Guest Post: Payments and Public Policy – the case of NZ’s EFTPOS
August 23rd, 2011 at 10:00 am by David FarrarA guest post by Mike Wilkinson, who analysed the economics of retail payment system development in a recently completed MA thesis.
While travelling overseas, it’s easy for New Zealanders to see that we use our payment cards a lot more than people from other countries. Indeed, the figure below shows this observation is backed up by statistics from official sources: relative to many other developed countries, the nation’s debit card system (known as EFTPOS) is very well-used.
What makes it so? Many would have you believe it’s because such a system was developed here, first. Yet, the second figure demonstrates that that’s actually a big urban myth – even in my small sample of developed countries, New Zealand was by no means the first to have such a system. That title looks like it goes to the United States.
If it isn’t that EFTPOS was developed here first, what is it about our country’s system that makes it so useful? The two most well-used systems in this sample, New Zealand’s and Norway’s, have one thing in common: merchants or retailers in neither country pay significant fees for transactions completed at the point-of-sale. In both places, they generally need to buy or rent terminals, but, once they have those, most are quite happy to accept transactions for nothing at all. In other countries, merchants are charged fees that make them unwilling to accept small transactions; instead many prefer their customers to pay with cash. Meanwhile New Zealand and Norwegian consumers are required (or at least during the years following the systems’ introduction, were required) to pay transaction fees for debit cards. That these consumers still used debit cards demonstrates that many people really don’t like using cash.
In the case of Norway, such an approach to pricing was encouraged by the Norwegian Government. What about New Zealand? Why did the country’s banks adopt this approach even when their Australian parents elected to charge merchants fees? The answer to this question is firmly rooted in the history of the country’s banks, particularly their regulation by our Government.
In the period following World War 2, New Zealand’s banking system was characterised by intrusive, prescriptive regulation. Organisations were separated into three groups: trading banks, thrift institutions (including trustee savings banks) and other financial institutions. In 1984, members of the first two groups introduced their own EFTPOS trials, which some readers may recall. The trustee savings bank system was called Cashline. The trading banks’ system, called Quicksmart, was operated by Databank, their joint-venture originally created in the 1960s for processing cheques. Evidence demonstrates that an adversarial relationship existed between the groups with little prospect of smooth cooperation over a combined system.
In 1987, legislation passed by the Lange-Douglas government came into effect, substantially changing the way banks were regulated. Under it, any organisation could become a Registered Bank, if it met permissive criteria administered by the Reserve Bank. The climate for cooperation changed substantially and a merger of Cashline and Quicksmart was being contemplated. However, the 1987 sharemarket crash made banks much more conscious of costs. In 1988, two former trading banks, BNZ and ANZ, decided to withdraw their support for Quicksmart. The two remaining participants, National Bank and Westpac, purchased the EFTPOS assets from Databank, renaming the system, Handy-point. In order to attract merchant account business, they decided not to charge merchants transaction fees for this new system.
The Handy-point system proved successful and its approach to pricing was adopted when it was merged with Cashline to form Electronic Transaction Services Ltd (ETSL) in 1989. BNZ eventually joined ETSL, which was later renamed Paymark. ANZ invested in its own EFTPOS services that interconnected with ETSL, which were later brought into a company ANZ had purchased, EFTPOS New Zealand Ltd. National Bank and Westpac and, later on, the owners of ETSL were happy to cooperate with the other banks because they saw EFTPOS as a marketplace rather than as a proprietary asset.
New Zealanders have benefited from their successfully developed EFTPOS system because the country’s comparatively light regulation of banks fostered cooperation, and because at no stage has our Government become involved by choosing among the relevant systems. In my view, were it not for the Lange-Douglas reforms, New Zealand’s EFTPOS would have developed much less successfully.
The success of EFTPOS makes the Snapper bus ticketing stored-value system more useful for non-bus related payments because it can be used for faster payments than can EFTPOS. The Snapper system is also lightly regulated (relative to how comparable systems would be regulated, overseas), allowing it to offer payment services cheaply. These two factors combine to make Snapper one of the few privately-owned stored-value systems based on public transport that can be used for other sorts of transactions in the world. Snapper’s development shows that New Zealanders continue to benefit from the country’s market-driven approach to banks and to payments.
