My current understanding is the issuer fees will drop if LCR is...

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15/12/22

17:06

Post #: 65329779
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Originally posted by tomhagen: ↑

This is the Lowe speech that The Australian article was referring to: https://www.rba.gov.au/speeches/2022/sp-gov-2022-12-14.html

RBA sees it as its duty to bring down the costs, to merchants and consumers, of processing debit and credit card payments. They've been successful over the years with a whole swath of techniques - interchange caps, surcharge caps, preventing schemes from imposing "no surcharge" rules, etc. The latter is what has made SmartCharge possible, and Smartpay the company it is today.

The latest technique with least cost routing (LCR) is interesting, and something I've only read up on today. With debit cards popularity continuing to rise and now 60% of all card transactions, the RBA is looking to use EFTPOS to drive down the card processing costs for debit cards. On average merchants are being charged 0.5% to process a Visa/Mastercard card but only 0.3% for an EFTPOS card, so they want to bridge this gap.

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LCR will essentially allow the merchant to choose the cheapest network to process the transaction, and save the merchant or consumer (in the case of variable surcharge per scheme) money.

The scope covers debit card payments across all mediums - in store tap (technically done), online (targeting end of 2022) and digital wallets (targetting end of 2024). The latter, I'd say it's already technically feasible, but just convincing Apple and Google to allow the merchant to choose the cheapest route if the user has not chosen a hard preference: https://support.apple.com/en-us/HT209137

To understand the impacts to SMP, the key question to pose management is: What is the average gross profit per TTV for processing Visa/Mastercard vs EFTPOS?

If comparable, then no impact.

It would also be interesting to understand the answer for WeChat Pay and AliPay as it's essentially the same category as EFTPOS - schemes that have very low interchange charges.

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My current understanding is the issuer fees will drop if LCR is implemented for mobile transactions (as occured for other LCR enforcement)

This is the basic flow (which basically everyone here probably already knows)

In more detail: The Merchant Service fee is what is charged to provide the service. If the card scheme (issuer) fees are reduced, the overall fee can be reduced by the same amount (and the surcharge also reduced)
I've not come across any hard caps on fees or surcharges, but there is this in the RBA standard:
https://www.rba.gov.au/payments-and-infrastructure/review-of-card-payments-regulation/pdf/standard-no-3-of-2016-scheme-rules-relating-to-merchant-pricing-2021-11-18.pdf

Basically, the surcharge can be whatever it costs the merchant to provide the service. So long as the acquirers fee is not outrageous, the RBA isn't really going to regulate harder (at least that's my take).
That also means that enforcing LCR on mobile wallets will reduce the fee as a percentage of the total (and reduce overall cost of txn for customers), whilst allowing acquirers to maintain their fees.

Happy to be corrected on any of the above.

SMP Price at posting: $1.04 Sentiment: Buy Disclosure: Held
3 Upvote

0 Great analysis

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