The Government's moving to empower the Commerce Commission to regulate fees charged by banks and card companies such as Visa and Mastercard, that are paid by retailers and other small and medium sized businesses (SMEs).
Commerce and Consumer Affairs Minister David Clark says following consultation, a Retail Payments Systems Bill will be introduced to Parliament later this year. It'll require reductions in interchange fees "as soon as possible," enable direct intervention by the Commerce Commission "using a broad suite of powers to regulate different participants in the retail payment system," and introduce a disclosure and reporting requirement to enable the Commerce Commission to monitor the retail payments system.
As the Ministry of Business, Innovation & Employment (MBIE) puts it, the retail payments system facilitates the transfer of funds from consumers to merchants in exchange for goods and services. The retail payments system includes a range of retail payment methods including card products, cheques, cash, bank transfers and buy now, pay later products. The Government says the overall objective for the retail payments system is to deliver long-term benefits for consumers and merchants of the retail payments system within NZ.
Card payments are the most common payment method in NZ comprising debit, including EFTPOS, and credit card payment products. Unlike cash payments, the card payment system is a complex web of technical infrastructure, arrangements and standards involving a number of intermediaries. As a result, the cost of accepting card payments is a significant overhead for merchants, typically the third highest cost of doing business for SMEs after wages and rent.
“One of the main components of merchant service fees is the interchange fee. We will cap those for credit card transactions at 0.8%, which is in line with Australia,” Clark says.
“We’re also capping the interchange fees charged for online debit card transactions at 0.6%. Contactless debit card interchange fees will stay at their current levels of 0.2% or less, and for swiped and inserted debit, it will stay at 0%.”
According to retail lobby group Retail NZ, NZ contactless debit fees on average were the equivalent of 1.1% of the purchase payment in 2019 versus 0.6% in Australia where regulation has been in place for years. Credit card merchant service fees were 1.5% in NZ versus 0.8% in Australia.
Interchange is typically the biggest part of the broader merchant service fee, comprising about three-quarters of it. Each bank sets its own interchange rates within a cap set by Visa and Mastercard. The merchant service fee is set by banks. Merchant service fees were temporarily waived by banks after COVID-19 hit last year. EFTPOS transactions don't incur a merchant service fee.
“The new regulatory regime is estimated to result in savings of approximately $74 million each year for New Zealand merchants. Smaller retailers, and those who rely on credit or online sales will particularly benefit from these savings,” says Clark.
"The Government aims to seek final policy decisions on reducing merchant fees in mid-2021, with a view to the full regulatory regime coming into effect next year."
Regulating merchant service fees was an election promise from the Labour Party last year.
“Reducing the merchant service fees that New Zealand businesses are being charged is a priority for this Government, and critical to the recovery of the economy," Clark says.
“Currently unregulated, New Zealand’s merchant service fees are set much higher than they are in Australia and add significant overhead for retailers, who often pass those costs onto consumers through higher prices."
Clark writing to banks, looking at BNPL sector
Speaking to journalists Clark said he's also looking at buy now pay later service providers, albeit he had nothing to announce at this stage. Buy now, pay later merchant fees can be more than 5% of the purchase payment.
Clark also says he expects banks to start moving.
"They [banks] are profitable in Australia where fees in many of these cases are about half what they are here...I'm also writing separately to the banks, the acquirers, to set out my expectation that they communicate with their customers, the retailers, about how their system works and advise them if there's a better plan that they should be on," Clark says.
"I am disappointed that there hasn't been more movement voluntarily and that's why we are taking steps to regulate...I expect retailers to pass on their savings to consumers," says Clark.
High cost payment methods boosted by COVID-19
In a regulatory impact statement the Government says impacts from the use of high cost payment methods became apparent when the COVID-19 pandemic hit with contactless payments encouraged, at the expense of EFTPOS, which is fees free for merchants, for public health reasons.
"Since March 2020, we have seen consumers move towards higher-cost payment methods like contactless payments, online payments or the use of alternative payment methods like buy-now-pay-later. Contactless debit card payments increased from 17% of transactions in February 2020 to 26% in October 2020 with the share of terminals with contactless functionality increasing from around 35% to near 55% over the same period. This has had implications for merchant costs as higher cost methods make up a greater share of transactions overall," the Government says.
The statement goes on to say that merchants often can't or choose not to discriminate when passing on costs to consumers.
"Many small businesses are reluctant to surcharge as higher cost payment methods are highly valued by consumers. Apart from surcharging, another option for merchants is to steer consumers away from higher cost payment methods [is] through refusing to accept credit cards or contactless payments or restricting the use of these payment methods to transactions above a certain value. The nature of e-commerce is such that customers can shop around to find businesses that accept a more suitable payment method with lower costs. As such, merchants often choose to absorb the costs, which get passed on to all consumers in the form of higher prices for goods and services."
Merchants' submissions said steering consumers towards lower cost methods, such as EFTPOS, has become especially difficult because of the COVID-19 pandemic.
"Merchants feel obliged to accept contactless payments due to the public health benefits. Hospitality and smaller retailers, in particular, have felt immense pressure, and in some cases backlash, for removing contactless payment facilities after initially enabling them following the first lockdown," the Government says.
"We have been told that it is difficult for merchants to surcharge individual consumers when they use higher cost payment methods. Some payment terminals do not have the ability to automatically surcharge or cannot distinguish between some payment types. Unless the merchant is willing to manually check, they have limited ability to steer customers."
Where surcharging does occur, Consumer NZ submitted that surcharges don't always reflect the real cost faced by merchants with many merchants over-recovering through surcharges.
"Some bank submitters noted they have come across situations where consumers are charged a 5% surcharge for credit card or contactless debit transactions, which is well outside the range the bank charges in merchant service fees. On the other hand, Retail NZ noted that it is difficult for merchants to accurately price surcharges, especially if they are on an unbundled [merchant service fee] rate."
"Consumer preferences for higher cost payment methods impose higher costs on merchants which they choose to recoup by increasing prices on goods and services or surcharging. This is a problem because it means that all consumers pay the same higher prices even when they use lower cost payment methods," the Government says.
"This results in a wealth transfer from the users of low cost payment options to users of high-cost cards (likely to be on high incomes due to issuer rules or higher annual fees). This perpetuates the economic inefficiency of the current retail payments system because it means that users of low cost payment methods essentially fund reward schemes for users of high cost payment methods, rather than matching up the costs and benefits of those different payment types to their users. This cross-subsidisation compounds the inequities within the retail payments system."
Regulation to reduce banks' profit
The Government also says regulation is likely to reduce the profit margins of banks and debit/credit card schemes Visa and Mastercard in NZ, albeit not on a significant scale. The proposals will also involve a cost to government to cover new regulatory functions of about $5 million to $15 million per annum.
"We estimate that across annual retail sales of $97.6 billion, a 20% reduction in credit card interchange fees and a 30% reduction in online debit interchange fees would equate to savings for consumers and merchants of $74 million."
An implementation risk the Government cites is that the Commerce Commission isn't adequately resourced for its new role.
"There is a risk that the Commission will not enforce the regime if it does not have the resources. We consider this to be a low risk. MBIE will work with the Commission and Treasury to ensure the necessary funding arrangements," the Government says.
*You can also see Gareth Vaughan's five-part series on retail payments fees, published last year, via the links below.