Business

Labour warned: merchant fee regulation not easy

Labour wants to close the big gap between what Australian and UK businesses pay their banks in merchant service fees and what Kiwi businesses pay - but experts warn it will take a lot of work and time to make that happen

The Labour Party’s election promise to reduce the hundreds of millions of dollars a year banks charge retailers for credit and contactless debit transactions fees could be a boon for struggling shops and hospitality businesses.

But don’t hold your breath it’s coming soon.

A bank payments expert warns if the Australian experience is anything to go by, reforming this intrinsically unfair system could be a long and tortuous road.

Jacinda Ardern’s small and medium enterprises policy, announced this week, includes a pledge to help reduce the transaction fee retailers must pay banks every time their customers use a credit or contactless debit card in their stores.

“Did you know New Zealand retailers pay nearly twice as much as their Australian counterparts for debit and credit card services?” Labour’s campaign says. 

Regulating fees charged by banks to retailers “will reduce costs for retailers by an average of $13,000 per year”.

That could be huge for some smaller retailers.

Newsroom has been writing on the issue for some time. In a recent story in our “Bad things happen” banking conduct series ("You pay, shops wave goodbye to millions"), we calculated banks earn somewhere between $750 million and $1 billion in so-called ‘merchant service fees’ every year.

The main ‘service’ the banks offer for that money is moving dollars electronically from customers’ bank accounts to retailers’ accounts.

Retailers wonder how the banks justify those fees. And as Ardern says, New Zealand stores pay double what Australian stores do, despite most of our banks being owned across the ditch. The differential with UK stores can be three times - or more.

Source: Retail NZ 2019 Payments Report

Bodies like Retail New Zealand have been campaigning for years to get fees reduced.

There have been some reductions, but the big gap remains between charges in New Zealand’s unregulated market and charges in Australian and the UK, where fees are regulated.

Retail NZ CEO Greg Harford hopes at last the issue will be taken seriously. Photo: Stephen A’Court

The promise of regulation to help small businesses here is “awesome”, Retail NZ chief executive Greg Harford says.

“It’s a clear signal from Government they want to see downward movement on fees and that’s undoubtedly a good thing. It says the issue is being taken seriously.

But... (and there’s always a ‘but’) “there’s a lot of work to make it happen", Harford warns.

"If there's a loophole, they'll use it"

Rebecca Fairbrother spent seven years at the Reserve Bank of Australia working on retail payments, before coming back to New Zealand and setting up Magnet (the Merchant Advocacy and Guidance Network), an industry body fighting for fairer merchant fees, among other things. 

Rebecca Fairbrother from Magnet says we could learn a lot from Australia who regulated two decades ago. Photo supplied

She knows only too well the road the Labour Party has ahead to get a regulatory system that addresses the imbalance between bank and retailer.

“It’s a complicated system and if there’s a loophole, the banks and the credit card companies will use it.

“Broadly the policy is good, but it’s about how it happens. If it isn’t done in a well-considered way, there are plenty of opportunities for loopholes.”

Australia is working on its third iteration of its regulations, Fairbrother says, after the banks and credit card companies found ways around parts of the first two.

One tactic used in Australia was moving customers to premium cards, which have a higher percentage fee.

Another was using the average fee rate set by the Reserve Bank of Australia and the three-year time frame between audits to bump up revenue in certain card categories.

More detail to come

For the moment there is no detail in the Labour Party policy as to what the regulation is going to look like, and for that reason card companies and banks were reluctant to give much comment until they know more. (But ANZ, for example, told Newsroom it was “happy to discuss the matter with the Government”.)

And Bankers’ Association chief executive Roger Beaumont said he "looked forward to seeing the detail of what’s being proposed in this complex area. We’d be happy to engage in any consultation that results from this policy proposal."

What is certain is it's not going to be easy. For a start, the way credit card companies and banks calculate merchant service fees is extremely complicated and pretty opaque. The only parts of the calculation that are visible from the outside are the interchange fees, which make up a certain (undisclosed) part of the total merchant service fees.

Visa’s interchange fee rate schedule runs to four pages, each one looking much like this one. 

Mastercard has its own structure, and the banks use the tables in some way to set fees for each retailer. Which retailers are categorised as ‘standard’ and which as ‘strategic’ and how they fit an individual retailer into a particular 'rate' is a mystery. In general, bigger retailers pay lower percentages, but there appears to be no rule about how that works.

Just that the smaller the shop or hospitality business, the more they pay the bank.

More transparency needed

Harford says step one for a government looking to implement merchant service fee regulation must be to shed light on what retailers are paying at the moment - and how that’s justified.

“Any regulation needs to look from a basis of solid data, and the more transparency the better. At the moment that’s a gap.”

Fairbrother recommends a period of robust consultation with key players, including engaging with payments specialists and regulators overseas. 

“The Australians, for example, have 20 years of experience. At one time they were the only one regulating retail payments - and there were plenty of lessons learnt.”

She also says New Zealand should create a specialist unit to have oversight of payments systems, like Australia’s Payments System Board. This body could be across the three existing regulators - the Commerce Commission, the Reserve Bank and the Financial Markets Authority. Or it could be a separate body. But it needs a competition focus, she says.
 

Look to the future

Both Harford and Fairbrother believe it’s essential the Government doesn’t just look at regulating merchant service fees on credit and contactless debit cards, but also other payments systems - present and future.

“They need to make it broad enough, and principles-based, so if things change - as they surely will - and other payments come in that we don’t even know about yet, they can be covered,” Fairbrother says.

And don't just look at banks and credit card companies, Harford says. 

Some of the ‘buy now, pay later’ schemes - Afterpay or Layby, for example - charge retailers “substantially higher fees” even than the merchant service fees, he says. They should be included.

“We need to see downwards pressure on merchant prices. But also, when we see innovation in the payments space, we need to make sure the price retailers are paying reflects the cost of providing those services.”

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