Counterpoint: Surcharging should be focus of ComCom’s payment fees clamp-down

Friday, 13 December 2024

Mastercard’s Ruth Riviere wants Commerce Minsiter Andrew Bayly to encourage the Commerce Commission to be bold and to be evidence-based.

Ruth Riviere is country manager of Mastercard New Zealand and the Pacific Islands. Mastercard New Zealand is actively participating in the Commerce Commission's consultation on interchange fees.

OPINION: A few weeks ago I hosted a panel at an open banking event where Minister Andrew Bayly gave the opening address.

Minister Bayly’s comments naturally touched on the brilliant progress and exciting future of open banking. But he also reiterated his focus on what he has described as ‘pesky surcharging’.

The minister appears convinced, as am I, that surcharging as it currently stands is a bad customer experience and Kiwi cardholders are paying too much.

Market research from RFI Global suggests that one in every two merchants in New Zealand are now surcharging, up from fewer than 20% in 2015.

These surcharges are frequently more than the underlying costs. The Commerce Commission itself states that these underlying costs are about 1% on average, yet cardholders are copping an average surcharge of 2%, with reports as high as 9%.

Ruth Riviere, country manager of Mastercard New Zealand and the Pacific Islands, says there should be more of a focus on cracking down on surcharging.

The Commerce Commission has clear guidelines stating this is not OK, but there is no enforcement of those guidelines.

Independent mystery shopping at 182 merchants found that 71% of in-person businesses fail to comply with the Commerce Commission’s guidelines.

Mastercard’s own estimate (using the Commission’s 1% cost and 2% surcharge figures) indicates that in the last year alone, Kiwi cardholders paid $90m in excessive surcharges for in store payments. That is, $90m over and above the actual cost of acceptance to the merchant.

We can all agree that’s not on. But what to do about it?

Minister Bayly has stated that he expects to make an announcement on this front in the coming weeks. In a radio interview he appeared to suggest that surcharges on debit cards would be banned, and surcharges on credit cards would be capped.

Many Kiwis, I’m sure, would welcome this development. The thing is, neither of these outcomes look to be on the table at present, because the work being done by the Commerce Commission in its current consultation is focused on further regulation of interchange fees, not surcharging enforcement.

Interchange fees are just one relatively small component of the overall cost a merchant incurs from their payment service provider to accept digital payments, commonly referred to as the 'merchant service fee.' It is paid by the merchant’s payments provider to the cardholder’s bank to cover the latter’s risk and is often used to fund new innovations and cardholder benefits.

The consultation looks at applying further downward pressure on interchange fees, claiming it will save merchants $250m a year, and in turn reduce surcharging.

The elephant in the room is the assertion that lowering these fees will result in lower surcharges is unsubstantiated.

Commerce Minister Andrew Bayly wants lowered surcharging for New Zealanders - but will his intervention prescription be the right one?

Interchange fees have been reduced through regulatory means previously – only two years ago. And yet surcharging got worse.

Doubling down on an intervention that did not curb surcharging the first time around will not deliver the outcome Minister Bayly quite rightly wants to achieve for Kiwis, and he should question claims to the contrary from the Commerce Commission without new evidence.

In fact, Commerce Commission chairperson John Small himself told media it’s “hard to know” if merchants would pass on savings achieved through regulation. Kiwis could reasonably expect a greater degree of certainty before even more market intervention.

There is also clear evidence, from both the US and Europe, that where you reduce interchange to unsustainable levels, cardholders – businesses and consumers – suffer. This is because interchange is not just an arbitrary cost, but rather a crucial balancing mechanism in the ecosystem to fund better card propositions.

In Europe, after interchange was regulated to levels similar to the Commerce Commission’s proposal, APRs increased, annual fees increased, and cardholder benefits decreased. In the US they saw a marked decrease in fee-free products on the market. The Commerce Commission, however, has stated that there are ‘no adverse consequences’ to its proposal.

Interchange fees are also vital to the business models of many innovative Kiwi fintechs that are enhancing competition in retail banking (another key objective of the Commerce Commission) and providing valuable benefits to consumers and small business cardholders.

Lloyd Burr asks why Kiwis should pay a fee to use their own money (in one of the toughest explainer pieces he's done so far)

So, what should we do if we want to address ‘pesky surcharges’?

The EU banned surcharging after it regulated interchange at less severe rates than those proposed by the Commerce Commission. This approach acknowledges the value of digital payments, while ensuring costs are shared rather than fully borne by consumers.

If interchange rates are going to be regulated to the same levels as Europe, why wouldn’t the Commerce Commission also ban surcharging in NZ? It would bring welcome relief to the confusion of different surcharge rates, illegible signs, and poor retail experiences, including our experience for tourists.

One consideration of interchange fee regulation is the lack of assurance that any reductions will be passed on to shopkeepers or the end consumer. Just last month Canada took meaningful steps to tackle this, bringing together industry players to lower fees for small businesses while ensuring any savings are directly passed on to merchants.

And in the UK, the government-mandated payment service providers to offer clear, user-friendly price comparison tools, empowering merchants to understand their costs across providers and encouraging them to seek the best deals for their businesses.

Combined, these three approaches could be highly effective in delivering better outcomes for merchants and cardholders in New Zealand, and Mastercard encourages the Commerce Commission to actively explore them.

If surcharging is to continue, stricter guidelines around what “acceptable” surcharging looks like are essential, alongside improved data collection, reporting, and enforcement. The Commerce Commission already has the remit to ensure merchants don’t surcharge beyond the cost of acceptance. It’s not currently doing so, but it should.

Those of us building the future of payments in New Zealand welcome Minister Bayly’s attention to the problem of excessive surcharging, and his enthusiasm for the future of our fintech sector. But we suggest that, in addition to encouraging the Commerce Commission to “be bold,” he encourages them to “be evidence-based”.

Otherwise, to Kiwis expecting a welcome reduction in surcharging, they will over- promise and under-deliver.