What is Merchant Routing Online and how it can save you thousands

In this article, ‘schemes’ means Mastercard and Visa. Eftpos is also a scheme, but to make it easier to differentiate Visa/Mastercard from Eftpos, when I say ‘Scheme’ I mean only Visa and Mastercard.

Where Scheme Debit Cards came from

When you open a bank account, most likely you’ll get a Visa or Mastercard debit card linked to that account. These cards are used at retail stores to make payments on a terminal using your own funds in your bank account. Before Scheme Debit Cards came about, we all used our Eftpos cards for such payments. We used to associate the Schemes with only Credit Cards.

Over the years, however, the Schemes and the banks got closer and closer, and Scheme Debit Cards were issued by banks with the default ‘rails’ for a transaction being the Schemes. This made sense for online payments, as Eftpos at the time wasn’t able to be used for eCommerce. But these cards were also being used in retail stores where payment was made on a terminal. The banks would process Scheme Debit cards through the scheme rails even though Eftpos was a viable option and most often cheaper for the merchant. The banks processed these transactions through the Schemes because they were looking out for their own bottom line and strategic partnerships with the schemes, without thought for the merchant — because the merchant was the loser here.

Enter Least Cost Routing

Well, the RBA didn’t like this, and a few years ago mandated banks to allow a Merchant (the shop owner) the choice to route certain card transactions to Eftpos — it was called Least Cost Routing (LCR) or Merchant Choice Routing. LCR works if a customer pays using a Dual Network Scheme Debit Card, which is a Visa or Mastercard Debit Card with an Eftpos logo on it — go on, check your pocket and see if your card has the Eftpos logo.

Most Scheme Debit Cards issued are Dual Network, and the RBA is pushing for all Debit cards to be Dual Network. So we can safely say most Scheme Debit Cards will be able to route to Eftpos. The reason a Merchant would want to use LCR is that, for most transactions, the Eftpos rails are cheaper than the Scheme rails.

The cost difference (an example)

Here are some examples of costs for $50 and $300 transactions. I’ve used arbitrary pricing to highlight the point. As you can see, a merchant paying 1.5% for a Visa/Mastercard (Scheme) transaction who sells items at $300 would save considerably by routing to Eftpos. In fact, for that transaction they save $4.10 — which quickly adds up to tens of thousands, even for a small business.

So why isn’t every business doing it?

The issue was that the RBA only made the banks enable LCR for Card Present transactions — those are the ones where you pay on a terminal, like in a retail store. They didn’t mandate it for Card Not Present payments (online, eCommerce, invoice, recurring, batch). And unfortunately, transactions paid via a phone can’t be routed either (I’ve written a separate article on that, as it’s wrong and costing merchants millions of dollars so Apple can fleece everyone).

So does that mean businesses such as eCommerce miss out? What about a large insurer, or an electricity retailer? If you manage payments at such a company, you’re probably wondering why you’ve never heard of LCR Online. Why hasn’t your bank said “John, we can save you hundreds of thousands by pushing debit cards to Eftpos”? Because many bankers don’t keep up with trends outside their own bank’s offering — and most banks aren’t offering this.

You don’t have to miss out

There are some non-bank players in the market that have developed the ability to route transactions online to Eftpos. It isn’t your Big 4, though.

I can help businesses save hundreds of thousands a year through Merchant Routing Online. Don’t wait for your bank to get up to speed — they’re always behind the 8-ball and only make changes when forced to by the RBA.

If you’re interested in Merchant Routing Online, or have any other payment question, please reach out.

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Related reading

• What is Scheme Tokenisation and why it could save you thousands
• The danger of banks white-labelling scheme-owned payment gateways