The Reserve Bank of Australia has substantively shifted its position on how banks and credit card schemes prioritise their products in mobile wallet Apple Pay. The decision means shopkeepers will have a basic choice in what cards they accept.
The shift could soon dramatically cut debit card payment acceptance costs of more than $1.0 billion a year for retailers and government shopfronts. This is because mobile transactions will no longer be allowed to automatically default to only the product that the cardholder’s bank picks.
The RBA had previously said a process known as Least Cost Routing (LCR), which lets merchants pick the rails a debit card payment runs on, was too hard to apply to mobile wallets because of technical challenges.
In its October 2021 Conclusions Paper for the RBA’s Review of Retail Payments Regulation, which essentially sets payment policy and regulation, the central bank observed that “technological changes have driven a significant shift away from the use of physical (plastic) cards at the point-of-sale to the use of new ‘form factors’, such as mobile wallets, which is increasing the pool of transactions that cannot be routed.”
Fast forward a year, with Apple expected to launch acceptance of payment on its devices here imminently. The RBA has now been sufficiently appraised of the technology, determining that merchants may now enable Least Cost Routing (LCR) in mobile payments. Further, the RBA is signalling LCR is not only possible but expected – regulatory parlance for what the central bank wants to see before it wields the stick.
The requirement for the addition of LCR functionality for mobiles is significant at a policy level because it has the potential to leapfrog regulation that results in technology lagging to the point where it becomes ineffective.
Pricing and routing regulations around debit cards, where the bulk of purchasing has moved to, have struggled to keep up with new ways to pay, like contactless or tap-and-go cards that initially excluded domestic debit provider EFTPOS in favour of force routing to Visa and Mastercard.
Visa, Mastercard and the banks used to hold the whip hand on payments, but Apple Pay’s meteoric ascent coupled with Apple’s huge financial power has dealt it into the game to the point where it’s now the gatekeeper, and banks are howling that Apple and Big Tech have too much power.
Banks have good reason to be scared. After half a century of controlling card and electronic payments, Apple this year revealed it’s turning its iPhone handsets into terminals, a move that could swiftly kill lucrative terminal rental deals banks use to tether their merchant customers.
Decoupling the terminal from the bank, meaning the merchant owns the device, could well have a similar effect to phone number portability reforms that let you more easily swap providers.
Banks will have been preparing to try and block such a move as anti-competitive and an over-concentration of market power.
With the RBA now acknowledging LCR can happen on mobile wallets, Apple has a potent argument that it facilitates choice and competition for consumers rather than eliminating it, especially when it launches iPhone payments acceptance here.
The RBA’s backflip on LCR on mobile might be signalling the launch is coming sooner than later.