A new regulatory regime for retail payment networks
Yesterday the Retail Payment System Bill (Bill) had its first reading in Parliament. It has now been referred to the Economic Development, Science and Innovation Committee for consideration. The Bill proposes to introduce a regime to regulate participants involved in the retail payments system. In doing this, the Bill aims to deliver long-term benefits to merchants and consumers through efficient retail payment networks (RPNs) and competition in the supply of retail payment services.
This Bill follows a commitment made by the Government in its 2020 Speech from the Throne to reduce merchant services fees (MSFs) in New Zealand. MSFs are the fees paid by merchants to their bank (or "acquirer") when a customer uses certain debit or credit cards for a purchase. From the Government's perspective, a lack of effective competition within the retail payments market has led to New Zealand retailers facing higher MSFs compared to their counterparts overseas. This has been a particular concern in recent years given that the COVID-19 pandemic has driven an increased reliance on contactless payment methods which incur higher MSFs than traditional forms of payment.
The Government considers that a targeted regulatory regime is necessary to address this perceived lack of competition, and any further issues that may arise in the future. The Bill therefore introduces a regulatory regime for RPNs to be developed and enforced by the Commerce Commission (Commission), as well as a number of additional measures which are intended to promote competition and economic efficiency in the retail payments system.
Designation of retail payment network
The new regime provides for a designation model for the regulation of RPNs. The Bill broadly defines the concept of a RPN and provides guidance as to which RPNs should be designated for regulation. This approach is intended to provide the level of flexibility necessary to enable the regime to respond to future innovation or developments within the retail payments market.
The RPN designation would capture all participants operating in an RPN. The Bill defines ‘participant', in relation to an RPN, as a person that is a network operator or any other service provider.
Before the Minister of Commerce and Consumer Affairs recommends the designation of an RPN to the Governor General by Order in Council, there is a requirement for the regulator, the Commission to consult affected parties and publish the rationale for designation. There are also specific considerations that the Commission must have regard to before designating an RPN, such as whether designation will likely meet the primary efficiency and competition objectives, the number, value and nature of the transactions that the system currently processes or is likely to process in the future (which is a requirement under the UK regime), as well as any other considerations.
The Bill itself proposes to provide initial designations of the Mastercard and Visa credit and debit networks, and establishes an initial pricing standard that requires reductions in interchange fees (which are a large component of MSFs) as soon as practical for transactions on those networks. This initial pricing standard would also prohibit operators from providing net monetary or non-monetary compensation to issuers (such as reduced scheme fees, discounts, and rewards) in addition to issuers receiving interchange fees.
The regulator
The Bill establishes the Commission as the regulator, given its "high level of expertise in access regimes (telecommunications and raw milk) and price regulation (electricity distributors)."
[1] The Bill will add yet another industry to the Commission's diverse portfolio of economic oversight responsibilities.
It is envisaged that the Commission will play a key role throughout all stages of the regime, from recommending which networks should be designated and the appropriate regulatory measures to apply, to taking enforcement action against breaches of regulatory obligations.
As the regulator, the Commission would effectively have the power to regulate prices or fees, which is not dissimilar to its role under Part 4 of the Commerce Act or the Telecommunications Act, by:
- issuing information disclosure standards, including a requirement for sharing information between different classes of participants in a RPN to reduce "information asymmetry";
- issuing pricing standards, including limits on fees charged by participants in a RPN and pricing method requirements (e.g. pricing methodologies);
- issuing standards imposing access requirements for aspects of a designated RPN, including how a person may become a participant of a network or gain access to network infrastructure or services, and requiring any class of participants to allow new participants to access all or any aspects of the network;
- giving directions to participants in a designated RPN that relates to setting or amending network rules; and
- issuing a merchant surcharging standard which may include matters such as information disclosure and record-keeping requirements. Standards may also set out the manner in which merchants must represent surcharges and impose limits on payment surcharges.
The consequences
The Bill provides for a range of remedies and enforcement mechanisms for breaches of regulatory obligations, including pecuniary penalties, enforceable undertakings, injunctions, damages, and compensation.
Under the Bill, if a participant contravenes a pricing standard the High Court may require a participant to pay a penalty of up to $500,000 for an individual, or up to $5 million in any other case, for each act or omission. Further, if a participant contravenes any other standard or direction issued by the Commission, the participant may be required to pay up to $200,000 for an individual, or up to $2 million for any other case, for each act or omission.
Submissions
Submissions on the Bill will open shortly, with the Bill scheduled to be brought before the House for its second reading in March 2022. If you would like to talk to our team about these reforms, please get in touch with one of our experts.
[1] Office of the Minister of Commerce and Consumer Affairs "Retail payments system: initial policy decisions to reduce merchant service fees" (14 April 2021) at pg 30.
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