Draft decision on changes to regulation of Mastercard and Visa interchange fees coming next week

The Commerce Commission is likely to push surcharges "right down" but "not to zero" when it releases the draft decision from its consultation on the costs to businesses and consumers of card payments next week.

The consumer watchdog says the draft decision and a reasons paper will be released next Wednesday, December 18, proposing changes to the regulation of interchange fees on Mastercard and Visa card payments.

Commerce Commission Chairman John Small spoke about the issue in a Economic Development, Science and Innovation Select Committee hearing last week.

"So what we're doing in that space is basically pushing those interbank fees right down. The [Retail Payment System] Act when it first came in cut them a fair bit. We are currently consulting, we are about to go out with a draft decision."

"The proposal that we put out was to push those fees down a lot further and to include international cards in that. There are two purposes. One is to make the numbers smaller so that the merchant pays less and so surcharges are lower, and the other one is to simplify, take a lot of the complexity out of it, so that treating like [similar] cards alike so that it's easier for everyone to understand what the merchant's paying," Small said.

"That work is underway so I better not give you the spoiler. But I should say that the reason we're doing that is because then it's possible to push those surcharges right down, and that's what we'd like to do. Not to zero because there needs to be some money in it for innovators. Not to zero, but to something low. It's a balancing act."

Fintechs such as Dosh and Emerge advocate for interchange to remain in place as a source of revenue for their fledgling operations, offering competition to established banks. (See more on interchange below).

An issues paper the Commission released in July estimated merchant service fees amount to about $1 billion a year, with interchange fees comprising about $600 million, or 59%, of these fees paid for Mastercard and Visa card payments, mostly via banks.

Thus the Commission said further interchange fee regulation could reduce fees substantially. Assuming 90% of these savings were passed through to merchants, merchant service fees could fall by more than $250 million annually, it estimated. This estimate is based on 0.2% domestic and 1.15% international interchange fee rates, which are lower than current rates.

In its issues paper the Commission said the average surcharge imposed by merchants was about 2% but the average merchant service fee was about 1%.

"Whilst the cost for accepting contactless debit is lower (0.70% for those on unbundled pricing plans), merchants will have higher costs when their customers pay with a more costly payment method (upwards of 2% for international cards) so they may just pick the higher number," the Commission said in July. (See more detail here).

Quantitative evidence sought

The Commission says feedback on its issues paper, in general, wasn't well supported by quantitative evidence.

"This makes it challenging to weigh up the strength of different trade-offs when making decisions. We particularly welcome quantitative feedback in submissions on this draft decision."

Small told the Select Committee: "There's a payment that runs between two banks in that network, between your bank as a card holder and the merchant's bank. So the merchant's bank pays your bank a fee and it charges the merchant for that fee, and it could be 1% or 2% of the transaction value." 

"The merchant has got to pay for that and so then the merchant's go 'well I need to get this back.' So they put a surcharge on. But often they don't really know how much that transaction is costing them and so sometimes they, whether it's lack of knowledge or they just want a bit of a profit margin, that is put on a surcharge." 

"So that's the sort of thing that really annoys people. And you can see why. It also promotes that payment form over others...because some of that money comes back to the cardholder in the form of reward points," Small added.

The Commission says $95 billion of card payments in NZ are processed by Mastercard and Visa each year. Meanwhile, the revenue Visa and Mastercard generate in NZ is run through their Singapore operations where very low tax rates are paid on it.

What are interchange fees?

Interchange fees are charged by the financial institution on one side of a payment transaction to the financial institution on the other side of the transaction. A typical card transaction involves four parties the cardholder, the cardholder's financial institution (the issuer), the merchant and the merchant's financial institution (the acquirer). For most card transactions, the interchange fee is paid by the acquirer to the issuer.

Visa and Mastercard point out interchange doesn't generate revenue for them. However it underpins and grows their networks and is the biggest component of merchant service fees paid by merchants to their banks. Interchange can thus drive up costs for merchants and ultimately consumers too, being reflected in retail prices and surcharges, with some also rebated to card holders as rewards.

They're also complicated. Visa and Mastercard have hundreds of interchange fee categories, impacting the cost and transparency of the merchant service fees paid, merchant service fee pricing and the accuracy of merchant surcharging.

Further regulation would mean a financial hit for bank card issuers for whom Visa and Mastercard relationships are lucrative.

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