By Gareth Vaughan
ANZ New Zealand, the country's biggest bank, is providing free contactless debit transactions for small business customers battling the coronavirus crisis.
We'll be providing free contactless debit transactions for eligible small business customers until 30 June. More support for small businesses to come.
— ANZ NZ Media (@ANZ_NZ_Media) March 18, 2020
A nice gesture that will help small businesses - with payments terminals able to accept contactless payments made via Visa and Mastercard cards - in a time of a public health crisis and economic stress. Westpac NZ has followed suit, saying it will support small businesses by waiving contactless debit fees for eligible existing customers for six months. And BNZ says it will waive contactless debit transaction fees for three months to provide help and support for small business customers.
But should these fees be removed permanently?
MBIE, Goldsmith raised the stick of regulation
In 2016, the Ministry of Business, Innovation & Employment (MBIE) released an issues paper entitled 'Retail payment systems in New Zealand.' Among other things MBIE said market dynamics suggested there was cause for concern in both the credit and debit card markets. This led to the National Party's then-Commerce and Consumer Affairs Minister Paul Goldsmith saying the Government was "prepared to consider regulatory options" if competition failed to moderate retail payments costs.
MBIE estimated market incentives drove at least $45 million annually of additional cost to the economy through the use of more expensive credit card networks compared to lower cost EFTPOS networks. MBIE said merchants paid about $461 million in merchant service fees during 2015. It also estimated merchants had to increase their prices to consumers by about $187 million annually to fund rewards paid to some credit card users. This, MBIE added, created an annual "regressive cross-subsidy" of $59 million from low income to high income households.
The business model credit card schemes operate under has interchange fees at its centre, which we looked at in part one of this series. When a card payment is made, interchange fees are paid by the merchant’s financial institution to the cardholder’s financial institution. As the Reserve Bank of Australia (RBA) puts it, this has two effects.
"First, the merchant’s financial institution will charge the merchant for the cost of providing it with the acceptance service plus the fee that it must pay to the card issuer (the interchange fee). The higher the interchange fee the merchant’s financial institution must pay, the more the merchant will have to pay to accept a card payment. Second, since the card issuer is receiving a fee from the merchant’s financial institution every time its card is used, it does not need to charge its customer – the cardholder – as much. The higher the interchange fee, therefore, the less the cardholder has to pay," the RBA says.
"In effect, the merchant is meeting some of the card issuer’s costs which can then be used to subsidise the cardholder. Indeed, with rewards programs, the cardholder may actually be paid to use his/her card for transactions and competition tends to involve offering incentives for a consumer to hold and use a particular network’s cards. A network that increases the interchange fee paid by the merchant’s financial institution to the cardholder’s financial institution enables the latter to pay more generous incentives, and can increase use of its cards."
According to a 2019 retail payments survey from Retail NZ, a lobby group for retailers, retailers pay weighted average merchant service fees of 1.1% on customers' contactless debit payments, and 1.5% on credit card transactions. The merchant service fee is paid to the bank providing payment services to the merchant. Banks say it's made up of the interchange fee set by the card schemes, and costs incurred by banks to process the transactions.
In contrast NZ's EFTPOS system, whose standards are maintained by Payments NZ but which has no owner as such, doesn't charge per-transaction fees to merchants.
MBIE said unregulated NZ interchange rates and merchant service fees were "significantly higher" than in countries where interchange is regulated such as Australia and the European Union. In Britain merchants pay weighted average contactless debit fees of 0.3% and weighted average contactless credit fees of 0.6%, respectively.
Before we look at the nitty-gritty of fees in NZ, and what has changed since 2016, let's take a look at how Australia regulates retail payments and detail Australian fees.
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Where the Aussies are at
Over in the Lucky Country, where the parents of NZ's big four banks are the major card issuers, the Aussie authorities have taken a very different stand on credit card schemes and interchange than our authorities have.
The RBA formally "designated" Visa and Mastercard's credit card schemes as payments systems as long ago as 2001. Visa's debit card scheme was designated in 2004. Mastercard's debit system hasn't been formally designated, but Mastercard provided a voluntary undertaking to comply with the standards applying to Visa debit.
That made them subject to RBA regulation under the Payment Systems (Regulation) Act, with designation the first step in establishing standards and access regimes for a payment system to deal with public interest issues. This came after a financial system inquiry (the Wallis Committee) in 1997 highlighted interchange fee arrangements and restrictions on access to credit card systems as areas of concern.
In 2000 the Australian Competition and Consumer Commission said the collective setting of credit card interchange fees was a breach of the Trade Practices Act, and said credit card systems and their members should seek authorisation of the interchange fee agreements if they could demonstrate these arrangements were in the public interest.
