Bernard Hickey: Competition leaves shoppers worse off

Retailers are padding their profits by imposing a surcharge on credit card usage. Photo / NZ Herald

If there is a Murphy's law for regulators and policymakers then it is the law of unintended consequences.

We all know of a new policy or regulation that generates the exact opposite of what was intended.

For example, Labour's new 39 per cent income tax rate fuelled a property boom as the wealthy bought property to reduce their tax bills, making it harder for those on lower and middle incomes to buy a home.

Now the Commerce Commission appears to have forced changes in the credit card landscape that are costing consumers more.

Many readers will recall the kerfuffle when some independent service stations added surcharges for customers who used Visa and Mastercard. The initial news coverage suggested the law had been changed so surcharges could be added.

The law hadn't been changed, but the Commerce Commission had changed the playing field by essentially forcing the banks and credit card companies to stop their practice of setting the "prices" they charge retailers in the form of so-called interchange fees.

They have ranged from 1 per cent to 3 per cent of the purchase price. Legal action between the watchdog, the banks and Visa/Mastercard ended when they agreed to end the price restrictions and an associated practice that banned retailers from adding surcharges to their bills.

The Commerce Commission was hoping to create a freer market where credit card issuers and banks competed against each other to get retailers to use them.

The idea was this competition would drive down interchange fees and lower prices for consumers.

The Commerce Commission even estimated the benefits of these lower fees at between $70 and $80 million. The hope was that the retailers and the credit card issuers would negotiate lower fees.

But instead the opposite is happening. Retailers are padding their profits by imposing the surcharge.

The benefits for retailers are potentially enormous. If all retailers added a 2 per cent surcharge on the $29 billion of spending each year using credit cards they could reap a profit windfall of $58 billion, as long as consumers still used credit cards.

Retailers are essentially betting that customers will be too stupid, lazy or desperate enough to use their Eftpos or cash. Many stretched consumers will have no choice.

What was supposed to be a bonus for consumers appears to have added a new tax that benefits retailers.

To be fair, it is early days and most large retailers have yet to start adding the surcharge. But, on the surface, it appears a no-brainer.

Adding the surcharge adds revenues and may help reduce costs by forcing customers to use the cheaper (for the retailer) alternative of Eftpos.

The depressing thing is this should have been seen coming a mile off.

The Reserve Bank of Australia instituted similar reforms in 2003 and its 2008 review found exactly the same thing happened: lower fees were not passed on to consumer and retailers used the charges to pad their profits.

Let's hope the early and bad signs of an unintended consequence are wrong. Otherwise the consumer will end up paying - again.

bernard.hickey@interest.co.nz