Labour's government support partners would back regulation of retail payments as part of moves to stimulate the economy after the crushing impact of the COVID-19 pandemic

Labour's government support partners would back regulation of retail payments as part of moves to stimulate the economy after the crushing impact of the COVID-19 pandemic

By Gareth Vaughan

As they look for ways to stimulate the economy in response to the COVID-19 pandemic, Labour Party Commerce and Consumer Affairs Minister Kris Faafoi and his colleagues could count on support from their governing partners, New Zealand First and the Green Party, should they decide to regulate to force down the credit and debit card acceptance fees small and medium sized businesses (SMEs) pay their banks.

In a recent five part series interest.co.nz laid out how New Zealand's retail payments sector is dominated by the major banks and their Visa and Mastercard partners, with card acceptance fees typically the third highest cost of doing business after wages and rent for retailers. Unlike dozens of other countries, NZ doesn't regulate retail payments and fees paid by our SMEs are significantly higher than those paid by their counterparts in the likes of Australia and the European Union, with these ultimately flowing through to consumers.

In our series Faafoi told us he hasn't ruled out regulation. So what do NZ First and the Greens say?

NZ First's Commerce Spokesman Fletcher Tabuteau said the party has consistently called for tighter regulation.

"New Zealand has historically paid some of the highest fees in the world. Arguably, competition between card schemes has actually driven prices higher. We can look not only to Australia for examples of regulation, but also the US and the European Union," said Tabuteau.

"When New Zealand First raised this back in 2016, there was agreement from Treasury but caution was suggested, as it did not appear desirable to regulate immediately and some time was needed to see how the market played out. The issue has deteriorated over time as EFTPOS usage continues to decline. New Zealand First would argue it is now past time."

Gareth Hughes, the Green Party's Spokesperson for Commerce and Consumer Affairs, said the Greens support greater transparency and regulation in retail payments.

“We are concerned about high costs paid by consumers and regressive wealth transfer from lower income New Zealanders to wealthier [ones] due to the structure of [credit card] rewards schemes," Hughes said.

“At a time when many Kiwis are doing it tough, the idea of paying needlessly high fees and seeing fantastically high profits sent overseas jars with our COVID-19 approach of pulling together and supporting each other."

“We are glad the Minister [Faafoi] is keeping an eye on the issues raised by the Ministry of Business, Innovation and Employment [MBIE], the Commerce Commission and the retail sector and that he is keeping the door open to regulation," added Hughes.

“Given New Zealand is behind Australia and many other jurisdictions with our light-handed regulatory approach we think there is a case for more active intervention. We urge the Commerce Commission to re-look into the issues last investigated in 2013, and the Commerce Minister to consider banning or regulating interchange and more active encouragement of open banking and real time payments to ensure Kiwi consumers are not needlessly paying more for goods and services.”

Labour and NZ First have a coalition agreement and the Greens have a confidence and supply agreement to support the Labour-led government. Thus the three parties between them have a majority in Parliament.

National: 'Regulation does remain an option'

Under the previous National-led government both Paul Goldsmith and his successor as Commerce and Consumer Affairs Minister Jacqui Dean, also aired concerns about retail payments. So what does National's current Commerce and Consumer Affairs Spokesman, Brett Hudson, say?

“We want to see competitive markets delivering better outcomes and lower prices for consumers. [Fee] reductions as reported by MBIE are positive, but the justification as to why they remain stubbornly higher than other comparable markets is unclear," said Hudson.

“Regulation does remain an option but we would need to ensure that any new regulation introduced didn’t increase costs elsewhere, as they did in Australia, for instance, with annual card fees increasing," Hudson said.

“At present, both merchants and consumers retain payment choices and are able to find ways to accommodate those in practise. The ubiquity of EFTPOS in NZ has provided merchants and customers with a practical alternative. Should that change, such as through customer pressure to move to contactless payments, the grounds for intervention may change with it," Hudson added.

In terms of addressing the taxation of companies such as Visa and Mastercard, whose NZ revenue is taxed at a very low rate in Singapore, Hudson suggested this is best dealt with through global initiatives such as the Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting (BEPS) initiative.

Meanwhile, ACT Party Leader David Seymour said the right regulatory intervention is to make prices transparent.

"Retailers should have the right to ensure consumers see the price of paying through different methods so they can decide if a particular card is worth using. It should be illegal for providers to pressure retailers not to add surcharges for different payment methods, as some retailers have complained happens," Seymour said.

Broad issues at play

Whilst banks are temporarily waiving fees on contactless debit card transactions and have increased the limit on contactless card payments to $200 from $80 during the COVID-19 pandemic, there are broader longer-term issues at play.

In a 2016 issues paper MBIE said market dynamics suggested there was cause for concern in both the credit and debit card markets. In interest.co.nz's recent series an MBIE spokesman told us credit and debit interchange fees have dropped by between 8% and 14% since 2016. Faafoi told interest.co.nz he is continuing to keep a close eye on interchange fees.