The Payments System Board (PSB) has responsibility for determining the RBA's payments system policy under the 1959 Reserve Bank Act. The PSB has regulated interchange fees since 2003. It has a benchmark for average interchange fees of 0.5% for Mastercard and Visa credit cards, a benchmark of 8 cents per transaction for debit cards, and a ceiling on individual interchange rates of 0.8% of the transaction value for credit cards and 15 cents, or 0.2%, for debit cards.
Visa and Mastercard didn't just roll over and take the Aussie regulation. They challenged it in the Federal Court on procedural and jurisdictional grounds. However in 2003 the Court found the RBA had validly and properly exercised its powers. (There's background and detail on the Aussie regime here).
'Ban 'em'
Meanwhile there has been a push in Australia to ban interchange fees altogether. This came in a 2018 report on competition in the Australian financial system by the country's Productivity Commission. Recommendation 17.1 from this report said: "The Payments System Board should introduce a ban on card payment interchange fees by the end of 2019. Any other fees should be made transparent and published."
Banning interchange fees would result in merchant service fees falling, the Productivity Commission said. It suggested the average interchange fee was about 70% of the average merchant service fee for Visa and Mastercard credit cards, and about 45% for Visa and Mastercard debit cards. The cost and complexity of interchange fee regulation would also fall, and removing interchange fees would also increase the transparency and efficiency of the payments system, the Productivity Commission said.
"Transparency would likely reduce the costs of the payments system overall if cardholders move some of their card payments to other, lower-cost payment methods, such as cash or bank transfers," the report said.
"To the extent that merchants pass on the cost of interchange fees as higher prices for all consumers, setting interchange fees to zero would reduce this cross subsidisation from the prices all consumers pay to the benefits received by cardholders. This means the people who receive no benefit from card payments do not have to pay for the benefits to others," the Australian Productivity Commission said.
The report did note that removing interchange fees might cause financial institutions to increase other fees to recoup some of the lost revenue.
The 2014 financial system inquiry, headed by ex-Commonwealth Bank of Australia CEO David Murray, pointed out Australia had been one of the first countries to implement interchange fee caps. which were now in place in 38 countries. Murray's inquiry considered banning interchange fees, saying this could improve efficiency by forcing customers and merchants to pay directly for the benefits they each receive.
"However the inquiry considers that banning interchange fees would have high transitional costs. Instead the Inquiry recommends that the PSB consider reducing interchange fees in the short term, and then consider further lowering fees in the longer term, depending on market conditions," Murray's final report said.
In November last year the RBA released an issues paper entitled Review of Retail Payments Regulation: Issues Paper. An RBA spokesman told interest.co.nz the paper is part of "a holistic review of the regulatory framework."
The issues the RBA is seeking feedback on include whether there's a case for further lowering of credit or debit interchange benchmarks or any change in how they're applied. It also questions whether interchange regulation should be extended to fees applying to transactions in Australia using foreign issued cards, and whether there's a case for greater transparency in Visa and Mastercard fee arrangements, including their effect on payment costs.
"Interchange fees may be appropriate in some circumstances, particularly in the establishment of new systems where they may be necessary to rebalance costs between the sides of the market and ensure that both sides of a market have an incentive to participate. However, the major card schemes are mature systems, and regulators in many countries have reached the judgement that their cards are ‘must take’ methods of payments – that is, that merchants have little choice but to accept their cards. In practice, with interchange fees being used to incentivise issuers to issue cards from a particular scheme and cardholders to use that card, the tendency has been for competition between mature card schemes to drive up interchange fees and costs to merchants, with adverse effects on the efficiency of the payments system," the RBA issues paper says.
Submissions were due with the RBA by January 31.
NZ, circa Aussie 2001
Back here in NZ we're at the point Australia was in 2001 in that we're looking to increase regulatory oversight of key financial market infrastructures.
The Financial Market Infrastructures (FMI) Bill is currently before Parliament's Finance and Expenditure Select Committee. The Bill provides for information-gathering powers, for the Reserve Bank of New Zealand (RBNZ) and Financial Markets Authority (FMA), in respect of all FMIs operating in NZ. It also gives the regulators a set of additional powers, such as oversight of rules and a full suite of crisis management powers, for FMIs considered to be systemically important. Or put another way, too big to fail.
To date neither the RBNZ nor the Government are suggesting Visa and Mastercard should be deemed systemically important, and Visa certainly doesn't think it should be.
As the RBNZ puts it, FMIs, such as payment and settlement systems, are the channels through which financial institutions, governments, businesses and individuals transmit money and financial instruments. Typically they are sophisticated systems that centralise activities, handling big transaction volumes and sizeable monetary values. By centralising activities, FMIs can concentrate risks and create interdependencies between and amongst FMIs and participating institutions. Some FMIs play a key role in supporting the effective and efficient functioning of NZ’s financial system, by facilitating convenient, cost effective, and low-risk financial transactions. As such, their sound and efficient operation is important to ensure the maintenance of a sound and efficient financial system. This in turn supports the sustainable performance of the economy.
