What is least-cost routing and how can it benefit my business?

In today’s digital age, businesses rely heavily on technology to streamline their operations and improve efficiency.

One such technology that can have a significant impact on a business’s bottom line is least-cost routing. 

In this article, we will explore what least-cost routing is and how it can benefit your business. 

Whether you’re a small business owner or the head of a large corporation, understanding least-cost routing and its potential benefits is crucial for staying competitive in today’s market.

What is least-cost routing?

Whenever a business accepts an electronic payment through an EFTPOS machine, they have to pay a service fee to make the transaction happen. 

Least-cost routing is designed to keep these costs down, by processing eligible transactions through the cheapest available network.  

Eligible transactions include contactless (tap-and-go) dual-network debit cards, which can be used to make transactions through EFTPOS or a debit card, issued by your bank, that can be identified by having both the Mastercard or Visa logo on one side and the eftpos logo on the other.

The Reserve Bank of Australia has indicated that 72 per cent of Australian transactions are made with debit cards¹, and around 90 percent of domestically issued debit cards are dual-network debit cards², therefore it may be beneficial to have least-cost routing as part of your business.

A brief history of least-cost routing

Now that we’ve covered what least-cost routing is, let’s take a look at where it began. 

Traditionally, cardholders have determined how their debit card transactions are processed, by pressing either cheque or savings (eftpos network) or credit (Visa or Mastercard network) when they insert or tap their card.  

However, when contactless transactions came into the picture, such as Tap and Go transactions, the processing was shifted to international networks, such as Visa and Mastercard, to do this on behalf of the consumer without their physical input. This initially reflected the fact that contactless card payments were only available for international schemes.³  

Eventually, most cards and EFTPOS machines were activated for eftpos contactless functionality.  

However, when card-issuing banks sent out dual-network debit cards they were programmed with the international scheme as the first-priority network for contactless use and the eftpos network as a second priority.  

While most cardholders were indifferent about which network processes their contactless transactions, many businesses had a preference for contactless transactions to be processed via the eftpos network, because it’s typically less expensive for them.³ 

Hence, the least-cost routing initiative was introduced for contactless card payments to help businesses keep their transaction costs down. 

We’re also proud to say we’re the first bank in Australia to offer EFTPOS least-cost routing to our customers.  

Tap & Save⁴ is now a reality for Tyro customers Australia-wide following the ability for EFTPOS to handle contactless card payments.

Relevant regulations

Least-cost routing in Australia is backed by the Reserve Bank of Australia (RBA). 

According to the RBA, least-cost routing is an initiative aimed at promoting competition in the debit card market and helping to reduce payment costs in the economy. 

The RBA Board strongly supports the issuance of dual-network cards to consumers and the provision of least-cost routing functionality to businesses.

Least-cost routing algorithm

To start using least-cost routing, you’ll need to opt-in for the feature with your EFTPOS provider. 

Once everything is set up, it’s typically an automated process, which means whenever a customer makes an eligible tap-and-go payment, you don’t have to manually key in anything to activate the money-saving strategy.

Your EFTPOS machine will do the hard work for you, so you don’t have to manually enter in any details to your EFTPOS device.

Types of payments

As we’ve mentioned, least-cost routing only works with contactless (tap-and-go) dual-network debit cards. The reason for this is when a customer inserts or swipes their debit card, they have to choose the network they want to use. When they tap their debit card, however, the EFTPOS machines selects the network for them. 

Let’s break down the elements of eligible payments below:

Debit card transactions

Debit cards are linked to a bank account and draw money directly from those funds. When a customer uses a debit card, this means they’re pulling from the money they already have rather than borrowing money they don’t (in which case would be credit).

Contactless payments

Hence the name, contactless payments don’t need to make physical contact with an EFTPOS machine. Instead of being inserted or swiped, they can simply be hovered or waved where it prompts you to do so. 

In Australia, customers can make contactless payments of up to $200 without entering a PIN. If the purchase exceeds $200, they need to enter their four-digit code to finalise the payment.

Mobile payments

Payments made through digital wallets like Apple Pay, Google Pay and Samsung Pay are a form of contactless payment. However, they aren’t yet eligible for least-cost routing. This is set to change though with the RBA wanting mobile wallet providers to offer least-cost routing options for businesses by the end of 2024.

Benefits of least-cost routing

By implementing least-cost routing, businesses can enjoy the benefits and efficiency that everyday technology can now provide.

Reducing EFTPOS merchant fees

The main advantage of least-cost routing is that it can reduce EFTPOS merchant fees and keep more money in your business bank account.  

Reducing the costs associated with card payments is just one of the many ways that EFTPOS can benefit your business.

How Tyro can help

For small businesses with Tap and Save enabled, these savings can go a long way in their business—allowing them to invest in the areas of the business that matter most.

How Tyro’s Tap & Save works

Integrated with our signature Tyro EFTPOS machines, Tyro Tap & Save automatically routes eligible contactless debit card transactions under $1,000 through the lowest cost network, meaning you don’t have to lift a finger to save on processing costs⁴. 

Any debit contactless transactions of $1,000 or more will continue to be routed via the original network due to the common daily limit on EFTPOS transactions.

Getting started with least-cost routing

Ready to reap the rewards of least-cost routing? It’s easy to get started with Tyro.

Implementation

Whether you’re an existing or new Tyro customer, you can activate Tap & Save simply by letting us know that you want it.  

Once you’ve opted in for the feature, we’ll go ahead and set it up for you – zero activation fees and zero disruption to your business. 

Once everything is set up, you can start enjoying the benefits of the cost-saving feature and monitor costs whenever you want in the Tyro Portal.

Wrap-up

As a small business, reducing costs is critical to maintaining profitability and staying on top in a competitive market.  

By keeping Merchant Service Fees to a minimum, Tyro Tap & Save is a simple step your business can take to ensure you’re not paying more than you have to. 

If you think your business could be taking advantage of least-cost routing but are unsure where to start, you can speak to our customer support team who will be happy to give you more advice on how to get started.

1 Reserve Bank of Australia. (2020). The Cost of Card Payments for Merchants https://www.rba.gov.au/publications/bulletin/2020/mar/pdf/the-cost-of-card-payments-for-merchants.pdf 

2 Reserve Bank of Australia. (2021). Review of Retail Payments Regulation – Conclusions Paper October 2021 https://www.rba.gov.au/payments-and-infrastructure/review-of-retail-payments-regulation/conclusions-paper-202110/dual-network-debit-cards-and-least-cost-routing.html 

3 Reserve Bank of Australia. (2017). Merchant Payment Costs and Least-cost Routing https://www.rba.gov.au/speeches/2017/pdf/sp-so-2017-12-13.pdf 

4 Tyro does not guarantee any cost savings by opting in for Tap & Save. Savings on eligible transactions processed through the cheapest network vary for each business depending on their card mix, transaction volume and amount, industry, and pricing plan. Eligible transactions are contactless debit card transactions less than $1,000. Tap & Save is not available on Special Offer pricing which includes some flat fee simple pricing offers or where you surcharge on debit card transactions as cost savings may not be realised. For details refer to Tyro.com or call 1300 00 TYRO (8976). 

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