Who’s making money out of pesky contactless surcharges?

Saturday, 26 October 2024

What started out as a simple exercise has turned into a two-part surcharges behemoth. In this installment, Explainer Editor Lloyd Burr seeks to find out who is making money from the fee Kiwis have to pay when tapping their card, phone, or watch.

The reason? There’s not a simple answer and New Zealand’s payment system is so complex, I couldn’t fit it all in an article with fewer than 2000 words.

So here I am, not quite as long as The Hobbit trilogy but certainly on par with ‘Harry Potter and the Deathly Hallows Part 1’ and ‘Part 2’.

But instead of waving my wand and confidently articulating a curse, I’m waving my card and cursing at the damned 2.5% fee being forced upon me.

If you haven’t already, read part one which was released on Friday. It explains how the payment options work and how much they cost. The conclusion: no matter how you pay, there’s a cost to the retailer.

On average, EFTPOS is cheapest (0.2%), followed by debit cards (0.2% if you insert, 0.7% if you don't), followed by credit cards/contactless (2.3%), followed by cash (4.1%). But it’s only credit and contactless payments that are passed on directly to the consumer.

That’s because it’s easy to calculate, easy to pass on, and - what you’ll find out in part two - easy to avoid the blame for.

Who’s making money from surcharges?

“Great question,” says Gemma Rasmussen from Consumer NZ. “And it’s one we don’t know the answer to. Is it the banks? Is it the merchants? It is very hard to say.”

It doesn’t exactly instil confidence in the payments system when our flagship consumer watchdog can’t figure out who’s making money from these fees.

What she does know is that Kiwis are paying $250m more than they should be in order to use their credit card or make a contactless payment. Across the ditch, it’s more than $1b.

“Consumers are the ones being rorted. It’s become part of our behaviour that we are accepting to tap because it’s quick and easy,” Rasmussen says.

They received 124 complaints about excessive surcharges last year ranging from 2.5% to an event company charging 16.25%. There was even a pilates studio that charged 14.6%.

“We’ve also had complaints from businesses who have been charged more than 2.5% by the merchant service fee provider,” she says.

Is it Visa and Mastercard making the money?

“Mastercard doesn't make any money out of surcharging,” says Ruth Riviere, the NZ boss of Mastercard. “It's not our global position and we're concerned about how prevalent it's becoming in New Zealand”.

While it’s true they don’t make money directly from the surcharges, they do make money indirectly as a result of charging fees to banks, which in turn recuperate those costs by charging merchants.

The reason scheme providers don’t like surcharges is because they discourage consumers from using a payment method that uses their network, which means they make less money (indirectly).

Riviere believes merchants need to absorb the cost not just because it’s a cost of doing business, but because it’s good for business and encourages business.

“We know that kiwis are increasingly looking to leave home without their wallets. They want to pay via mobile or watch. From a retail side, that's an investment in a customer experience and investment in the conversion of a sale,” she says.

Riviere also makes the argument that the overall cost of credit and contactless transactions is lower than cash, which doesn’t incur a surcharge.

“There is a cost to all payments,” she says, pointing to the Boston Consulting Group report which says the average cost of cash per transaction is 4.1% compared to the average cost of credit and contactless which is 2.3%.

She also points to terminal providers and retailers who are taking advantage of the process and implementing excessive surcharges.

“What we think is happening is that on top of that [merchant service fee], there's an additional amount being put on. And that's not cost recovery,” says Riviere.

Is it the banks making the money?

“No,” says an ANZ spokesperson. “ANZ does not set the level of surcharges or receive any benefit from them.” ANZ isn’t the only bank saying that.

“We don’t make any money on merchant surcharges,” says Westpac NZ’s General Manager of Product, Sustainability and Marketing, Sarah Hearn.

“We do recoup the cost of providing merchant facilities by charging merchant service fees, which cover processing and associated business costs. Whether merchants pass on their fees via a surcharge is at their discretion and has no impact on our income,” she says.

What should the surcharge be, then? “No more than 1%,” she says. “The average merchant service fee is 1%, and we agree that Kiwis should not pay more than that cost through surcharges”.

But they are. Many shops are double that. Early Bird Bakery on Ponsonby Road is 2.5%. Around the corner at Itameshi, the fee is 2.9% (although it’s not shown as a percentage). I’ve been sent plenty of photos of 2% and 2.5% places. Why?

“We’ll soon start contacting merchant customers where we can see they have higher-than expected surcharges loaded on their terminals, and ask them to review their surcharges,” says Hearn.

