By Bernard Hickey
Yesterday I booked return flights to Auckland from Wellington on Air New Zealand and decided to try something different.
I'm as keen as the next person to save money and thought I could save myself NZ$8 by not paying the credit card surcharges.
I tried to pay using the POLi internet banking service. It turned out after a couple of false starts (it doesn't work on Apple's operating system) that POLi wanted me to give it my Internet bank username and password. It did it using a page that looked like an ASB login page, but wasn't.
This phishiness made me feel uncomfortable.
After a little digging I found ASB had warned its own customers (in this Stuff article from December) against using POLi, which is also used by various government departments. That was more than enough to scare me off. (And is more fodder for another story.)
So I was forced back to using a credit card to book my tickets online. That got me thinking. The credit card surcharges amounted to NZ$8 (NZ$4 each way), which was worth 4.5% of the total cost.
After a little bit more digging and talking with credit card and retailing industry experts I discovered that most retailers and companies like Air New Zealand would be paying credit card transaction costs of less than 1%, which begs the question: why does Air New Zealand charge so much and how do they get away with it?
Firstly, Air New Zealand's only competitor, Jetstar, charges even more for each flight per person -- NZ$5. That too is extortionate. Jetstar's parent Qantas has form across the Tasman. Australia's version of the Consumer Association, Choice, pointed out in a 2010 report on Credit Card surcharging that Qantas' credit card fee of A$7.70 plus GST per domestic flight helped generate A$100 million of excess profit that year, just from surcharging alone.
So, collectively, Air New Zealand and Jetstar are charging at least NZ$4 a flight for credit card transactions that are likely to cost them NZ$1 per transaction. And let's not even begin to think about the times that a single transaction covers multiple people and multiple flights. For example, I bought a return flight to Wellington from Auckland last year for myself, my wife and my daughter (no child discount of course). That's six flights and six fees for one transaction. The total surcharge worked out almost 8% of the total cost.
It's worth trying to work out the extent of the egregious charging going on here in New Zealand. There were around 6 million passenger movements through the Auckland domestic terminal last year alone. Assuming surcharging profits per flight and per person of around NZ$3 would suggest profits of around NZ$18 million just there. This is back of the envelope stuff and doesn't take into account those passengers who use POLi or book through agents or via corporate accounts, but it also doesn't take into account flights from airports that don't end up in Auckland.
Last year Air New Zealand made normalised net profits of NZ$91 million. Assuming Air New Zealand has two thirds of the market here (and that's probably conservative), that suggests that around 10% of its net profit was made from overcharging for credit card fees. Fair Go asked Air New Zealand about overcharging in May last year, but Air New Zealand said its charges simply covered its costs. However, Air New Zealand has never detailed the domestic costs vs revenues for its credit card fees. It may be revenue neutral overall (we don't know) because of a cross subsidy for international routes, but my credit card industry sources tell me the costs are much less than 1% per transaction. International charges of around 1% are in line with that cost.
The domestic terminal is an important element of this. I'm focusing on the domestic flights because this is where the big problem is. Anyone buying a return flight from Wellington to London would pay a credit card surcharge of NZ$35 on a NZ$3,152 ticket, which works out at a more reasonable 1.1%. There is a lot more competition on these international routes and it's not so easy to get away with overcharging.
Essentially Air New Zealand and Jetstar are using their dominance on domestic routes to overcharge with credit card fees and therefore to subsidise their less profitable international routes, or just plain boost their profits.
It's an opportunistic bit of rorting that shouldn't be allowed, let alone tolerated by their customers (although at the moment they have no choice). Air New Zealand Jetstar should be honest with their customers about the true price of their flights and the credit card charges. They may argue they would simply increase the cost of their flights to offset the lost profits on credit card charges. Fair enough. I don't mind as long as you're honest with me. and the charges are transparent.
By the way, I'm not the only one talking about this. Consumer did a nice piece on this in August last year. Consumer's Sue Chetwin was also quoted in this piece on Stuff from last month.
Where's the regulator?
Which brings me to the regulator involved, the Commerce Commission, and what it could or should be doing.
