Macquarie, HSBC face fallout from debit card reform

23^rd February, 2021. Banking Day News

Macquarie Bank, HSBC and other mid-tier banking providers could be forced to reconfigure their newly-minted single network debit cards after the Reserve Bank publishes the findings of its payments review in the middle of the year.

Leading payments experts believe the RBA’s Payments System Board is set to crack down on the practice of issuing single network cards because it threatens to undermine competition in the transaction processing market.

Thousands of Australian retailers have been able to lower the cost of accepting contactless payments in the last two years by electing to route transactions to EFTPOS Australia’s processing network.

However, merchants stand to lose those cost savings because banks such as Macquarie, HSBC, Greater Bank, Volt and Bank of Us are now issuing debit cards that allow contactless transactions to be processed exclusively through either the Visa or MasterCard networks.

Banking Day understands that the country’s largest mutual ADI – Credit Union Australia – is also considering a proposal to go down the single network path by curtailing EFTPOS functionality on its Visa debit cards.

Card issuers are adopting single network cards because they are cheaper to operate than multi-scheme offerings.

However, the temptation for middle tier card issuers to enter exclusive deals with the global card schemes has put them on a collision course with the Reserve Bank.

There is an emerging consensus among payments consultants that the RBA’s review will recommend constraining the ability of banks to undertake single-network debit card issuance.

“I believe all debit cards should be dual-network and that least cost routing should be law of the land,” said Sydney-based consultant, Bradford Kelly of Payments Services Pty Ltd.

“It’s pretty clear that the RBA will require large card issuers to offer dual network functionality.

“In many other markets such as India and Canada multi-network cards are just standard practice.”

RBA governor Phillip Lowe raised concerns about the rise of single-network cards at an AusPayNet conference in December where he highlighted their potential anti-competitive effects, particularly in relation to least cost routing.

While Lowe indicated the RBA might continue to allow small ADIs and new market entrants to issue single network cards for cost reasons, he also indicated that such issuance would be a no-go zone for the major banks.

“To be clear, the board sees a strong case for all larger issuers of debit cards to issue cards with two networks on them,” Lowe said in December.

“At the same time, it recognises that there can be additional costs of supporting two networks, which can make it harder for new entrants and small institutions to be competitive.

“So it may not be appropriate to expect very small issuers to issue such cards.”

The RBA is now consulting with market participants to determine a threshold for establishing what a “very small issuer” means for regulatory purposes.

Card issuers such as Macquarie, HSBC and CUA each boast household deposit bases above A$10 billion and therefore rank within the middle tier of Australian retail banking.

While none of these providers could be considered “large” market players, each holds a presence in the debit market well beyond the ranks of card issuing minnows such as Volt and Bank of us.

This raise questions about the tenability of the Macquarie and HSBC single network card programs, with each facing the real prospect of having to restore EFTPOS functionality when the policy outcomes of the RBA review are announced.

That could be a costly exercise given that it might require each bank to recall thousands of cards so they can be reconfigured to meet with the RBA’s regulatory expectations.

Apart from undermining the opportunity for merchants to route contactless transactions to a cheaper payments processor, single network cards also limit services available to cardholders.

Without EFTPOS functionality, debit cardholders are exposed to the risk of not being able to apply for online Medicare rebates at point of sale.

There are also constraints on the ability of some retailers to provide cash-out services.