Least-cost routing explained

Merchants across Australia are faced with constant pressure on margins. Given that payment costs can be significant, it’s not surprising that merchants are paying increasing attention to them.

We’ve done some homework to help you understand least-cost routing, the benefits, and considerations.

What is least-cost routing?

Least-cost routing is where a merchant chooses to route a debit card transaction to the lowest cost network for that transaction, which in many cases will be the eftpos network.

Least-cost routing’ is sometimes also referred to as ‘tap and save’, ‘merchant choice routing’, ‘wave and save’, ‘lowest-cost routing’, ‘low-cost routing’, ‘merchant routing’, or ‘smart routing.’ However, these terms are not always interchangeable because how this functionality is applied by service providers can vary. It is important to understand the differences – read on as we explain this in more detail.

Why does it matter?

The merchant service fees charged by a payment service provider for accepting payments can vary according to the different payment methods used by a cardholder.

Most debit cards issued in Australia (i.e. cards that draw funds from a bank account) are dual-network cards, i.e. support both an international network (Visa or Mastercard) and the domestic eftpos network. This means that debit card transactions can be routed through either of those networks.

Typically, when a dual-network card is inserted into a point of sale terminal, cardholders determine how the transaction will be routed by selecting either CHQ or SAV for eftpos or the CR button for the international network.

However, for a contactless or ‘tap-and-go’ transaction, the cardholder is not given that option and presently the transaction is usually routed to the international network for processing.

Data collected by the Reserve Bank of Australia (RBA) highlights that merchant service fees on eftpos cards are on average lower than fees on Visa and Mastercard debit cards.

Because international network transactions are typically more expensive for merchants, merchants report that the shift from contact to contactless transactions has resulted in a significant increase in payment costs for debit transactions.

Let’s unpack how least-cost routing can help you

Merchant Benefits

  • Can least-cost routing benefit my business?

Typically yes, but it depends upon how the payment service provider has enabled least-cost routing, if your business is on a pricing plan that has differential pricing for eftpos and international network transactions, and the average transaction size (value).

  • Will every business save?

Savings will depend on your card mix, transaction volume, transaction size, industry, and pricing plan.

It is important that you ask your service provider how they have implemented least-cost routing, i.e. are eligible transactions individually routed to the lowest cost network, or does enabling this functionality mean that ALL eligible transactions are routed to the eftpos network? This can have implications when Visa and Mastercard merchant service fees are ad valorem (i.e. a percentage of the transaction value) while eftpos merchant service fees are based per transaction.

For example, if the Visa and Mastercard merchant service fee is 1% and the eftpos merchant service fee is $0.15 per transaction, then at an average $50 transaction size, the average merchant service fee if all eligible transactions are routed to Visa and Mastercard would be $0.50, compared to an eftpos fee of $0.10.

In the scenario above, if instead all eligible transactions are routed to eftpos, there would be lower merchant service fees for each transaction above $15, but a higher fee for transactions below $10. Some service providers that enable all eligible transactions to be routed to the eftpos network label this functionality as ‘merchant choice routing.’ However, this differs from when a service provider has enabled true ‘least-cost routing’ where a merchant would save regardless of the transaction size as each individual transaction would be routed to the lowest cost network for that transaction. In this example, that would mean any transactions above $15 would be routed to eftpos while any transactions equal to or below $15 would be routed to Visa or Mastercard.
One bank, Tyro, has reported that eligible merchants have saved on average over 8% on total merchant service fees since the launch of the functionality, while some Tyro merchants have saved on average around 20-30% on routed transactions.

For merchants that already add a surcharge to pass on the costs, the cost saving should be passed on to the cardholder as the surcharge should be in line with the cost of acceptance for the network to which the transactions are routed.


  • Are there any transaction amount limits for least-cost routing?

The amounts will depend on your provider. Some will only allow least-cost routing when transactions are above a certain dollar amount while others will apply it to all eligible transactions. Debit contactless transactions above $1,000 may sometimes continue to be processed via the original network due to the common daily purchase limit on eftpos transactions with some banks.

  • Will least-cost routing also affect credit card payments?

No. In Australia, the concept of routing choice only applies to debit card transactions (and not to credit card transactions). It also only applies to dual-network cards and cards that only support one network will always be routed over that network.

  • Will my customers realise the difference with least-cost routing?

The customer experience at the point of sale remains the same, with the customer tapping or inserting their card to pay as they do today.
Your customers may notice that the transactions processed through eftpos are automatically deducted from their account, whereas the transactions processed through Visa and Mastercard can be reported as pending for a longer duration.

  • Are protections against fraud and disputed transactions the same for eftpos, Visa and Mastercard?

Chargeback rights are the same for eftpos, Visa and Mastercard debit authorised transactions. These cover the full range of losses required by the ePayments Code, such as fraud, unauthorised transactions, goods not received and equipment malfunction or processing errors.
There is also no difference between the security of eftpos and Visa and Mastercard debit transactions though different daily limits may apply.

  • Should my customers be able to choose how their transactions are processed?

They still can. Customers that want to select the network through which their transactions are processed are still able to choose by inserting their card.

  • What do I need to disclose to my customers?

There are no specific regulations covering what needs to be disclosed to customers. However, your service provider may have specific requirements.

How can I enable least-cost routing?

Nearly all payment service providers in Australia offer least-cost routing on dual-network debit transactions for in-store payments. This feature is typically called ‘merchant choice routing’, ‘tap and save’,  ‘wave and save’, or ‘smart routing’, depending upon the service provider.

A few payment service providers also offer least-cost routing on dual-network debit transactions for online recurring payments and digital wallet payment apps (e.g. Samsung Pay).

Least-cost routing is usually offered as an optional feature and may not be available on all terminal models or pricing plans. Merchants are recommended to contact their current payment service provider to understand the options available to implement least-cost routing.

If the payment service provider proposes changing the pricing plan in order to implement least-cost routing, then this may be an opportune time to check out the different payment service provider options available in the market.

Author: Mangala Martinus, Managing Director, Payments Consulting Network.

How can Merchant Pricing Hub and Payments Consulting Network assist?

Working through the myriad of different payment service provider options can be difficult particularly with all the variations in pricing structures and the different ways that least-cost routing can be implemented. This is where a payments industry expert like Payments Consulting Network can make a significant difference in achieving the best outcome for organisations seeking to optimise payments acceptance costs and service levels.

Payments Consulting Network created Merchant Pricing Hub to highlight the services that we provide businesses and not-for-profit organisations to reduce payments acceptance costs while also addressing other key requirements such as: integrations; systems reliability and redundancy; reporting; settlement timeframes; and acceptance of new payment types.

One of the key tools that we use to provide clarity around potential cost savings is our Fee Savings Calculator. This sophisticated tool helps to easily compare alternate transaction routing options and pricing structures across different service providers.

We recognise that the support required can vary between organisations based on organisation size, industry sector, payments channels supported, payment types supported, card mix, capacity, expertise, requirements and objectives. For this reason, we provide a range of different services to cater for different needs. Please refer to our Services pages for an outline of each of the services that we offer.

To read recent client testimonials about the work we do, please refer to the Case Studies section as these highlight the difference engaging Payments Consulting Network can make.

If you would like support or wish to find out more, please complete the contact form on the Services or Contact Us pages to provide further information on your organisation and requirements. We will then be in touch to schedule a call to discuss potential options and next steps.

Sources and Useful References