New Zealand will cap credit card transaction fees from November, but critics say we're not moving as quickly as other countries to regulate the increasingly powerful credit card companies
Pieter Zwart has a sign up in his little pro shop at Waitangi Golf Club, telling customers there's a 2.8 percent surcharge if they want to pay by credit card. That doesn't cover the $4,500 in credit card transaction fees he pays each year. "When they see that, and I tell them, they'll bring a debit card out. Invariably."
Previously, retailers would accept four or five or six credit cards: American Express, Diners, UnionPay ... but now just two of the international providers dominate the global market. Visa and Mastercard.
With the pandemic encouraging both contactless payments and online shopping, these two companies are running up the most consistently high profits in the world. In The Economist this week, Craig Vosburg of Mastercard describes the migration from cash as “a significant and long-running tailwind".
From November, the new Retail Payments Systems Act will cap interchange fees at 0.8 percent on credit card transactions and 0.6 percent on online debit card transactions.
But as the size of every transaction increases with the soaring cost of living, shoppers and merchants are paying more and more to the banks, which in turn are paying the credit card companies. Consumer NZ and retailers are calling on the Government to follow its international counterparts and do more to rein in the fees.
Zwart was talking about this to a fellow business operator, this week. "I know the cafe down the road where I go to, just in Kerikeri. I was talking to the lady about it the other day, and said, do you charge for card purchases? She said no, we just let it run. Our bill is $12,500 a year. I said, wow!"
In New Zealand, Eftpos transactions are free. But the banks charge a merchant service fee for transactions on credit cards like Visa, Mastercard or UnionPay, or contactless payments. It's calculated as a percentage of the dollar value of the transaction.
"The profits will be astronomical compared to what what they're having to spend on products." – Jon Duffy, Consumer NZ
There are five components to the merchant service fee: the scheme fee, the network transaction fee, the float cost, and the bank acquirer margin. ANZ says the biggest is the interchange fee between banks, which is set by the credit card company and increases depending on the type of card, whether the transaction is contactless, insert or swipe, and the country the card was issued in.
KiwiBank's website says its credit card fees range up to 1.85 percent of a transaction. BNZ's website says it has dropped its transaction fees to 1.5 percent on locally-issued cards; 2.95 percent on overseas cards.
Polipay, a competing online payments system, says New Zealanders are paying too much for credit card transactions. In Australia and the UK, the total merchant service fee is typically less than 1 percent for each transaction, but in New Zealand the cost for accepting card payments can be anywhere between 1 and 4 percent, with an average of about 1.6 percent.
Retail NZ calculates a similar average: 1.5 percent for credit card transactions, 1.1 percent for contactless payments.
These fees apply to all credit card transactions, whether someone is paying at the counter, or ordering through a website. "At least half of adult New Zealanders are regularly shopping online, an increase of 13 percent from 2019, and these numbers will continue to grow," Polipay says.
Quoting the $4.7 billion processed in online transactions in 2019, Polipay says if all of those were on credit card (they're not) that would cost New Zealanders more than $75 million.
Zwart is pretty sure everyone in the transaction pathway – credit card companies, tech companies, payment networks and banks – is taking too big a clip out of the ticket. "You get a bank loan from Westpac, and they post a profit of $800 million. And then they put a helicopter on your desk and ask you to put coins in it. Hold on a second! You could pay for 20 helicopters and run the whole thing and get a bit more street credit for that, rather than putting helicopters on people's desks for coins."
“Price limits on interchange fees will put downward pressure on the merchant fees paid by businesses and ultimately the charges paid by consumers, and the first priority of the Commission will be to monitor and enforce these limits." – Anna Rawlings, Commerce Commission
Consumer NZ chief executive Jon Duffy says the payments have got "seriously out of whack".
"And you've got to look at the value proposition. What are their overheads? To quote Flight of the Conchords, it's just money generation now, not a lot of systems building. I'm sure there's some maintenance but the profits will be astronomical compared to what what they're having to spend on products."
He says smaller retailers are carrying the heaviest cost. "We've just come out of a period where contactless payment has been pushed by government, and that means credit cards, right? So not only do you have customers preferring to use cards, but you've actually got central government saying you should move to this because it's safer from a health perspective.
"And the poor old smaller merchants, who can't absorb the cost and have to pass them straight on to consumers, are suffering for that."
He says the fees should be brought down as low as possible. "In an environment where consumers are struggling with the cost of living, these costs are being passed through to consumers. And that's a direct wealth transfer to private enterprise and their shareholders."