However, the governance and risk management of these FMIs might not always fully align with public policy considerations, the RBNZ says, and in some cases, market failures could lead to FMIs "not being as safe or efficient as socially optimal." In 2013 the RBNZ reviewed existing powers for the oversight of payment and settlement systems. This review concluded that the regulatory framework left significant systemic risks unaddressed and that it doesn't provide sufficient regulatory oversight of a sector of critical importance to the NZ financial system.
"It was also noted that New Zealand’s very light-handed regulatory powers seemed to be an outlier by international comparison and did not reflect the risk mitigation that had taken place at the international level," the RBNZ says.
The FMI Bill details what the RBNZ and FMA, as joint regulators, must take into account when making their systemic importance determinations. This includes:
(a) the FMI’s size, including the number of participants and the number of indirect participants:
(b) the types of persons who are participants and indirect participants:
(c) the nature and scope of the activities under the FMI, including the way in which, and the extent to which,
(i) the FMI interconnects (directly or indirectly) with other FMIs or other activities within the financial system:
(ii) participants and indirect participants transact or otherwise interconnect with each other (directly or indirectly) under the FMI:
(d) the way in which, and the extent to which, financial risks are concentrated within the FMI:
(e) were activities under the FMI to be disrupted, whether another FMI could promptly and effectively take them over.
An RBNZ spokesman says the process to decide which FMIs are systemically important is yet to be run and is some time off because the parliamentary process needs to run its course.
"A framework is being developed to support the forthcoming systemic assessment process and the framework will be published for stakeholder feedback ahead of systemic assessments taking place. The summary of submissions from the 2015 consultation on the oversight of designated FMIs considered a list of potentially systemic important FMIs (see Appendix Two) which did not include Mastercard or Visa. While this provides an indication of early views on the relative importance of FMIs operating in New Zealand at that time, it is not deterministic and the systemic assessment process will effectively cover all FMIs operating in New Zealand," the RBNZ spokesman says.
Finance Minister Grant Robertson is the MP in charge of the FMI Bill. Asked whether Robertson believes Visa and Mastercard should be designated as systemic important FMIs under the FMI Bill, a spokesman for Robertson says no decisions have been made about which institutions will be covered.
"These decisions will be made by the RBNZ and FMA, and signed off by the Ministers of Finance and Commerce once the Bill becomes law," Robertson's spokesman says.
'Retail payment systems do not pose systemic risk'
Visa clearly doesn't want to be a designated FMI in NZ. A submission on the FMI Bill to the RBNZ from Martin Kerr, Visa's NZ and South Pacific country manager, makes this clear.
"We note that retail payment systems like Visa usually involve small value transactions between two consumers, between a consumer and a business, or between two businesses and involve deferred settlement. In contrast wholesale payment systems deal with inter-bank, inter-country large value, large volume real time payments and related clearing and settlement systems," Visa says.
"Unlike wholesale payment systems, retail payment systems do not pose systemic risk because their failure would not threaten the solvency or liquidity of the overall system."
Visa goes on to say that it's subject to 'robust regulatory oversight" in its home country by the US Federal Financial Institutions Examinations Council, which includes multiple US authorities such as the Federal Reserve Board.
"Duplicative regulation can lead to confusion, regulatory inefficiency and unnecessary costs. It is also inefficient for central banks, potentially leaving them with fewer resources to devote to emerging payment services that often times require much more focus on, for example, risk management processes," Visa says.
"An uneven playing field not only negatively impacts providers like Visa, but also leads to economic distortions in the larger payments ecosystem."
'Fees have come down'
In 2016 when MBIE issued its retail payments report bank lobby group the New Zealand Bankers' Association (NZBA) said it didn't agree that there were material inefficiencies or cross subsidies in the system or that these were at a level that warranted government intervention. Furthermore regulation wouldn't derive material benefits for participants in payment systems and would lead to unintended consequences, NZBA said.
NZBA did, however, make a range of commitments for acquiring banks to improve transparency around fees and pricing for merchants. Four years on an NZBA spokesman says banks haven't changed their minds about regulation.
"In light of how acquirers have responded since then we still think regulation is not needed," the NZBA spokesman told interest.co.nz.
Four years on, from its report what does MBIE have to say?
"We can confirm that since 2016, credit and debit interchange fees have decreased by between 8% and 14%," an MBIE spokesman told interest.co.nz.
In the third article of this series we'll look in more detail at what has changed since 2016 and whether it's enough.
To be continued...
(You can read Part 1 in this series here).
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