Related posts:
- EFTPOS in Destiny Churches
- Credit Cards Fees
- Guest Post: Our high exchange rate
- Guest Post on Accepting Drugs in Sport: the Case of Pro-Cycling
August 23rd, 2011 at 10:11 am
>Snapper’s development shows that New Zealanders continue to benefit from the country’s market-driven approach to banks and to payments.
I thought NZTA and the Auckland Council were sponsoring their own ticketing system in Auckland, and that Snapper won’t be allowed to operate in the city once the government and council owned system is running.
Vote:August 23rd, 2011 at 10:22 am
Shocking, absolutely shocking that someone can write this:
It flies in the face of every left argument!
Vote:August 23rd, 2011 at 10:48 am
The comparative analysis does not take into account tax evasion. Eftpos transactions are trackable; cash transactions are still the preference of many small businesses in high tax (esp. sales tax) regions.
Vote:August 23rd, 2011 at 10:48 am
davidp – Snapper is being installed on Auckland buses because of an urgent need to replace worn out ticketing machines, although AFAIK Auckland branded cards will be used. The Auckland system requires a card with greater capability/ memory than the existing Wellington Snapper card, but this new card will work with existing Snapper equipment. Infratil (owner of Snapper and most of Auckland and Wellington bus companies) has not had the victory it would have liked in Auckland, but has succeeded in having a major foot in the door.
On a more general note it would be great to see more competition and transparency in the international EFT-POS market – at present banks screw their customers. I needed AUD50 in Australia recently – AUD2 other banks ATM + $7.50 NZ bank withdrawal fee (ie tax) despite my Visa being in credit plus I dread to think of the exchange rate margin.
Vote:August 23rd, 2011 at 11:08 am
Davidp, don’t you think that the Auckland Transport initiative, the HOP Card, is missing an incredible opportunity? That is, it can’t be used, by itself, for anything other than public transport. Of course, actual HOP Cards currently can, but that’s because they interconnect with Snapper. If, once HOP’s up and running, Snapper was made incompatible with it, wouldn’t all those HOP Card holders start complaining that they can’t any longer use their cards to buy things besides bus and train tickets?
Trout, yes, tax avoidance will likely always mean that some prefer cash, as will the drugs trade. I didn’t suggest that cash will be totally replaced. In fact, I can’t see that happening before the public has a serious discussion about the role of government in the economy. Still, my focus wasn’t on cash, it was on EFTPOS (and Snapper)!
Peterwn, why didn’t you just use your standard NZ bank card in an Aussie ATM? Back in 2006, I think, my ANZ EFTPOS card worked without any problems in an ANZ ATM in Melbourne.
Vote:August 23rd, 2011 at 11:32 am
I wonder if this is a slightly ideological view of banking systems. That eftpos co-operation could easily be seen by some as a cosy cartel setting standards then pulling up the drawbridge. Basically the same parties got stung for their dodgy behaviour on credit card fee setting.
It seems to me he is missing a point that I have been told is important in NZ banking – they essentially shared the same operating standards, a heritage of Databank which built the core systems they effectively ran on. That meant you could relatively easily have a national payments system because the different bank systems are already talking to each other in real time. A banking friend told me NZ is one of the few places in the world where the system zero balances every night because all payments are allocated to an account – we don’t have large volumes of unallocated money floating around between banks that don’t talk to each other, except very slowly.
That was the case in the US a few years ago, where banks in different parts of teh country did’t talk to each other in real time, you had overlays of national and local/regional banks, with differing systems, which made their payments much more complex. I suspect that allowed third party cards like Amex and Diners that offer a single payment platform, room to move – they have never really got going here IMO because their offer was not that enticing.
I suspect one of the reasons for databank getting going in the first place was not light handed regulation but onerous regulation of the 60s/70s – buying computers was very expensive and getting foreign funds very difficult, so co-operation was needed.
@ peterwn
Westpac have an agreement with Westpac Aus, Paribas, Bank of America and Royal Bank of Scotland (assuming any of them have survived) for ‘free’ use of eftpos cards in ATMs. I say free advisedly….
Vote:August 23rd, 2011 at 11:40 am
“Yet, the second figure demonstrates that that’s actually a big urban myth.” And yet when I travelled from NZ to England and the USA several times from 1993 onwards, it was like going back in time. You went from easy eftpos access in all shops to no one having a terminal. NZ, in the places that I was, had immediate *universal* implementation while those other places simply did not have it in most places. I remember a few shops in the USA getting the “new fangled” eftpos terminals in 95′ and people being somewhat weary about using them.
