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Regulating Merchant Service Fees: Issues Paper Released

Home Insights Regulating Merchant Service Fees: Issues Paper Released

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Contributed by: Craig Shrive, Emmeline Rushbrook and Ben Gregson

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Published on: December 11, 2020

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Yesterday the Ministry of Business, Innovation and Employment (MBIE) released an Issues Paper seeking feedback on issues with merchant service fees (MSF) in New Zealand. This follows the Government's commitment in the Speech from the Throne to "regulate Merchant Service Fees to reduce costs on retailers".
 
Unsurprisingly, the Issues Paper therefore proposes to introduce hard price caps on interchange fees, which are a key component of MSFs.  
 
MBIE is seeking views on whether its understanding of the following as being key issues is correct:
 
  • MSFs are high based on international comparisons. New Zealand merchants pay nearly twice as much as their Australian counterparts for some transaction types.
  • Many merchants include the MSFs in costs of goods and services, instead of using surcharges, so that costs are spread across all customers and card users do not face the full cost of their payment choices.
  • Card issuers use rewards schemes to win customers, which increases MSFs (paid by all consumers of the goods or services).
  • Small businesses typically process small volumes and values of transactions. Because of this, they lack bargaining power with their banks, and are more likely to bear higher MSFs than larger businesses. Smaller businesses also have limited ability to surcharge or steer consumers to other payment methods without risking losing sales.
  • EFTPOS, which has no transaction fees and places downward price pressure on payment methods with fees, has a declining market share.
  • Competitive pressure on interchange fees is relatively weak.
 
MBIE reviewed and identified a number of the same issues with New Zealand's retail payment system in 2016. Commitments to improved self-regulation led the Government to agree to continue monitoring and encouraging industry-led solutions over direct intervention. As a result, merchant service fees and interchange fees continue to be unregulated.
 
While there have been improvements since this review, the Issues Paper comments that implementation of self-regulatory measures has been slow, and the measures have not dealt with the underlying issues above.
 
MBIE is requesting submissions on the following proposed measures:  
 
  • Price regulation for interchange fees. This would see a 'hard' or 'soft' cap, or a combination of the two, introduced on interchange fees for open party credit and debit schemes (like Mastercard and Visa). Caps may vary depending on transaction type and different classes of merchants.
  • Price regulation for other aspects of the retail payments system. This may see direct price control applied to whole merchant service fees and card fees for consumers. In the alternative, these charges could become subject to principle-based tests, such as requiring merchant fees to be closely connected to the activity for which the fee is charged and not unreasonable. MBIE sees this regulation of interchange fees working in tandem with price regulation for other aspects of the retail payments system.
  • Information disclosure. Under this regime, acquirers would be obligated to periodically disclose information relating to the calculation of merchant service fees to a regulator or the public. This would improve transparency for merchants and improve the regulator's monitoring function.
  • Collective bargaining. This would enable collective bargaining by groups of merchants with acquirers and other payments providers may increase the power of merchants when bargaining.
 
MBIE identifies a range of other technical options to support these measures, including:
 
  • codifying rules that would support greater transparency and incentives in the system (eg limiting the extent of rewards and loyalty schemes);
  • requiring merchants to surcharge for particular higher cost payment methods or requiring discounts for customers that transact using lower cost payment methods; and
  • requiring payment terminals to be able to automatically surcharge for different payment types
 
These measures reflect an initial assessment of the options that could be explored to achieve the Government's objective. A full assessment is set to occur in the next stage of the project, taking into account submissions on the Issues Paper. In accordance with good regulatory practice, a full assessment should consider the following matters:
 
  • Whether there is sufficient cost-based evidence to support the assertion that MSFs are too high. In our experience, relying on high level overseas benchmarking can be flawed. Prior to intervening with strong price regulation measures, it should be demonstrated that returns are excessive because they do not reasonably recover costs (including a proportionate profit amount).
  • Whether the proposed solutions are properly targeted at the identified issues. For example, it could be that improving price signals received by consumers will help to remove the market distortions identified in the Issues Paper, and therefore increase competitive pressure on the level of MSFs without the need for direct price regulation.
 
MBIE seeks written submissions on the issues raised in the Issues Paper by 10 am on 19 February 2021. The Issues Paper can be accessed in full here, and instructions on how to prepare and make a submission can be accessed here.
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