NZ credit card fee reforms risk handing extra profit to retailers; repeating Australia's mistakes

By Emma Geraghty

Moves by the Commerce Commission late last year to increase competition on credit card interchange fees and cut retailers' costs by around NZ$75 million have yet to bear fruit as retailers, banks and credit card companies are stuck in a Mexican stand-off to see who will take the first pain. Consumers, meanwhile, have also yet to see any benefits.

The first moves in this impending battle were made in early January when several independent petrol stations started adding credit card surcharges and some government departments started charging these fees for payments online. These moves followed a slew of announcements from the Commerce Commission in August and October about settlements with banks and credit card companies that removed a ban on these surcharges and removed restrictions on so-called 'interchange' fees charged to retailers by banks. The commission hoped these moves would free up the market, forcing the banks and credit card companies to compete with each other and push down fees and, ultimately, prices for consumers.

But this has yet to eventuate. Instead some retailers and government departments have simply added the fees onto  prices to bolster their profits, raising fears consumers will abandon credit cards and use EFTPOS and cash more often, which would cut the NZ$28.5 billion a year spent by New Zealanders using at least 3 million credit cards. Profit windfall? If all retailers were to add the current interchange fees of around 2% to all credit card transactions and they didn't pass that on in the form of lower prices on all goods this would deliver a NZ$570 million profit windfall to retailers and potentially deliver a slight one-off boost to the inflation rate, adding extra pressure on the Reserve Bank to raise interest rates.

The Commerce Commission's hopes that retailers would pass on these gains through cuts to retail prices have also failed to materialise, reinforcing the fears of those who point to the apparent failure of similar reforms made in Australia in 2003.  The Reserve Bank of Australia's own review in 2008 of its reform of interchange fees found retailers had benefited at the expense of consumers and it recommended other regulators be wary of such reforms.

One of the main effects of the RBA's interventions has been a redistribution of wealth in favour of merchants (retailers). Merchant service charges have declined as a result of the RBA's regulations. The fact that merchants in Australia are lobbying aggressively for further reductions in interchange fees (indeed, the elimination of interchange fees) is clear evidence that they have benefited from the RBA's regulations and strongly suggests that they have not simply passed through reductions in merchant service charges in the form of lower prices and/or improved quality of service.

Visa and Mastercard worried

Until a much larger number of retailers add the surcharge, most of the players expect the standoff to continue. Visa and Mastercard are hoping retailers will stop charging the fees, which retailers were given the green light to start charging after the settlements announced in October last year by the Commerce Commission. Visa New Zealand Country Manager Sean Preston told interest.co.nz Visa did not support the scheme and had not seen widespread signs of it occurring in New Zealand yet.

"We have not seen any significant impact for surcharging in New Zealand and we hope not to be seeing any financial impact in the future. Obviously it's a payment and we do not want to see Visa customers discriminated against," Preston said. "Credit card card merchant services are no different to any other costs that a merchant has to any other costs that a business pays, for example; rent and power," he said. Mastercard was opposed to "excessive surcharging" and would take the necessary steps to prevent it, Country Manager Stuart McKinlay said in a statement.

"Under the new rules, merchants who choose to surcharge are required to inform their customers of the added charge before the completion of the transaction, and the amount of the surcharge must bear a reasonable relationship to the merchant's cost of accepting MasterCard cards," McKinlay said. "It is well known that most consumers resent being surcharged and for this reason it has been banned in a number of countries. Moreover, by discouraging the use of electronic payments and forcing consumers to carry more cash, surcharging may aggravate societal problems such as crime and tax avoidance," he said.

New Zealand Retailers Association Chief Executive John Albertson told interest.co.nz the majority of retailers were likely to introduce surcharges, as the interchange fees had to be recouped from customers. "Obviously now they have the ability to surcharge, if you look at the movement, the cost of implementing credit card surcharges is supported across the whole business. Depending on the average size the retailer can have a surcharge of between 1.5% to 3%," Albertson said.

Pak'n'Save watching

Players in the standoff will watch the major supermarket groups and service station groups for the next move. Progressive Enterprises, which is owned by Woolworths and runs the Countdown and Foodtown chains, has ruled out adding the surcharges for now, but the locally owned Foodstuffs group, which runs Pak'n'save and New World chains, has said it is watching the market closely. Foodstuffs NZ chief executive Tony Carter told interest.co.nz via email Foodstuffs was aware of the surcharge, but at this stage had no plans to introduce it. 

"However, we will keep it under review," Carter said. Some independent service stations have started adding the surcharge and advertising it on pumps, but the big oil groups' own sites (630 out 1,300 stations nationally) have yet to add the surcharges. BP spokeswoman Emmy Lukins told interest.co.nz that BP-owned sites would not be putting a surcharge on at present. Shell spokeswoman Kylie Reeves said Shell's 207 company-owned stations had no plans to add the surcharge.

The Commerce Commission said in a statement last month it was monitoring the surcharges after a flurry of publicity around independent petrol stations adding the fees. It reiterated it expected retailers to pass on to consumers the benefits of fee reductions they were likely to see because of settlement agreements signed last year between the Commerce Commission, the credit card providers and the banks.

"As a result of that settlement, from April this year most retailers will pay lower fees to their banks on credit card transactions. As retailers now have the ability to pass the cost of credit card acceptance directly to the card-holder, pressure can be brought to bear on credit card issuers to reduce their transaction fees," Commerce Commission General Counsel Peter Taylor in the statement "This should over time result in decreased costs to credit card users while benefitting retailers and their customers through reduced costs," Taylor said. Taylor was not available for comment to interest.co.nz this week.

Berry's pledge

Commerce Commission Chair Mark Berry said in a statement in October the settlements with banks and credit card providers allowing retailers to add surcharges and card providers to cut fees would save retailers money, which he expected to see passed on to consumers. "We expect the savings to retailers over the next three years as a result of these settlements to be in the order of NZ$70 to NZ$80 million.

This represents a significant reduction in the cost of doing business for retailers who offer credit card payment options, and we would expect to see this passed on to consumers over time through lower retail prices," Berry said. The Commerce Commission announced its initial settlements with Visa and Mastercard in August last year.

Settlements with ANZ National, ASB, Westpac, BNZ, Kiwibank, TSB and The Warehouse Financial Services were announced in October. American Express is not subject to the rulings.