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A new payments act passed earlier this month will ensure that interchange fees in New Zealand are more tightly controlled, as a result of a long-awaited move by the country’s regulators.
Visa and Mastercard’s credit and debit card networks will come under immediate scrutiny following the passing of the Retail Payment Systems Act 2022, which seeks to promote competition and efficiency in the retail payments market.
Among its provisions, the act allows New Zealand’s Commerce Commission to monitor the retail payment system and regulate “designated” retail payment networks.
Initially, only Visa and Mastercard’s card networks will be “designated” as such, and the act will set limits on the interchange fees that its issuing banks can charge.
Interchange fees for credit card transactions will be capped at 0.8 percent, which is in line with that of Australia, while interchange fees for online debit card transactions will be capped at 0.6 percent.
Contactless debit card interchange fees will be set at 0.2 percent, which is the current market rate, and for contactless transactions where interchange is a fixed rate, it must not exceed 5 cents per transaction.
Swiped and inserted card transactions will remain at 0 percent, as the local debit card scheme, EFTPOS, does not charge interchange for these types of transactions.
These changes were telegraphed in May last year by commerce and consumer affairs Minister David Clark, before the bill was introduced to parliament.
Clark said the fee changes were necessary to relieve financial pressure on businesses that are struggling with the impact of COVID-19.
“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,” he said in a press release in October 2021.
He also complained that New Zealand’s interchange fees were much higher than Australia’s, creating a “significant overhead” for retailers who often pass those costs onto consumers through higher prices.
Enforcement, surcharges and other commission powers
The Commerce Commission will be responsible for monitoring and enforcing the interchange fee limits, which will come into force on November 13, 2022.
The act also empowers the commission to ensure that payment surcharges imposed by merchants on their customers for using a card are no more than the cost to the merchant for accepting the payment.
This has long been an issue in the region. For example, when Australia became one of the first countries in the world to cap interchange back in 2003, it also removed the no-surcharge rule imposed by card schemes on merchants.
However, this led to unintended consequences, as there was a significant rise in the number of merchants charging consumers for accepting card payments.
The government was forced to amend its legislation in 2013, placing restrictions on the amount merchants could surcharge, after the Reserve Bank of Australia admitted that “practices have emerged in some industries where surcharge levels on some transactions appear to be well in excess of merchants’ likely acceptance costs”.
In New Zealand, the card scheme’s no-surcharging rule was previously removed by the Commerce Commission in 2009 after it was deemed uncompetitive. However, similar concerns have emerged.
According to Anna Rawlings, chair of the Commerce Commission: “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.”
Going forward, if the commission identifies other retail payment networks (including non-card) that it believes ought to be more competitive or efficient, it can make a recommendation to the Ministry of Business, Innovation and Employment to “designate” those networks as well.
If deemed necessary, the commission can then impose measures, such as greater transparency requirements, rules on how prices can be set or expressed, or orders to open up areas of the network to other market participants.
“As this is a new role for us, we will be working with network participants, merchants and consumers over the coming months to better understand the retail payment system and how it works,” Rawlings added.
“This will help inform where to focus our monitoring efforts to deliver long-term benefits for consumers and merchants.”
The commission has also established a new team in the Market Regulation branch to carry out the commission’s responsibilities under the act.
Catching up on interchange regulation
The act marks the first time that New Zealand has imposed regulations on interchange fees, making it a slow-mover among advanced jurisdictions such as Australia, the EU and the UK.
As reported by VIXIO, New Zealand had been threatening to impose interchange regulations since at least 2016, as MPs, ministers and the central bank began to question the country’s “excessive” fees.
In 2018, commerce and consumer affairs minister Kris Faafoi said he had chosen not to follow the lead of Australia and the EU on interchange regulations, which set the process back several years.
The new rules introduced by the Commerce Commission are bound to have a significant impact on payments market revenues, as cards are by far the most popular payment method in New Zealand.
In 2020, VIXIO calculated that card payments accounted for about 78 percent of all New Zealand’s non-cash transactions.
This is typically higher than most other developed markets, albeit in line with neighbour Australia, where cards account for 74 percent of non-cash transactions. The EU average is around 50 percent.
Zero interchange fees for in-person swiped and inserted card transactions is also likely to encourage banks to further promote contactless payments in the country, which can generate a fee of 0.2 percent.
During the pandemic, contactless payments increased significantly in New Zealand, accounting for almost 40 percent of all card transactions, according to Payments NZ.
