Paywave and interchange fees

Scott Simpson announced:

Surcharges will be axed to put money back in Kiwis’ pockets, says Commerce and Consumer Affairs Minister Scott Simpson.

“Surcharges are a hassle and an unwelcome surprise when shoppers get to the till. That pesky note or sticker on the payment machine will become a thing of the past.

“We’re banning surcharges so consumers can shop with confidence knowing how much they will pay for their purchases.

“New Zealanders are paying up to $150 million in surcharges every year, including excessive surcharges of up to $65 million. That’s money that could be saved or spent elsewhere.

This should be a popular move, that Consumer NZ has been calling for. Some have worried it will mean businesses will just put prices up, but that misses a second aspect to the announcement:

The ban follows the Commerce Commission decision to reduce interchange fees paid by businesses to accept Visa and Mastercard payments, a move to save businesses around $90 million a year.

The interchange fees are a bit of a scam. I’ll use an analogy with the telco sector. Telcos used to change a mobile termination fee. So if you were on (then) Telecom and called or texted a (then) Vodafone phone, the telcos would bill each other a few cents a minute. This allowed them to then have plans where you can call other phones on their network for free, but had to pay to call or text phones on other networks. This led to entire schools having all their students on one network as you couldn’t afford to be on the one your mates were not on.

This was basically a scam. The actual cost of transferring a text was miniscule. Think 0.00001c or the like. But the fees were great for the incumbent telcos, as they kept out new comers and also generated money for them.

Interchange fees are somewhat similar. The Commerce Commission stated:

It costs New Zealand businesses around $1 billion a year to accept Visa and Mastercard payments, which is often passed onto their customers through surcharges and higher product costs. 

The Commission has determined this cost is too high and has acted to reduce this cost for businesses by around $90 million a year.  

“This is an important step in our continued work to cut costs for businesses and consumers. Our latest decision builds on the initial fee caps set in 2022, which led to $140 million in annual savings to New Zealand businesses,” Commerce Commission Chair Dr John Small says. 

The actual cost of transaction is near zero. There are definitely fixed costs in the network that have to be covered, but the variable cost is very very small. There is a case that fees should be based on the number of transactions, not the value of them. A $1,000 payment costs the same to process as a $10 one. The Commission noted:

The current retail payment system lacks strong competitive pressure and most merchants are price takers for interchange fees. Despite current regulatory caps, interchange fees on the Mastercard and Visa networks in New Zealand remain significantly higher than in comparable jurisdictions. For example, interchange fee caps for personal domestic credit card transactions in New Zealand are more than double the caps in Europe.

So the combination of the Commerce Commission reducing the interchange fees, and the surcharge ban should see both businesses and consumers better off.