Vote:August 23rd, 2011 at 11:45 am
The integrated travel card issue in Auckland is complicated, with various card-operating companies competing for contracts, various bus companies looking for the best business solution, and Auckland council trying to impose its own will on matters. When one company is charging bus companies ~$2k per bus to install machines, the company offering to fit buses out at no cost is attractive, even if it is not fully integrated. Smaller companies are waiting to see the outcome; they can’t afford to buy a system which might become marginalised. Perhaps Auckland transport would benefit from “the country’s market-driven approach to banks and to payments”, and less government intervention? Or can we not trust businesses to seek out the most effective and innovative methods to increase their own business (and resultant profits)?
Vote:August 23rd, 2011 at 12:13 pm
@ evadne
I think it is more complicated by the NZTA funding of public transport and wanting to be able to trace usage and subsidy payments. They wanted an electronic system with open/common protocols so that everyone they funded was reporting on a common basis – Snapper wanted that system to be theirs but I believe NZTA went for a non proprietary one.
Vote:August 23rd, 2011 at 1:15 pm
Hm. Debt cards are not the same as eftpos. Debit cards have only just been introduced here, they are apparently used in the US like we use eftpos here.
Not hard to see how eft-pos became popular here though. With a small country and a small number of banks, setting up a central payment agency is much, much simpler that it would be in the US.
Vote:August 23rd, 2011 at 1:18 pm
I agree that the hands-off attitude of the RBNZ contributed to the growth EFTPOS in NZ. Another important factor is that the banks have operated the system as a utility that saved them money, rather than a profit centre.
Interesting though that Mike’s post is largely historical and omits mention of the fact that EFTPOS is rapidly losing market share to Visa Debit, and the potential implications of this shift (and related moves by Mastercard). The live issues in the electronic payments sector in NZ are over (a) the extent to which the international card schemes will control our payments infrastructure and (b) what if anything can be done to avoid significant price increases once domestic EFTPOS has been displaced.
Mike knows about these issues. His post implicit prescribes continuation of a hands-off policy. My view is that while history matters, policy decisions should be forward looking and the issues of the future are quite different to the issues of the past.
Vote:August 23rd, 2011 at 1:40 pm
I think you need to check your definitions, Scrubone. EFTPOS is just one type of debit card, as is the Visa Debit card first issued by Westpac in 2006.
If it’s all about having a centralised agency, why did the Aussie banks find it so hard? There’s only four major ones of them.
Vote:August 23rd, 2011 at 2:29 pm
John, since Visa Debit cards actually use EFTPOS payment networks, on what basis can anyone say that EFTPOS is losing to market share to Visa Debit?
I agree that policy should be forward-looking, but think that it shouldn’t ignore mistakes from the past. My thesis shows that one key mistake is to think that our Government can reliably judge what the appropriate outcomes are and regulate to bring them about.
Overall, though, my thesis suggests that New Zealanders have far more to fear from the unintended consequences of poor government interventions than they do from the actions of Visa and MasterCard. You would do well to think about those consequences before making judgements about where government interventions may be warranted.
Vote:August 23rd, 2011 at 3:22 pm
Thanks for the advice Mike.
Regarding market shares, transaction volumes are probably the best measure.
Vote:August 23rd, 2011 at 3:43 pm
My apologies that that comment may have been a little sharp, John. However, payment instruments are differentiated products. I think it’s very difficult to regulate them without affecting features different to the ones you meant to: the possibility of unintended consequences is very real. If we care about overall welfare in this country, I think we need to be very careful before suggesting that government intervention might actually improve things.
As an example of the unintended consequences of regulation, the Reserve Bank of Australia is currently reviewing the extent of payments innovation in Australia. It can be argued, however, that the RBA’s own payment system regulations has made innovation much more difficult. If correct, that view suggests the RBA should step back from its regulation in order to encourage more innovation.
In regard to market shares, I agree that transaction volumes are a good way to measure market share. However, I still don’t follow what you’re worried about. By volume, Paymark and EFTPOS NZ still process 100% of NZ’s EFTPOS transactions completed at the POS. What’s the issue?
Vote:August 23rd, 2011 at 4:21 pm
Visa debits are fine for those who can’t manage a credit card but want the ability to do online transactions. That will be a niche but, given the penetration of credit cards, I can’t see it taking over debit cards, unless all debits cards become visa debits. But that is talkng about products rather than systems.
