New Zealand banks have slashed debit contactless merchant fees to zero, amid the Covid-19 crisis. The move late last month is commendable; banks are putting health before profits, at least in the short term.
But what happens when we “return to normal”? Will the banks extend, repeal or modify the current fee-free arrangements? Their rapid response and willingness to make a loss on contactless debit card transactions suggests room to reduce merchant fees more widely.
Merchant fees in New Zealand are expensive. Businesses here pay around twice as much to accept card payments as their Australian counterparts, and around three times as much as UK businesses. Reflecting this, consumers in Australia used contactless for 83 per cent of in-person card payments last year. Meanwhile contactless payments made up just 15 percent of card transactions here.
Why are merchant fees so high in New Zealand? In short, because card payment systems are not regulated here.
But they are in Australia, the UK and Europe. Regulators there have imposed caps on so-called “interchange fees”, which are set by Visa and Mastercard.
Interchange fees make up a big chunk of the merchant fees charged to businesses by their banks. With lower interchange comes cheaper merchant fees.
Reducing merchant fees without regulation is, to say the least, unlikely. This is despite it being in everyone’s collective interest to do so: banks only get merchant and interchange fee revenue when businesses make sales, and many businesses are at risk of failing and need support. Conflicting individual interests and coordination challenges, however, get in the way.
In 2016, the Ministry of Business, Innovation and Employment (MBIE) published a report on issues in retail payments. MBIE found that credit card rewards programs had led to higher interchange fees and therefore higher merchant fees. What’s more, MBIE found that smaller businesses were paying higher fees than larger businesses – in some cases more than double.
But it’s not just businesses who suffer. Poorer people are subsidising wealthier people. MBIE estimated prices rose by $187 million per year for all consumers, to cover the cost of rewards credit cards that are typically held by more wealthy customers.
Of particular concern, low-income customers received no rewards, yet paid $59 million in higher prices.
Although Visa and Mastercard reduced interchange fees to an extent 18 months after the report was published, the fees are still too high. Furthermore, it has not translated into significantly lower merchant fees for businesses.
In mid-2018, Commerce and Consumer Affairs Minister Kris Faafoi threatened interchange regulation. However, the issue now seems to have slipped off the Government’s radar.
In managing the Covid-19 crisis, our Government leads the world. That ship sailed long ago for card payments regulation. But we can – and should – play regulatory catchup.
Businesses are already struggling; this is one way to help them survive in the “new normal”.
* Rebecca Fairbrother has worked in finance internationally. Now living in Blenheim, she helps businesses reduce the costs of accepting cards, and has set up an industry association – the Merchant Advocacy & Guidance Network – which represents businesses to bring down card transaction fees.