The Minister of Commerce and Consumer Affairs takes a different view. David Clark argues the new law changes already go further than many other countries.
Not only would credit card interchange fees be cap for credit card transactions at 0.8 percent – which he says is in line with Australia – but the Government is creating an overarching regulatory framework for retail payments. "Other countries who have just capped fees have seen the costs popping up elsewhere in the system," Clark tells Newsroom.
The Commerce Commission will be able to issue standards covering pricing, access and information disclosure arrangements, and directions around network rules. The Commission can also issue standards prescribing what merchants can surcharge, he says. "The bold, pragmatic changes we’ve made are expected to save New Zealand businesses around $74m a year when they come into effect in November."
Here, the Bankers' Association declines to comment on competitive issues, including pricing and the products and services offered by member banks. "Banks operate in a highly regulated environment and take their compliance obligations very seriously," a spokesperson says. "In this case, we respect the fact that the cap has been set by the government."
But in the US, the National Retail Federation says its members pay US$138 billion (NZ$218b) in bank-card company interchange gees – their second-biggest cost after wages. Three-quarters of those fees go to Visa and Mastercard.
Doing so has made them two of the most profitable companies in the world, with net margins last year of 51% and 46% respectively.
This week, The Economist ranked every firm in the S&P 500 index by their average net-profit margins last year, five years ago and a decade ago. Only four appear in the top 20 every time: Two are financial-information firms; the other two are Mastercard and Visa.
At a time of high cost of living rises, New Zealand will be capping credit card transaction fees at 0.8% – that's an improvement on existing charges, but that’s still way higher than UK and the European Union, where they're capped as 0.3 percent.
And in China, intense competition and scale mean that WeChat and Alipay collect charges of just 0.1 percent.
Now, the US has introduced a bill to break the duopoly there.
Senior Democratic Senator Dick Durbin has cross-party backing for his Credit Card Competition Act, which would lower fees by forcing banks to offer merchants a choice of at least two credit card networks – and one has to be a smaller network other than Visa or Mastercard.
That's a far more dramatic structural change than the one being implemented in New Zealand. Under the Retail Payment Systems Act 2022, the Commerce Commission is promising an initial focus on Mastercard and Visa credit and debit card networks, in order to promote competition and efficiency in the retail payment system.
"Labour is soft on crime, soft on everything. They need to be much tougher on the credit card companies." – Pieter Zwart, Waitangi Golf Club
The Act allows the Commission to monitor the retail payment system, and regulate designated retail payment networks, for the long-term benefit of New Zealand businesses and consumers who rely on it every day to buy and sell goods and services.
The Mastercard and Visa credit and debit networks have been singled out. They have initially been ‘designated’ by the Act – which allows the Commission to regulate those networks to require greater transparency, determine how prices can be set or expressed, and allow other participants to access aspects of the network.
The Commission will be responsible for monitoring and enforcing the interchange fees caps when they come into force on November 13. In addition, the Act gives the Commission power to issue merchant surcharging standards for any network to require consumer surcharges for payment services such as credit cards or contactless payments to be appropriate.
Though Visa and Mastercard networks are the most commonly used networks, other networks like Eftpos and American Express are reasonably well-used. Data from Payments NZ shows that in 2020, 32 percent of card transactions were processed through the Eftpos network, and American Express cards were often be used for online purchases.
Nonetheless, the Commission says there are "far fewer cards" in New Zealand than other markets such as the United States.
This regulatory role is a new one for the Commission, which has not done a market study on the sector like the ones it's done on the fuel retail, groceries and building supplies sectors. Its staff have been working with network participants, merchants, and consumers, though, to understand the retail payment system, including the impact of fees on consumers.
“A well-functioning retail payment system will provide long-term benefits for business and consumers," says Commission chair Anna Rawlings.
“Price limits on interchange fees will put downward pressure on the merchant fees paid by businesses and ultimately the charges paid by consumers, and the first priority of the Commission will be to monitor and enforce these limits.
“We expect the limits on interchange fees will have an impact on surcharges that consumers pay for some Mastercard and Visa payments. If needed, the Commission will be able to issue standards to require that surcharges charged by businesses reflect the actual cost of providing that payment option.”
The Commission has established a new team in the Market Regulation branch to carry out the Commission’s responsibilities under the Act – but Pieter Zwart would like the Government to crack down much harder.
"Labour is soft on crime, soft on everything," he says. "They need to be much tougher on the credit card companies."
