LCR failings come back to bite the banks in payments merger review

03/05/21,
Banking Day

The banks’ tardiness in implementing least cost routing for merchants is coming back to haunt them, as one submission after another to the ACCC’s review of the proposed amalgamation of BPAY, eftpos and NPPA has cited problems with LCR as the reason they would not trust the owners of the merged entity to promote innovation and competition in payments.

The Australian Competition and Consumer Commission has released 23 submissions to its review, with the majority of them opposed to the merger.

BPAY is owned by the Big Four banks. eftpos has 19 members, including the big banks, a number of smaller banks and Coles and Woolworths. NPPA has 11 shareholders, including the big banks, smaller banks and the Reserve Bank.

The majority of the submission came from organisations representating merchants, small businesses and various retail sectors. Absent so far are any submissions from consumer groups.

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Retailers and merchants are concerned that as consumers use less cash and rely more on debit cards and digital wallets for payments, transaction fees are a growing cost. They want to see more innovation and competition in payments, particularly if it leads to lower costs.

Generally, their view is that the big banks would have effective control of the merged entity and they do not trust them to deliver that innovation.

The Council of Small Business Organisations Australia said an entity that can compete more effectively with international payment networks makes sense.

However, “our experience is that the benefits to be gained by the banks will not transfer as reduced costs to small business. Over time, competition in payments would be significantly reduced by this merger.”

The National Retail Association said that with cash payments disappearing, merchants need to see card and digital transaction costs come down.

The NRA opposes the merger because it believes the marriage between big banks, large payment providers and large retailers would lock out small business.

These and other submissions referred to concerns over least cost routing, which is the process of allowing merchants to choose to send contactless dual-network debit card transactions via the network that costs less.

LCR relies on the issuance of dual network debit cards, allowing point of sale transactions to be routed through the eftpos network or Visa or Mastercard.

The RBA has said LCR can help reduce merchant payment costs and increase competitive pressure between the debit schemes.

The Australian Association of Convenience Stores said “many of the banks that are party to this application are already long-standing beneficiaries of one of the most insidious payments practices – the refusal to embrace least cost routing. The rate of adoption has been unacceptably slow and there is a long way to go.”

Restaurant and Catering Australia sad the new organisation would “in no way be incentivised to continue pursuing LCR, which would dramatically impact our small business members.”

The Reserve Bank has, in the past, criticised the banks for their handling of LCR, although its tone has softened in recent communications.

In a speech to the Australian Payments Network last December, RBA governor Philip Lowe said: “While progress has been slower than we would have liked, the slow progress by the major banks did create competitive opening s for other players, which led to some innovation.

“The major banks now all offer least cost routing, with some making it the default offering for small and medium-sized businesses.”

Submissions in support of the amalgamation see a bigger local payments group as better able to compete with the global payments giants Visa and Mastercard, and big tech companies. For many of the groups making submissions it appears to come down to a question of who they dislike more – the big banks or Visa and Mastercard.

The Australian Retailers Association said that initially it had concerns about the impact of the proposed consolidation due to the lack of transparency of the merger discussion.

“This raised questions about the future of eftpos and whether retailers would continue to be served by a competitive domestic scheme,” the ARA said.

“It is critical that the proposed merger provides certainty and strengthens a domestic debit scheme in order to provide a competitive counterweight to the international card schemes.

“We are broadly satisfied that the merger application addresses most of these concerns and that the merger has the potential to ultimately strengthen competition in the payments system.”

The Australian Finance Industry Association said the merged entity would have the scale to compete with overseas payment networks.

Visa and Mastercard made submissions. Visa said the merged entity will have a dominant position in the Australian payments landscape and its “control’ of the value chain could reduce the motivation for the merged entity’s shareholders to explore and offer alternative solutions to customers.

Visa said: “There is a risk that if the merged firm were to develop standards that do not conform to international standards, and shareholders are incentivised to invest in the merged firm’s technology at the expense of others, this could prevent the Australian public from obtaining the full benefit of all global payments technology innovations.”

Visa recommends that safeguards are put in place to ensure the proposed merger does not increase barriers to entry. The proposed merger should maintain principles of competition and choice.

Mastercard was more forthright: “The proposed merger will result in a fundamental and permanent change to the structure of payments markets in Australia. This will have long-term, adverse consequences for competition in these markets.”

It also warned that there would be serious governance issues, with the proposed merger increasing the scope and level of co-ordination between businesses that would ordinarily compete with each other.