Vote:August 23rd, 2011 at 4:49 pm
Insider, I agree that Visa Debit is about a product rather than about a system. For some reason, though, there’s a lot of nervousness about it. Although my first reply to him was rather critical, John Small was merely expressing some of this nervousness. It is at least partially driven by perceptions that banks will start using the Visa brand for all of their debit cards.
My critical comment was an attempt to dissuade John and others of the notion that, if Visa Debit is a problem, our Government can and should be relied upon to solve it. I for one am very fearful of the unintended consequences that might come should this be done.
Vote:August 23rd, 2011 at 5:32 pm
What’s all this about regulation? There are lots of policy initiatives that don’t get anywhere near regulation. And anyway, there is not currently anything to debate here from a policy angle. My point was simply that if, at some future time, there is a policy debate, it should be based on the relevant facts. History is part of that, but the analysis must be forward looking.
I hope you agree Mike that Visa Debit is in fact rapidly gaining market share at the expense of EFTPOS. The fact that it uses the domestic EFTPOS infrastructure is irrelevant. These are competing products and Visa Debit is charging ahead. If anyone is confused about the role of shared infrastructure, think about Ford & Holden: they compete even though both use some of the same infrastructure (roads, petrol systems etc).
The issue? Parties with commercial interests have noticed this fact and are thinking about how to position themselves. They are forming their own views about whether and/or how quickly EFTPOS might vanish from NZ, and what future pricing might look like, and what threats or opportunities that creates. All good commercial stuff.
I’m not nervous Mike, and I’m sorry to hear you are fearful even though there is not even a policy debate here.
Vote:August 23rd, 2011 at 9:45 pm
Major success factors of the original EFTPOS network also included interoperability and refurbishment and recycling of early machines which greatly expanded merchant base out to smaller enterprises such as the corner dairy. This recycling occurred when integrated POS systems became available for large Merchants such as supermarkets.
The discussion so far regarding debit cards (EFTPOS or ATM cards) verses Scheme Debit (Mastercard & Visa etc) overlooks a couple of very real issues. Firstly, the existing system connects directly between Paymark or EFTPOS NZ to the card issuing bank and then the customer’s account. The scheme debit cards have potential to switch using the card companies proprietary networks which adds another (some would argue unnecessary) layer of processing. Secondly, Merchant fees are a real possibility with scheme debit. Already, scheme debit transactions processed online over the Internet attract the same fees as credit card transactions. If the existing EFTPOS network is replaced by the card company networks it is possible the charging structure could also change and become aligned with credit cards. Ownership of the payment system is an issue yet to be raised – is the country prepared to rely on foreign owned companies to provide the payments networks? John Small seems to think the issue is solely pure competition between two products – the reality is somewhat different and more complex: we are also talking about ownership of our payments systems, the cost of payment systems, who pays and the overall efficiency of our payments systems.
Also a correction, the existing EFTPOS system is not strictly real-time, the authorisation advice is real-time with underlying settlement transactions being processed in batch mode at the end of day. Some banks “memo post” while others with real-time update do post the debit leg in real-time on receipt of an authorisation request. Merchant settlement is always end of day.
The issue about Government intervention is a bit of a red herring in my view. It hasn’t occurred in the past 50 years and I don’t expect that will change unless the wheels fall off completely. By that I mean there would have to be a huge misalignment between the requirements of commerce and available payment services. A couple of points here: the RBA and the Reserve Bank of NZ are poles apart in terms of their propensity to intervene. Over the years the RBA has taken the banks on regularly while (in a payments sense) the Reserve Bank of NZ has basically applied influence and allowed the banks to dictate the timelines.
I do feel there is a shift in payments occurring driven largely due to the banks loosing control over preferred channels. Technology, particularly as it relates to user interfaces is evolving at an unbelievable pace. The banks cannot control this. I do not believe banks have the capacity to keep up with the payments requirements of these emerging technologies particularly as it relates to the back end processing systems and especially where industry collaboration is required. Potentially non-bank sponsored payment solutions will enter the market to meet the needs of commerce. Examples of these types of solutions already out there are PayPal, Transactor Technologies and POLi to name a few. Real-time on-line processing pervades commerce except payments. The country deserves better: the question is, can the banks deliver (as they did with EFTPOS in the 80′s)?
