Payments regulation: More is more
New Zealand is in a unique position where we have a blank slate to regulate the payments system and can learn from overseas regulators. To get regulation right, the Government must take a broader approach than just merchant fees, consult widely and set up a specialised regulatory unit, says Rebecca Fairbrother
Hooray, card payments regulation is in sight. This is big news.
On 8 September, Labour announced plans for “Tighter regulation of merchant service fees charged to merchants.”
On the face of it this is great news for businesses that accept card payments. Merchant fees in New Zealand, charged by banks for handling card payments, are unfair. In Australia and the UK – which do regulate – these fees are much lower.
However, it’s not as simple as the Government setting a maximum merchant fee. This approach would – without a doubt – lead to unintended consequences.
For instance, banks might begin charging higher monthly fees to merchants, or stop providing merchant services altogether.
It goes further than just merchant fees
Merchant fees are but one tiny cog in the machine. There are many other things going on behind the scenes in the credit and debit card system that must be factored in. For example, interchange fees, surcharging, scheme fees, dual-network cards, non-banks providing merchant services, network fees, eftpos, payments technology, neobanks, fintech…
I’ve proved my point: this stuff is complicated.
The need for a comprehensive approach and a future regulator
The Government must take all these things into account and regulate the credit and debit card system, not just merchant fees. Otherwise failure is certain: someone, somewhere will pay in some way, if not through merchant fees.
Furthermore, the entire payments system needs to be regulated, as a whole. The credit and debit card system is only one piece of the puzzle.
In doing so, the Government should talk to overseas regulators. Australia, in particular, has plenty of lessons to share; the Reserve Bank of Australia has been regulating payment systems for 20 years. In that time it has conducted many reviews of card payments and retail payments more broadly.
Payments is a complex and peculiar market. Currently there is economic inefficiency in the payments system reflecting a lack of competition. Merchant fees are unfair in part because of this.
... any future regulator should be given the power to regulate any payment system, including ways to pay that don’t yet exist.
The future regulator will need specialised expertise, and competition powers specific to payment systems. Each of the agencies suggested by Labour has relevant regulatory capabilities:
- Reserve Bank of New Zealand – already has powers to oversee wholesale payments, which it uses to promote a “sound and efficient financial system.”
- Financial Markets Authority – has a focus on innovation in financial services and products that contributes to “promoting fair, efficient and transparent markets.”
- Commerce Commission – has responsibility for ensuring “sectors with little or no competition are appropriately regulated.”
The Government could create a cross-agency payments regulation unit, or a new separate agency. Either way, any future regulator should be given the power to regulate any payment system, including ways to pay that don’t yet exist.
But, only when problems arise. Any decision to regulate should not be taken lightly. And the payments industry (including banks) should have a reasonable opportunity to fix the problems first.
New ways to pay, already happening overseas, will come to New Zealand (look out for a future article on this). The right regulations can accelerate this, meaning businesses will pay less to take payments in future. Australia, the UK and Europe have had such regulations for a number of years.
We need a regulatory framework that is flexible enough to handle how things might turn out in future (‘future proofing’ is the trendy term for this). As we don’t know how things will indeed turn out, the regulatory approach must not be prescriptive (i.e. with specific rules). Because where there are rules, there are loopholes.
What the Government must also do is follow through.
Back in 2016, the Ministry of Business, Innovation and Employment (MBIE) did some great work on retail payments.
MBIE discovered problems in New Zealand credit and debit card markets, similar to those identified overseas. It found that these problems had only been addressed in countries where “some sort of regulatory intervention” had occurred.
Yet, the Government did nothing of note after that.
It must this time.
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