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A New Zealand regulator has said that local businesses will save an estimated NZ$105m (US$64m) each year thanks to a new cap on card interchange fees.
On Tuesday (August 8), the Commerce Commission of New Zealand published its first report assessing the impact of domestic interchange fee caps that were introduced in November 2022.
According to the report, the commission estimates that the caps will save more than NZ$130m for acquirers each year, of which NZ$105m will be passed on to businesses in the form of lower merchant service fees.
“These should be ongoing savings in what businesses are charged by their payment provider, and we will be watching for what we expect to see in these businesses sharing this benefit with their consumers,” said John Small, chair of the commission.
In May 2022, New Zealand passed the Retail Payment System Act, setting a so-called initial pricing standard for domestic transactions via the Visa and Mastercard credit and debit networks.
As per the act, interchange fees for credit card transactions are capped at 0.8 percent of the transaction value.
For debit card payments, interchange is capped at 0.6 percent for online transactions; at 0.2 percent or a $0.05 flat fee for contactless in-person transactions; and at 0 percent for contacted in-person payments.
The caps, which came into force in November last year, do not apply to payments made via commercial cards or prepaid cards.
Acquirers do not pass on all savings
The new regulations have lowered domestic interchange fees and average merchant service fees even more than the commission originally expected.
Although data submitted to the commission shows that acquirers reduced the merchant service fees by 2 to 13 percent since the regulation came into force, the report notes that not all the savings appear to have been passed on to businesses.
The commission said it is unclear what has happened to the estimated $25m difference between the savings of acquirers and merchants.
“This could be due to the phasing of merchant repricing or changes to the cost of other components of the merchant service fee, or to profit taking,” it said.
Lack of understanding of payment costs
The commission also noted that merchant service fees vary significantly by acquirer, with some being closer to 1 percent and others closer to 2 percent.
“This suggests an opportunity for merchants to get lower fees if they shop around,” the report pointed out.
However, switching is hindered by merchants having a limited understanding of the most common customer payment methods and the relevant costs.
Additionally, acquirers tend to advertise their fees in a complicated way that can make it “difficult for merchants, especially smaller merchants that lack resources, to determine what is an appropriate merchant service fee”.
For instance, the level of the merchant service fee could be affected by the size of the merchant.
Smaller merchants typically pay higher fees, or if a merchant processes more international payments, which are not regulated by the Retail Payment System Act, they also pay higher fees.
In addition, the recent shift away from EFTPOS, the low-cost domestic card scheme, may affect the overall fees merchants pay for accepting a card payment.
This is mainly due to the fact that although EFTPOS is free for in-person transactions, it cannot be used to make contactless payments or purchase online.
As more consumers switch to contactless or credit card payments, merchants may continue to pay more to receive payments via the Visa and Mastercard networks, which incur higher fees.
Overall, the commission concluded that greater transparency about the pricing plans “would help merchants ensure they are getting the best deal dependent on their business requirements and preferences”.
Regulator hints at potential scrutiny of scheme fees, partial pass-on
Although interchange is the largest portion of the merchant service fee and has decreased, the report found that other unregulated components “seem to be increasing”, such as scheme fees.
This has been described by some experts as a whack-a-mole situation, whereby one component of the fee decreases and another increases.
In the UK, the Payment Systems Regulator (PSR) found that smaller merchants get little or no pass-through of the Interchange Fee Regulation (IFR) savings from the five largest acquirers and is separately probing why scheme fees have been increasing.
In neighbouring Australia, regulators raised concerns in October 2021 about the opacity of scheme fee arrangements and ordered card schemes to submit quarterly data on their scheme fee revenue and rebates to the Reserve Bank of Australia (RBA).
Similarly, the New Zealand Commerce Commission has now hinted at the possibility that it may look more closely at those other fees in the future.
“We want to understand why the unregulated components of merchant service fees seem to be trending up,” the regulator said.
It added that “this would require further information and engagement from stakeholders” and it “may opt to use our statutory powers to obtain the required information”.
Going forward, the commission is also considering further work to assess why the savings have not been fully passed on and “may” opt to use its statutory powers to “compel the provision of such information”.
Finally, the commission said it has been widely reported that most banks have reduced card rewards because of lower interchange fee revenue.
The regulator, however, said it is not planning to investigate in that regard.
The commission said it expects that interchange fee caps will reduce surcharges and will ultimately benefit merchants and consumers through lower costs of payments.
