.
“In my view there are no access issues whatsoever,” he said.
Wormald also defended the major banks following recent criticism from regulators over the time it has taken them to introduce merchant choice routing.
ANZ and Westpac have come under scrutiny for adopting business models that deviate from the RBA’s preferred model known as automated least cost routing.
“No (bank) acquirer has got to the position where they can dynamically route transactions,” Wormald said.
“I know the banks are working through making the changes but there is a lot of complexity involved.
“I think they need to give the banks time to do this.”