An interchange fee is charged by the financial institution on one side of a payment transaction using a Visa or Mastercard product or service to the financial institution on the other side of the transaction. A typical card transaction involves four parties being the cardholder, the cardholder's financial institution (the issuer), the merchant and the merchant's financial institution (the acquirer). For most card transactions, the interchange fee is paid by the acquirer to the issuer.

Visa and Mastercard point out interchange doesn't generate revenue for them. However it underpins and grows their networks, meaning more transactions for them to clip the ticket on. Interchange is typically the biggest part of a broader fee known as the merchant service fee. Each bank sets its own interchange rates within a cap set by Visa and Mastercard. The merchant service fee is set by banks.

According to Retail NZ, a lobby group for retailers, weighted average merchant service fees in NZ last year were 1.1% for contactless debit transactions and 1.5% for credit transactions. In contrast in Australia they were 0.6% and 0.8% respectively, and in the UK they were 0.3% and 0.6%, respectively.

"While average weighted interchange fees have tracked down over the last three years, if we start seeing increases I won’t rule out taking action including regulation,"  Faafoi said.

"It’s important that new payment methods continue to develop, as this will lead to greater competition and lower payment fees passed onto consumers. While I don’t have a strong view on particular technologies that might be developed in this space, I expect they might involve mobile and internet-based payments that bypass the card schemes. The development of open banking also benefits consumers by giving them control and choice over their data. So I continue to encourage banks and merchants to explore alternatives to credit card payments and take up the open payment standards that Payments NZ is developing," said Faafoi.

In December Faafoi made it clear open banking isn't progressing as fast as the Government would like. Open banking should give customers greater access to and control over their own banking data, and requires banks to give competing third parties access to their systems. The threat of legislating for open banking remains.

"In my letter to API [application programming interface] providers in December last year, I expressed my concern at the slow pace of progress on industry-led open banking initiatives and outlined my expectations for providers to prioritise this work. I am treating these concerns seriously and will continue to consider the appropriate role for government in this space," Faafoi added.

You can see interest.co.nz's five part retail payments series through the links below.

1) In the first part of a series on NZ's retail payment systems, Gareth Vaughan details the scale of key players Visa & Mastercard, looks at how & why they pay a miniscule amount of tax & how interchange works

2) In the second part of a series on NZ's retail payment systems, Gareth Vaughan looks at how New Zealand's regulatory oversight of retail payments is behind where Australia was at in 2001

3) In the third part of a series on NZ's retail payment systems, Gareth Vaughan looks at the complications of interchange & merchant service fees and finds a government minister still waving a regulatory stick

4) In the fourth part of a series on NZ's retail payment systems, Gareth Vaughan looks at EFTPOS and COVID-19, and finds banks in charge of implementing some of the key technologies that could crimp their revenues

5) In the fifth and final part of a series on New Zealand's retail payment systems Gareth Vaughan lays out a roadmap for regulating the retail payments sector and outlines why this should be done

*This article was first published in our email for paying subscribers on Friday. See here for more details and how to subscribe.

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25 Comments

Apologies this is a bit to one side but has anybody else been caught by one of their vaunted foreign currency cards. For example the hotel takes a deposit on check in but when you check out and pay the bill in total that deposit remains in place, about 10 days usually but for us it was 30. So you get to the next hotel and hey there is not enough funds on your card. Spent emails galore arguing with the hotel and card provider who simply blamed each other. Card provider admitted this can happen but no warning at all on the terms and conditions. This is a rip off, must create a gigantic “float.” Also advised us, just use another card for the deposit then if you don’t like it.

One thing we know about fees is that someone ends up paying them.
If it's not the merchant paying the bank it will be the customer ( via fewer cash rebates etc).

Agreed - avoid those foreign currency cards as far as possible. If you use your NZ issues credit card you will be hit with foreign exchange charges but in the long run you are better off. I recommend getting the foreign currency card and mainly using it to get cash for small payments and for the places that don't accept plastic (they still exist)

Most of those foreign currency cards are a rip-off in terms of fees and the exchange rates they offer. The only one I can personally recommend is the TransferWise debit Mastercard. You get the actual (wholesale) mid-market foreign exchange rate and minimal fees.

It's worse if you use a debit card, because then they're actually tying up your money.

This is a time for action not talk ! These are the sort of items that need to be implemented in our current financial environment as well as tax them ,should be a priority in the current budget we should be looking to pay down this accruing debt as quickly as possible to avoid passing it on to the next generations . While the pollies are at it another priority should be building costs ,yes fletcher and co I mean you building costs in nz are ridiculous need to be tackled with urgency nz needs to address these if it is ever to catch up with housing supply issues .

About time. The 20% interest rates and fees on credit cards ensure vast profits, no need for them to skim off transactions too. Shame that EFTPOS cannot build up a similar system with minimal fees

No-one is forcing you to borrow at 20% on those credit cards though. And no-one is forcing you to use a credit card instead of EFTPOS.

The online economy runs off Credit Card and credit-provided branded debit cards. Those providers have a huge strangle-hold on commerce and EFTPOS is not an option for people doing things online.

Ah but it could be - https://www.interest.co.nz/business/104343/fourth-part-series-nzs-retail-payment-systems-gareth-vaughan-looks-eftpos-and-covid

Right. They provide added-value in other words.