A bit more digging (with many thanks to a few helpers on twitter) uncovered that this issue of credit card surcharging is not limited to New Zealand. Australia liberalised its credit card surcharging rules in 2003 and has been scrambling over the last year to put some of the genie back in the bottle after Qantas and a range of hotels, taxi companies and others started rorting the system. The Reserve Bank of Australia announced in June last year it would limit these surcharges to a 'reasonable cost' after a review of the practices that had developed since deregulation in 2003.
Here's its summary of what went wrong:
There is evidence to suggest that there are certain industries or payment channels where surcharging well in excess of merchant service fees is quite common. These industries and channels also tend to be those where the proportion of merchants that surcharge is quite high. The Bank identified a range of industries where it is common for merchants to impose high ad valorem surcharges, including: accommodation and travel; entertainment, leisure and recreation; hospitality; professional services; rental, hiring and transport; restaurants, dining and takeaway; retail; taxis; and telecommunications and internet.
In addition, data from a survey conducted by the Bank in 2010 suggest that the incidence of surcharging is much higher for online purchases than those made in person; respondents paid a credit card surcharge on around 18 per cent of transactions made online compared with 4 per cent of those made in person. A related concern is that often these surcharging industries or merchants are ones for which there are few genuine alternatives to payment by a credit or scheme debit card.
And here's the RBA chart of what retailers were surcharging (blue lines), alongside what those credit card fees were costing them (red lines). Obviously the gap represents pure profit. The lines crossed around 2007, four years after the leash was removed.
The new limits were due to kick in from January, but I understand Qantas has managed to secure a delay until March...
The same thing is happening in Britain, where the Office of Fair Trading (OFT) is also banning excessive surcharging on credit cards..
Here's the British Consumer Affairs Minister Norman Lamb quoted last September via BBC on the issue:
"Traders will no longer be able to make a profit by charging the consumer for credit or debit card use above the amount it costs them to process that payment," said Consumer Affairs Minister Norman Lamb.
"These proposals will stop companies from adding on these excessive charges, and allow consumers to see a clearer and more transparent breakdown of what they are paying for."
So what's happening in NZ?
Back in 2009 the Commerce Commission took legal action against the banks and the credit card companies over their fixing of these credit card fees between banks and retailers. The regulator settled with the banks and card companies.
Part of the agreement was a plan to allow retailers to charge credit card fees to customers to recover the costs of the fees, while allowing retailers, credit card system providers and banks to compete against each other to lower charges, which would in turn be passed on to consumers in the form of lower prices... The hope was the reforms would save retailers NZ$75 million a year, which would somehow magically be passed on to consumers through the power of the market in the form of lower prices...
Surprise, surprise, and almost four years on and it's hard to see how the 'free' market has benefited consumers. Instead, retailers and online sales merchants such as Air New Zealand and Jetstar, have used that freedom to extract excessive surcharges while at the same time forcing the banks and card providers to compete to lower costs. The combination of a higher revenues and lower costs is higher profits...
Now the Commerce Commission has noticed something is amiss. Possibly. Back in October it announced it was surveying retailers to find out how the 2009 changes were playing out. It made clear this wasn't a formal inquiry and it didn't see any enforcement action resulting from the survey.
Here's Commerce Commission Chairman Mark Berry:
“We want to know what their experience has been since the credit card scheme rules have changed. For example, have they been able to negotiate a better deal with their bank as a result?” asks Commerce Commission Chair Dr Mark Berry.
The Commission’s survey is not an investigation. The results of the survey will not result in any further enforcement action. The survey will help the Commission to complete a detailed analysis evaluating the impacts of the changes to the credit card markets resulting from the Interchange settlement agreements. The results of that analysis are simply to inform the Commission (and other interested agencies) about the effectiveness of this intervention.
It doesn't sound to me like the Commerce Commission is that worried or keen to force the airlines back into line. I've asked the Commerce Commission for a chat to find out their current approach and they're still getting back to me.
Meanwhile, one of my Twitter followers said he had already complained to the Commerce Commision and been told it was comfortable with the NZ$4 fee, which the supposed consumer watchdog said was 'reasonable.'