Banks like people paying via Visa and Mastercard’s networks because the banks recoup the cost via the ‘merchant service fee’. When people pay with EFTPOS, banks have to pay a ‘switch fee’ to Worldline or Verifone which they don’t recuperate.

Is it the retailers making the money?

The Commerce Commission says some merchants intentionally have excessive surcharges, while others have no idea what it should be and either guess or take the lead from other merchants or terminal providers.

“Many businesses appear to have surcharges higher than their associated payment costs,” says Matt Lewer who is Head of Payments at the Commerce Commission. “Surcharging is not an opportunity to increase a businesses’ profits, as excessive surcharging harms their customers”.

It’s not illegal for retailers to make money from surcharges but it is illegal to mislead consumers regarding surcharges (i.e. you must be told there’s a surcharge before you pay). How many retailers are over-charging when it comes to surcharges? The Commerce Commission doesn’t know.

“Merchants will have different costs based on things like their size and mix of different payments, so it is difficult to quantify. The average surcharge imposed by merchants is about 2% and this is probably higher than the costs for most merchants,” says Lewer.

Retail NZ supports its members implementing surcharges, as long as they’re not excessive. Its chief executive Carolyn Young does have concerns about terminal providers luring in retailers by advertising high surcharges.

“The terminal providers make it easy. They do,” she says. “Everyone in the last couple of years have been updating their terminals and one of the sales points for the providers is the ease of adding surcharges and they’ll set it up for the retailer too”.

The Commerce Commission has concerns about this too. “Some terminal providers are incentivised to implement surcharges and they charge a fee for it. Some terminal providers also offer other services which may be harmed by surcharges so they may not be pushing for it,” the spokesperson says.

Young says operating costs have gone up for retailers. “Electricity, rates, goods, wages, internet, and security have all gone up and they have to absorb it. At least with surcharges, they can offset the merchant service fee but they can’t with all the other costs,” she says.

She points out that 75% of her members do absorb the merchant service fee instead of passing it on.

When asked who’s making money from surcharges, an ANZ spokesperson gave this response: “The retailer decides whether they will add a surcharge to their terminal and how much that surcharge will be. The retailer would receive the money generated by any surcharge”.

What’s the solution?

The Commerce Commission has consulted on surcharges and is currently working on the next steps. It might recommend banning surcharges, capping surcharges, or capping some of the costs along the chain. Or it might recommend doing nothing.

“We think there is an opportunity to reduce and simplify the fees to businesses, and subsequently any surcharges that get passed on to consumers,” Lewer says.

But it’s not as simple as that, as Emerge co-founder Jamie Jermain points out.

“ComCom are currently looking at doing a second cap on interchange. Unfortunately this could be a huge own goal for payments in New Zealand. Not only are you scrapping any money that card issuers can use to innovate and drive competition, you’re also making card payments so cheap that there’s no incentive for someone to build a domestic solution that could be a better experience for the customer,” he says.

As a fin-tech, Emerge uses the money generated from the interchange fee to innovate and build its capabilities. Any changes to that will affect Emerge’s ability to seriously compete with the big banks.

“The banks have hundreds of revenue lines,” says Jermain. “Fintechs only have a few at the start while they scale. Fintechs will bring competition and this revenue subtraction will hurt them and damage any opportunity for customer-first innovation and competition in the space”.

There’s also something on the horizon that could change everything: Open banking.

Open banking is something the Finance Minister has tasked officials to work on at pace. In short, it gives you access to your own banking information and allows you to swap banks quickly. It would drive more competition in the banking sector, which would bring costs down. It might also allow new innovations at the point-of-sale with new APIs (application programming interfaces) like retailers and consumers being able to transfer funds directly rather than payments being routed through the complex network of switches, schemes, rails, gateways, clearing systems etc.

Jermain says open banking is an exciting opportunity for Emerge but progress is slow.

“We’re not working as an industry to keep the price down. Because of that there isn’t really a use case for someone to come in and build something exciting for the customer,” he says.

“At Emerge we’re all about APIs that are extremely secure but as close to free as possible, and then seeing what people can build. We’ll be working on some exciting developments in that space in 2025,” says Jermain.

If surcharges persist through the open banking upheaval, they might actually provide an incentive for retailers and consumers to transition to new technologies.

This is buoyed by talk that Apple will soon unlock its NFC (contactless) capabilities so other apps can use it, rather than just Apple Wallet exclusively. This would be a game-changer when combined with open banking innovations.

So the solution? Hang tight, keep being pissed off at surcharges, keep paying with EFTPOS or avoiding places with surcharges, keep reporting excessive surcharges (anything more than 2%), and have some faith that a better system will emerge from the expensive and expansive bird’s nest that is New Zealand’s payment system.