Vote:August 24th, 2011 at 9:56 am
Thanks for the thoughtful comment, AliH. While I think the factors you identified contributed to the success of EFTPOS, I believe the argument in my guest post is what underlies it all: there wouldn’t have been any interconnection if the Lange-Douglas reforms hadn’t meant that financial institutions were regulated similarly and there wouldn’t have been any recycling of terminals if merchants hadn’t demanded it as a way to get easy access to the cheap (for them) EFTPOS system. Still, your points are valid ones and the space constraints meant I didn’t mention them in my guest post.
Regarding duplication of processing networks, I’m not sure there is any issue here. According to RBNZ documents, credit card transactions are processed by EFTPOS NZ and Paymark, in spite of the fact that the schemes now issue a much higher proportion of credit cards than they do debit cards. If you have an alternative processing network that’s fine, but why would you start using it if it wasn’t cheaper or better than the incumbent networks?
Regarding the schemes increasing merchant fees, I offer a different view to that commonly held in this country: I have observed no cases of the schemes raising these fees in any of the countries I’ve studied that are independent of other external changes in competition, such as judicial or regulatory decisions. If the schemes introduce fees for debit, the risk is that many merchants stop accepting debit cards. Consumers will not like it if they can’t use their debit card at the local dairy and simply go back to proprietary bank cards. It seems to me that the crap will hit the fan if anyone tries to change the terms of important payment instruments. Following a decision forced on them by their Australian head office, ANZ tried to introduce merchant fees in 1998 in New Zealand. They had to give up after they started losing serious numbers of merchant customers – it simply wouldn’t be at all easy to do what many fear the schemes might do.
Finally, in terms of whether the country deserves better service from their payment instruments that what’s currently offered, I think you’re effectively asking the wrong question. I think the question shouldn’t be, do they deserve it. It should be, do they wish to pay for it?
Vote:August 24th, 2011 at 12:07 pm
Thanks for your response Mike… Some additional thoughts
Vote:Much of this debate boils down to who is responsible for the provision of efficient payment services and as you say, who should pay. The stakeholders are easily identified as are their interests. The consequences of not having an efficient payment system are significant economically. For example, if the EFTPOS model had not evolved in NZ as it did, the consequences and costs would have been unimaginable. We’d still be reliant on cash and cheques for the approx. 3.2m merchant transactions each day. Another example – approx 1m automatic payments and direct credits are processed daily in New Zealand. The potential cost to the banks of processing cash and cheques was a primary factor in the evolution of the underlying payments processes supporting EFTPOS and the old Databank MTS system. As time has moved on the underlying cost benefits of efficient bank owned payments systems plus the capacity of efficient systems to grow transaction volumes appears to be overlooked in the pursuit of pure payment system derived profit. To support modern on-line real-time payment systems, back end processing and switching systems are required. No different to the back end processing and switching systems required to provide efficient Merchant payments at POS i.e. EFTPOS. The original EFTPOS system was not designed to generate profit of itself – processing efficiencies did that. In the modern profit driven world I simply wonder whether the environment exists for the development of new payment system infrastructure by the banks necessary to support electronic commerce in the 21st Century? As argued above, efficient payment systems drive down costs so in answer to the final question, my view is that the public deserve efficient payment systems to keep the cost of payment processing low. Perhaps the question should be, does the environment exist that will support the evolution of necessary new payment system infrastructure (by the Banks) which brings us back to your original point about intervention or not by Government to achieve that.
August 24th, 2011 at 12:54 pm
I largely agree with all that, AliH. The costs of payment systems are borne widely, but so are the costs of the development of new systems. Notwithstanding recent government guarantees of customer deposits, I would argue that appropriate incentives exist, in general, to encourage efficient payment systems (that is, where the benefits of new systems are worth the costs). During the preparation of my thesis, one bank manager described the problem to me as this, “if we invest in the wrong system, or don’t invest in the right system when others do, we’ll risk going bust.” Government interventions (and guarantees of deposits are but one example) may reduce the risk banks go bust and therefore their need to give their customers good service.
This is not an argument that the world would be perfect, were it not for government intervention: of course, there will always be issues and dramas, whatever happens in the conduct of our banking system. It is my belief, however, that government interventions risk having unintended consequences and one possible outcome would be that banks have less reason to offer good service to their customers and thereby less incentive to invest in efficient payment systems.
