Using the right payments funnel

Ever made a tap-and-go payment with your debit card and wondered how that money gets to where it needs to be? No? You’re probably not alone. Indeed a good payments system is one where you shouldn’t have to think about these things.

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But there is quite a complex payments system behind all of those transactions, a vast underground plumbing network if you like. And a significant part of that system is in the process of being re-plumbed. 

"Changes were driven by the break-neck speed of innovations during the past decade and we, consumers, have driven them and can see them.”

At ANZ we call it “Merchant Choice Routing”, or MCR. The aim is to give merchants more choice in how they process card payments and, ultimately, make the system more efficient.

The evolution of payment has taken centuries - from barter to cowrie shells to coin and cash and cheques - but in the last decades that evolution has accelerated with payment cards, digital wallets, smart watches, Fitbit Pay, Garmin Pay and more.

Those changes were driven by the break-neck speed of innovations during the past decade and we, consumers, have driven them and can see them.



Route costs

This latest change though is not so visible.  In industry speak, the talk is about “Least Cost Routing” and it has been part of the payments blueprint for about 18 months (but actually gained currency as an idea well before that following work by the Australian Payments System Board). The Reserve Bank of Australia and the Australian Retailers Association have been advocating this Least Cost Routing model, but there are other factors which must be considered.

The idea is that a tap-and-go payment from a customer’s debit card (plastic or digital) should be sent down the payments system that costs the merchant the least – different routes have different costs. So that idea makes sense – if we started with a blank sheet of paper.

But the system has actually been in place for decades, with the first MasterCard transaction occurring in 2003. ANZ in partnership with Visa commenced the contactless journey in 2008. It has since become ubiquitous with our daily transactions and has helped propel us towards a less-cash society, if not quite a cashless one.

Because Visa and Mastercard developed the technology first and then worked with banks and merchants to deploy, whenever you’ve made a tap-and-go payment on your debit card in the past, that transaction was automatically sent via their payments system. Around 2014, eftpos joined the party and developed its own version.

There are different costs for the merchant associated with each of these systems and different ways of levying charges. ANZ charges cents per transaction for eftpos and for Visa and Mastercard a percentage of the transaction value for most customers. For the consumer, historically there has been virtually no noticeable difference.

In basic terms, there is a threshold for most small businesses or merchants and it’s when any transaction gets to about $A30. More expensive than that and it’s probably going to be cheaper for the merchant to have those payments sent via the eftpos system.

But for transactions cheaper than $A30, the Visa or Mastercard option will probably be cheaper. This is a very basic rule of thumb to help explain the main point here, which is why we have now developed Merchant Choice Routing.

Choosing the right funnel

Like the name suggests, MCR gives the merchant or small business customer, the ability to choose which system they want those payments funneled through.

We don’t presume to know their business as well as they do and we’re certain they have a better idea of their plans for the future. So we’ve given them the choice.

If they opt for the eftpos system but down the track decide it is not best for them, they can choose to go back.

ANZ was the first bank to roll out this change, but others have since done similar work and we expect the whole industry to get on board sooner than later.

There are nuances regarding pricing options, the benefits of one system versus another, and in some cases just the complex mix of payments a particular business might experience on a regular basis make definite answers difficult.

These are all important factors any business will need to consider, but they now have a choice.

It’s still early days and we only have about 50 businesses using the option, but we are confident in time this could benefit a significant number of our customers.

One customer who recently activated MCR came to us to talk about turning contactless payments off completely – not something we hear very often given how much consumers love the system.

At the time, we hadn’t made it known we were offering a choice. Once we explained it to the customer, they elected to leave contactless payments enabled on their terminal and chose the option they believed would best suit them. That choice empowered the business to run their operation the way they want.

In time, and with the benefit of more informed data, we expect MCR will evolve into a more sophisticated system, perhaps with dynamically linked pricing information enabling a routing decision to be made as a transaction is being processed. But for now, it’s important to provide this choice and give merchants more power in how they run their business and how they access the complicated systems that make our daily transactions so simple.

John Collins is Payments and Merchants Lead at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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