I hope the Commerce Commission proves wrong my suspicion that it is locked into the dogma of many in the 'economic' government departments that the market works best and competition will solve all ills. It hasn't in this case and it hasn't overseas in bigger markets with more competition.
For some reason the situation of paying for a good or service online seems to change the usual dynamics of competition. It's as if for a moment in time there is a dominant player with a monopoly position who can overcharge with impunity. It seems to be a special situation where the normal market dynamics don't apply.
Let's hope the regulator steps up if the airlines don't do it themselves.
I welcome your thoughts and experiences in the comments below. Have you exerienced such credit card surcharges in other areas? Taxis are one notorious example I've seen. What were the fees?
I remember in 2011 a petrol station in Remuera started charging to use credit cards and almost immediately lost most of its business. It had to abandon the surcharge after a couple of months and even a year or so later it had a sign on the footpath saying it was under new management and no longer charged for using credit cards. It was still empty.
One of my twitter followers, Ahmad, contacted me to say he complained to the Commerce Commission about the practice last year, but was told the Commission was not concerned.
Here's the copy of his correspondence to me, including a letter he said he received from the Commission.
I lodged my complaint with the Commerce Commission in November 2011. They phoned me in May 2012 with the result of their investigation (apparently "extensive") but I never received anything in writing.
Your recent tweets prompted me to call them again today to clarify the situation, and it seems I never received their decision in writing due to a typo in my email address. The person I spoke to today reiterated the Commerce Commission's position and said that there was nothing that had changed significantly since May 2012 that would lead them to review that decision.
In addition to the information below, I was told today that my complaint resulted in some changes from Air NZ including a change in terminology (to "Card Payment Fee" which encompasses "all costs associated with accepting credit card payments" which Air NZ says is more than only the commission fee charged by the CC companies.
Of note, the Com Com says that Air NZ are free to charge any fee they wish as long as it bears a "reasonably close relationship to the costs associated with providing credit card payment" - the Com Com are satisfied with information provided by Air NZ (some of which was "commercially sensitive" and not able to be disclosed to me) that they are not profiting from the CRF.
This complaint was directed solely at Air NZ because that is what I raised with them, so does not specifically cover JetStar.
The determination was made after "extensive" investigation including information provided to the Com Com by Air NZ themselves.
Hope this is of some use to you. Kind regards, Ahmad.
Here's the letter from the Commission.
“The Commission has investigated your complaint (among others) about the card payment fee charged by Air New Zealand Limited (Air NZ) on airfares paid by credit card. In our view, the existence, level and disclosure of the card payment fee are unlikely to breach the Fair Trading Act 1986 (the Act).
Air NZ provides customers with a choice of payment methods, and it is possible to purchase flights without incurring the card payment fee (e.g. by online banking, Airpoints dollars or Air NZ travelcard). Where a credit card payment fee is being charged, Air NZ is entitled to charge any level of fee that it chooses.
However, this fee does need to bear a reasonably close relationship to the costs that Air NZ incurs for the provision of credit card payment i.e. given the fee is called a card payment fee, the fee must relate to the costs associated with credit card payments. It would be misleading if the fee was used for other revenue recovery purposes.
In addition, it must be clearly disclosed to the cardholder at the time of purchase.
In relation to this latter point, we note that the card payment fee is clearly disclosed in a number of places on the Air NZ website during the online booking process. Air New Zealand has advised the Commission that, in setting the level of this fee, Air NZ’s sole objective is to recover all costs associated with accepting credit cards as a form of payment.
Its card payment fee is used to recover all of the direct and indirect costs associated with credit cards payments. The fact that the fee is a per person, per flight fee reflects the way in which credit card direct and indirect costs are incurred by Air New Zealand.
That is, the costs are incurred as a percentage of the value (in dollars) of all bookings, rather than per credit card transaction.
In order to simplify the fee structure, Air NZ has grouped airfares into one of three categories - domestic, tasman/Pacific Island and international - and has elected to charge a set fee, rather than a percentage fee. Air NZ advised the Commission that it considers charging a set figure is easier for customers to understand and enables Air NZ to set the fee out clearly in its booking process and promotional material.
Thank you for the information you have provided. Feel free to give me a call if you have any questions.”