Vote:August 24th, 2011 at 1:49 pm
AliH: your discussion with Mike illustrates why I am characterising these as commercial issues, at this time. If there is any hint of a policy issue here, Mike will revert to his “belief” that government intervention is dangerous. The cool thing about this belief is that it doesn’t depend on any policy argument (it can’t do, because none has been advanced yet the belief clearly exists). Conclusion: there is nothing to be gained by kicking around potential policy issues/ideas with Mike. If you ever reach the point of invoking laws or seeking to change laws, then there will be an argument focused on an actual proposition.
Vote:August 24th, 2011 at 3:02 pm
An interesting discussion;
As a (commercial) student of Payments for a number of decades – i would agree that there are some world leading and quite novel elements within the current NZD Retail Payment System. I was first attracted to this subject when a Kiwi told me (when i was working offshore ) that there was no ‘float’ in NZ’s Cheque payment system – that was in about 1987. We in NZ need to ensure our payment system does not become like (NZ) winning the world cup – always looking wishfully back to the 1980′s.
So what do customers really need? – as Payments Systems exist to serve market demand for ‘moving money’. NZ must evolve its capabilities so as to ensure Kiwi buyers and sellers can cost effectively access domestic and international markets. The speed of tech change, as per AliH comment, and the commercial reality that consumers are now accessing a global supply market (Addidas experience) means those firms currently providing customer touching ‘moving money’ services have to keep up with that demand – or loose customers to firms than can.
As i say – i am simply a student of the payment system, as just when i think i am starting to understand it, i learn how much i actually don’t know!
Vote:August 24th, 2011 at 3:21 pm
John, this doesn’t need to be a debate about people’s thoughts on the efficacy of regulation. My guest post is simply a discussion of the history of NZ’s EFTPOS. You agreed with my take on that history, but said you thought the policy framework behind our EFTPOS might need to change, given the emergence of scheme debit in NZ. I responded (admittedly too strongly in my first reply) that my thesis shows that payment instruments and networks are difficult things to regulate because of the likelihood of unintended consequences.
If there’s any sort of debate to be had, I am quite open to it. However, arguing that my “belief” makes me an inappropriate person to talk to means you risk ignoring the mistakes that have been made elsewhere in the world. I’m sure you’ll agree that those who ignore history are doomed to repeat it!
Vote:August 24th, 2011 at 4:38 pm
In order to have a debate, there needs to be a proposition. I don’t have one and I haven’t seen one here. But the great thing about policy development ideas is that they are contestable. So if one does arise in this space, you’ll have a chance to express yourself Mike. And in the meantime, I’m sure you’ll have plenty of other people to talk to.
Vote:August 24th, 2011 at 4:54 pm
I completely agree, John. We live in a democratic world and all are entitled to their opinions. I think debate is what underpins a democracy, though, and I’m sure we both look forward to discussions of various angles for policy.
Here’s wishing you all the best until our next little “discussion”.
Cheers,
Vote:Mike
August 24th, 2011 at 5:31 pm
Ausimport, sorry, I just noticed your comment while reading over the thread. You look to be new to this blog and your next comment should go up immediately.
I agree with you that payment systems are awfully complex. I can’t claim to have much more than an idea about the retail side (consumers and merchants) and the public policy side. I’m absolutely sure that I also have much to learn about them, at least in terms of the wholesale, infrastructural side.
I agree the technology is moving fast. Although we may be at risk of looking back to the 80s longingly (in terms of both the RWC and of payment systems), the future beckons. As with the RWC, we may be closer to the future than many might think. I mentioned Snapper in my guest post and, if I’m right about it taking off, we may even see cellphone-based payment instruments developing from it. Whatever ends up working though, I’m sure it will always be somewhat unexpected (including by me), I think it will be a race to see who catches up first!
Vote:August 24th, 2011 at 8:10 pm
A final word (my perspective of course) to wrap this up…
Vote:At the time the banks had to do something because the cost of processing cash and cheques was killing them – processing costs were thought to be unsustainable. EFTPOS came on the table as a solution but collective the Bank strategy resulted in:
1. two competing systems,
2. no interoperability, and ultimately
3. we had two banks believe the EFTPOS model would never be successful (BNZ and ANZ) and they bailed.