Refatornz
Agree with you. Anyone continuing to carry a credit card debt knowing the cost of interest needs to look at themselves; it is either poor self discipline and/or financial sloppiness.
You know you are going to be hit 20% if you don’t pay the balance off so what are you going to do about it? Two possibilities are to split the mortgage having a revolving credit facility (5%) to meet irregular financial demands or contain one’s discretionary spending.
I noted comments recently regarding the incentive traps (Airpoints, BNZ Flybuys etc); pay your account of monthly and these are bonuses. I put all my spending on my BNZ credit card, pay-off monthly, not attracting any interest, and converting $40 a month (tax free income) of Flybuy points into KiwiSaver which well and truly covers my annual card fee 12 times over.
Another incentive of credit cards when travelling is the free travel insurance. The BNZ card I have means that I don't have to purchase the travel (e.g. airfares) with it to activate the insurance - I pay the travel with my debit card so don't get hit the surcharge. When travelling, I find that putting spending on credit card now days (also carrying some cash) is by far the best option and minimal risk loss of credit card is lost or stolen - well worth it.
To those that are chocking by paying 20% on credit card balances really aren't using credit cards effectively (I am hard pressed not to label them "idiots").
I expect a bit of flack that I am a bludger. My response: “We know the rules of the game and they are same for us both, so get yourself sorted, and stop complaining - it is your choice”.

Yes, really good advice - we do all that too.

But if you don't have a house/mortgage (or some other asset) against which you can get the 5% revolving credit account - that isn't a solution to the near criminal interest charged on credit card balances.

So, the rules of the game are definitely not the same for all.

Use/consume now, pay later - put the bill to govt. - all future tax payers will bail you out.
This is always partly the favourite chosen path by neoliberal politicians (both red & blue team0

Or just do the obvious: copy Oz' regulations and structure wholesale, rather than trying to 'consult', invent it yet again for the locals, or do nothing. We are gonna be very dependent on Oz for much, including our daily bread, metals, and markets. Harmonizing retail payment regulatory structures would lubricate this interdependency....

We could certainly do worse Waymad.

We could also do better.

Those foreign banks should be given the heave-ho. I have no problem with re-creating the old State Advances, minus interest. At least it stops 'wealth' (credits for energy/resources) being sucked out of the NZ system. If we turned that tap off (they do nothing useful, merely issue electronic digits which we can do ourselves) we'd be getting rid of a millstone.

The NZ way - Why go fast when you can go slow?
Australia has done it - took awhile - but they got there
https://www.abc.net.au/news/2016-05-26/rba-and-accc-crack-down-on-surcha...
In the end it wasn't hard. Why do you think they did it?
Better still why go slow when you can go fast

If the consumer pays directly and at the time of purchase then consumers will decide if the use of the payment method is worth it. Maybe the convenience of using my credit card will be better than something else but I will decide that not the government.
If the government regulates prices of the current providers then it will be hard for new players to enter the market using different methods. WeChat Pay and Alipay for example use QR codes and the cell phone network so no need to build a new network.

Not sure what Tabuteau is referring to - How does higher competition push these fees up?

Where there is additional regulation (distortion of the free market) there will likely be unintended consequences lurking somewhere.

Everyone should just start using Ethereum.

I weary of hearing "we are keeping a close eye on it " and locals must pay export prices as these always actually mean locals will pay more than export . It is time to take action not keep a close eye on it. If Australia can regulate these companies so can nz . These are companies not nation states it is time they were made to realise they are not running nz we have a government that has some debt to pay off to avoid pasing it to the next generation.

Gareth you might want to note that under APRA regulations the merchant acquirer has to hold regulatory capital against the credit risk they take on by being the merchant acquirer. In effect the merchant acquirer is taking on performance risk on the merchant for delivery of the good or service provided as the customer can claim against the merchant acquirer for non delivery. Obviously for a point of sale transaction there is no risk but for others there is. Sometimes this can be quite large when for instance annual service payments are paid for by credit card.

I was doing mail orders before online came about. A customer would phone or post an order and willingly supply their credit card number and expiry date. You would then phone visa or master card for an approval number before couriering or posting (rural) the goods. You would have to do this for every transaction. Quite a few people still posted cheques those days. Every month you would be debited your credit card merchant fees.......I could be wrong (memory) but the fee reduced the higher the value. It was a significant cost but it greatly facilitated the mechanics of doing business, so you had to live with it.
I'm still uncomfortable with credit cards and personally wouldn't use them, but that's probably a generational thing.
I still don't pay my creditors by direct debit if I don't have to. I prefer auto-payments for constant amounts or online banking for irregular amounts.
But, if the credit card companies got any greedier, I think they should be regulated as in other countries.

Sounds like unanimous support in Parliament. Get on with it.

But what about these "new payment methods" that Faafoi says is important to continue to develop, e.g Afterpay and Laybuy where the merchant fee is 5%??? how come that is ok? Oh yes sorry it is the Uber principle, screw the establishment with your new whizzy "disruptor" and cream the profits.

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