Regulation of MSFs confirmed
Yesterday the Minister of Commerce and Consumer Affairs, Hon Dr David Clark, announced that a new regulatory regime will be established to reduce merchant service fees (MSFs) for retail payments.
MSFs are the fees paid by merchants to their bank (or "acquirer") when a customer uses certain debit or credit cards for a purchase. The MSF payable for processing a transaction depends on the type of card, method of use (e.g. online or contactless) and merchant type. The MSF includes an interchange fee, which is charged by the cardholder's bank (or the "issuer") to the merchant's acquirer in recognition of the value derived from card transactions.
To date, New Zealand has taken a relatively light-touch approach to oversight of MSFs. Following the Ministry of Business, Innovation and Employment's public consultation on the proposed options to regulate MSFs (see here), the Government has now decided that regulatory intervention is required to reduce what it believes are negative impacts, particularly on small merchants and consumers caused by the existing level of MSFs.
Key features of the Bill
A new Retail Payments Systems Bill will be developed that will:
- introduce a regime to regulate (on a case by case basis) classes of retail payments system participants, their providers, and any associated infrastructure operators (including secondary infrastructures) that meet the prescribed thresholds;
- appoint the Commerce Commission (Commission) as regulator;
- establish a transitional downward price path to reduce interchange fees for debit credit card transactions under the Visa and Mastercard card schemes. This will be in place until the Commission decides to alter the limits;
- the Commission will be empowered to use a broad suite of powers, to regulate designated participants or classes of participants in the retail payments sector, which include:
- imposing price principles or limits on fees (or components of fees);
- imposing information disclosure requirements;
- making directions requiring designated parties to amend their rules or processes (such as rules relating to surcharging or steering by merchants); and
- accepting enforceable undertakings as an alternative to regulation or to remedy non-compliance.
To reduce the risk of unintended consequences, the regime will be broadly scoped to potentially apply to any retail payment methods (excluding cash) that are important to merchants and consumers, and the Commission will be equipped with a broad toolkit to address issues that may arise in the future.
Some risks identified; more work to be done
Interestingly, the Government has acknowledged that there are several risks associated with regulation, including those which could directly impact consumers, such as:
- recouping the cost of regulation through other means (e.g. new card fees);
- reductions in reward programmes; and
- reductions in interest free periods (which "could have a significant impact on some consumers").
These risks, including the fact that reductions may not be fully passed on to all merchants (and therefore consumers), are "secondary policy issues" on which the Minister intends to report back to Cabinet, following future stakeholder engagement and receipt of further advice on how these risks are best mitigated.
While Cabinet has approved the overarching regulatory framework for the new regime, there are a range of additional secondary policy issues that are yet to be determined. Further targeted engagement with key industry participants and the Commission on these issues is expected, to ensure the regime is workable and fit-for-purpose. These additional issues to be consulted on include:
- the criteria and process for designation to be included in legislation;
- institutional arrangements for coordination between the various regulators of payment systems;
- the nature and scope of the regulatory toolkit available to the Commission, including mechanisms that should be available to the Commission to future-proof the regime; and
- the design of a monitoring and enforcement regime, which is to include offences or penalties.
Next steps
The Minister will report back to Cabinet on these secondary policy issues by the end of June 2021, following targeted consultation. The Government has indicated that a discussion document will be released shortly.
Final policy decisions on regulating MSFs are expected to be made in mid-2021, with a view that the full regulatory regime will come into effect in 2022.
Further details can be found in the Cabinet Paper and Regulatory Impact Statement here.