There was a failure on the part of Senior Management within the banks to recognise the potential and get behind it. The development effort was largely IT led and I’d also suggest the participants (including myself) also never understood the potential or importance of getting it right. I remember seeing two competing stand alone EFTPOS terminals on one counter in a supermarket. Normally, you could only use certain bank cards in certain outlets depending where the Merchants banked or the system the Merchant supported. At the time, the potential was beyond everyone’s comprehension. I was told by a Director of the Bank I worked for not to waste my time or the banks time on EFTPOS because in his opinion it would never be successful!
I believe we have ended up with the world leading solution we have due to the process of the evolution of the system itself. Obviously, we could have done it better but could we at the time without the benefit of hindsight?
Looking back and with another 30 years payments experience I’ve learned that the evolution of the EFTPOS network in New Zealand was typical of most Payment System initiatives (where you try to get fiercely competitive institutions to collaborate) both here in New Zealand and overseas.
I’d suggest “unintended consequences” arise from every new payments system and the extent of Government intervention is irrelevant on that score. This is for a couple of reasons: the introduced payment system changes payments customer behaviour which is hard to predict and the introduced system is often used by the end user in ways that are quite unforeseen in the planning stages.
The fact EFTPOS worked out as well as it did in NZ was partly due to the “standards” referred to previously and that certainly influenced the technology solution but importantly there was recognition by some banks (with the benefit of the various “trials”) that the system was viable.
The decision not to charge Merchants was in line with other bank charges – there were no cash handling fees and cheque clearance fees were minimal (perhaps only on out of town cheques if my memory serves me correctly). The “integrated” New Zealand Payment System was quite different to the largely bi-lateral Australian model so costs were different. Also at the time, EFTPOS was aligned in our thinking to the ATM. ATM cards were initially used in EFTPOS terminals. EFTPOS was often explained as being akin to an ATM in a shop. There were no charges for using an ATM.
I’m not sure light regulation or Lange-Douglas had much to do with the success of EFTPOS in New Zealand. In my view it was a pragmatic outcome to a series of poorly managed payments projects.
I’ve enjoyed revisiting EFTPOS history and participating in this discussion
August 25th, 2011 at 8:45 am
Hi Mike, interesting debate. Is your thesis publicly available?
Vote:August 25th, 2011 at 8:55 am
Thanks AliH. It sounds like you have a heap of experience working at the coalface with new systems, where as my experience lies largely studying them after the fact. I do, however, stand by my conclusions.
I would be more than happy to email you documents I found in the RBNZ archives clearly demonstrating that, prior to the reforms, the trading banks and the trustee savings banks really did not like each other. If I were to speak informally for a moment, I’d say that they hated each others’ guts! Only following the reforms, did the cooperative environment exist that lead to the inter-connection you’ve identified.
I’m not sure I follow you in regard to the pricing approach of EFTPOS being similar to other payment systems. Not charging merchants for EFTPOS transactions leaves providers no option but to charge consumers. If consumers weren’t charged for ATMs, how does it make sense to charge them for EFTPOS?
I’m pleased you’ve enjoyed the discussion. If you remain interested, I’d love to continue it. This forum might not be the safest place to exchange email addresses. If you’ve worked in the industry, you might know a few people who helped me with my thesis. Can I suggest asking after me with senior people you may know involved with payments at Westpac or ANZ?
Cheers,
Vote:Mike
August 25th, 2011 at 8:57 am
Andrev, yes, my thesis is available through Victoria University. Here’s the address: http://researcharchive.vuw.ac.nz/bitstream/handle/10063/1747/thesis.pdf?sequence=1
Let me know if it doesn’t work.
Vote:August 25th, 2011 at 10:52 am
Your summation of the position between the then Trading Bank v Trustee Banks and Post Office is spot on – in fact that position continued after the “reforms” due largely to the success of the former “Savings” Banks in dominating the retail market. I think it would be fair to say the former Trading Banks we very suspicious of any innovation that could be capitalised upon by the former Savings Banks. They did have the advantage of newer systems and an ability to relatively deliver system changes quickly and easily. In fact, that more than anything, stifled innovation in payments through most of the the 90′s.
Regarding the pricing situation – delivery systems (channels) were seen as a cost (to a bank) (including EFTPOS). Revenue was largely derived from (base) account fees and transaction fees with little allowance for the “delivery system” be it, for example, a teller, DC, ATM or EFTPOS. Charging for receiving a deposit was seen almost (in simple terms) as paying to give cash to a bank and wasn’t a popular concept at the time. The Merchant Settlement was seen as simply another deposit. How times have changed?
I will contact you as you suggest.
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