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New Zealand’s competition regulator is hoping to save merchants NZ$260m ($150m) per year in payment costs if its new draft caps on interchange are enacted into law.
On Wednesday (December 18), the New Zealand Commerce Commission published a new draft decision on interchange fee caps, following more than two years of studying the issue.
If adopted, the commission’s plans would lead to major reductions in the fees paid by merchants for accepting Visa and Mastercard transactions.
The plans would bring commercial credit cards and foreign-issued cards under New Zealand’s interchange regulations for the first time.
The caps on these currently unregulated interchange fees would therefore see the biggest reductions.
At present, interchange fees for commercial credit cards are capped (voluntarily) at 2.2 percent by Mastercard and 2 percent by Visa.
Under the commission’s proposals, both of these caps would come down to 0.2 percent under law.
Similarly, interchange fees for foreign-issued cards are currently capped at 2.4 percent by Visa and 2.35 percent by Mastercard.
If the commission’s plans go ahead, both of these caps would come down to 0.6 percent by law.
For domestic debit card transactions, the current cap of 0 percent would continue to apply for contacted transactions, as would the current cap of 0.2 percent for contactless transactions.
For domestic credit card transactions, the current caps would fall from 0.8 percent to 0.2 percent for both contacted and contactless transactions.
Stakeholders have until February 18, 2025 to provide feedback on the proposals, which are scheduled to come into effect on November 1, 2025.
Why the need for further regulation?
In a Reasons Paper published alongside the draft fee caps, the commission said that New Zealanders are “paying too much” to make and receive payments using the Visa and Mastercard networks.
The commission refers to interchange fees as a “key driver” of the costs faced by merchants to accept card payments and by consumers to make card payments.
Of the NZ$1bn ($570m) that merchants currently pay in fees to accept Visa and Mastercard transactions, $NZ600m ($344m) is made up of interchange fees.
Although interchange fees are not paid directly by merchants, they are passed on to merchants by their acquirers.
In turn, merchants pass on these fees to consumers in the form of surcharging, higher retail prices and potentially through additional card transaction fees, the commission said.
“We’re proposing a reduction of around NZ$260m a year to the largest component of the fees charged to New Zealand businesses to receive Visa and Mastercard payments,” said John Small, chair of the commission.
“We’re also setting the clear expectation that payment providers and businesses should pass these savings on to customers.”
The status quo
According to the commission, New Zealand’s current regulations on interchange fees are not fit-for-purpose.
Current interchange fee rates vary widely across payment types, card types, merchant categories and fixed versus percentage rates.
In total, there are more than 150 possible combinations of category and card type offered by Visa and Mastercard respectively.
The commission, which referred to these fee structures as “confusing” and “complex”, believes that they are hindering merchants’ ability to understand their payment costs.
Moreover, when merchants struggle to understand these costs, they are more likely to levy excessive surcharges to recoup them.
Additionally, the commission believes that New Zealand’s interchange fees are too high in comparison to similar jurisdictions such as Australia, the UK and the EU.
In Australia, interchange fees cannot exceed 0.8 percent for credit card transactions or 0.2 percent for debit card transactions, and the same caps apply to both domestic and foreign-issued cards.
In the UK and EU, interchange fees cannot exceed 0.2 percent for consumer debit cards and 0.3 percent for consumer credit cards.
“The significant difference suggests that New Zealand's fees are relatively high and could be reduced through similar regulatory measures,” said the commission.
Bringing surcharging under control
The final aim of the commission’s plans is to rein in “excessive” surcharging, which is currently costing New Zealand consumers up to NZ$65m ($37m) every year.
The commission defines an “excessive” surcharge as any surcharge that exceeds the average merchant service fee for an in-person transaction.
In Mastercard’s submission to a prior consultation payment costs, the card giant estimated that excessive surcharges are costing consumers more than NZ$90m ($51m) annually.
Whatever the exact figure, the commission insists that “excessive surcharging needs to stop”.
“Excessive surcharging rates need to come down, and with a further reduction in interchange fees, our expectation is that surcharge rates should follow,” it said.
It also noted that the average surcharge rate is almost double the average merchant service fee among merchants who surcharge.
This is due, in part, to the wide range in payment costs faced by smaller merchants.
Based on (unpublished) data collected from acquirers, the commission said that some small businesses are paying less than 1.5 percent on average to accept Visa and Mastercard tractions, while others are paying up to 2.5 percent.
In early 2025, the commission is planning to open a separate consultation on a potential surcharging regulation.
The options under consideration will include imposing a maximum surcharge rate, requiring merchants to display their average merchant service fees and/or requiring terminal providers to display these fees, prior to surcharges being added.
