The Government’s plan to ban merchants from adding surcharges to in-store card payments is likely to force shoppers who pay with low-cost methods to subsidise those who use high-cost cards, officials have warned Minister of Commerce and Consumer Affairs Scott Simpson.
In the face of a ban, merchants who previously recovered higher card fees through a surcharge are expected to recover that cost by increasing their prices for goods or services, a cost borne by all shoppers.
The advice was provided to Simpson by Ministry of Business Innovation and Employment (MBIE) officials this year.
The widespread practice of merchants levying surcharges for certain payment types – especially credit cards and contactless debit card payments – has been the cause of considerable consumer disgruntlement. The advocacy group Consumer NZ supports the ban.
However, a ban is likely to entrench the market power of Visa and Mastercard, officials warned.
“Banning surcharges is likely to steer consumers away from lower-cost payment options, such as Eftpos, and towards more convenient but higher-cost card payments. This could increase demand for card payments using Visa and Mastercard payment networks,” Simpson was told in a March briefing.
Credit card companies frequently entice customers through expensive perks such as cash back and other rewards programmes, and help to recover the cost through charging merchants high fees.
Officials also warned of inflationary consequences: “Those merchants that previously surcharged may raise prices to cover payment costs that were previously recouped by surcharges. Consumers of these goods and services that use lower-cost payment methods would be partially cross-subsidising those that use higher-cost payment methods”.
The advice noted that retailers’ non-acceptance of high fee cards and discounting for lower fee cards are possible outcomes of a ban, though the latter was not viewed as likely by any party.
Despite officials’ warnings, Simpson has maintained that the scrapped surcharges will “put money back in Kiwis’ pockets”.
On July 28, he announced the Government will ban surcharges for most in-store payments made by personal debit and credit cards, including Visa and Mastercard. The ban is expected to come into effect through new legislation by May of next year.
It will not cover online payments, foreign-issued cards, prepaid cards, or cards such as Amex and UnionPay.
MBIE, which has responsibility for drafting the legislation, does not yet know whether it will cover commercial credit cards (such as business or company cards).
The decision caught a wide range of interested parties – including Retail NZ, Consumer NZ and the Commerce Commission – by surprise.
Before Simpson decided to pursue a ban, the commission, which is responsible for regulating the retail payment system, had planned to consult stakeholders on limiting merchant surcharging to cost-recovery.
In March, Simpson’s office requested “urgent advice” from MBIE on “next steps for taking action to ban customer surcharging for card payments”.
Officials advised Simpson that the Commerce Commission has the power to reduce consumer surcharges to reflect the costs incurred by the merchant, and that it had plans to consult on bringing in such limits later in the year.
However, Simpson pushed ahead with a ban and, in light of this, the commission abandoned its own plan to consider tackling merchant surcharging.
Simpson told the Herald that surcharging “frustrates customers” because it “feels like they’re being stung with a hidden extra cost right at the last moment of purchase”.
He said that surcharging “clearly isn’t working for customers” and that many businesses impose a blanket surcharge rate instead of differentiating between cards carrying different costs – customers who use high-cost cards and those who use lower-cost cards are frequently slapped with the same level of surcharge by the retailer.
That view was largely echoed by Consumer NZ chief executive Jon Duffy.
He pointed out that most retailers, especially large ones, already forgo surcharging and spread the cost of expensive payment systems across all shoppers.
He argued that this benefits all consumers because it is simpler for them to compare the price of goods and services when they do not have to factor in an additional cost for payment.
However, the Eftpos system, readily available to anyone with a New Zealand bank account, is free to merchants and not subject to merchant surcharging, though relatively rare exceptions have been reported.
Shoppers currently have the choice to use this surcharge-free payment method (as well as the option to use cash) – though Duffy noted this is not the case for blind people cannot enter a pin.
In contrast, surcharging typically applies to contactless payment, which is rising in popularity but carries more technology-related expense, and to reward-heavy credit cards.
Where retail surcharges apply, they are commonly 2-2.5% of the purchase price, according to the Commerce Commission.
(The cost of cash was not considered in any analysis; this option is widely considered a public good.)
Carolyn Young, the CEO of industry body Retail NZ, predicted that when the promised ban erases from consumers’ view the higher cost of some card payments, the low-cost payment method Eftpos will be driven out of use entirely. This, she warned, will be inflationary.
Young agreed that there are instances where excessive surcharges are used by some retailers, well above cost recovery.
She said the Commerce Commission should have been allowed to carry out its planned work to tackle such practices.
She also noted that the anticipated ban will not touch what she described as the most excessive surcharging, applied to online purchases such as airline, event and movie tickets.
Government ministers have suggested that this carve-out is, in part, to allow the forces of competition to work as so-called open banking regulations come into force later this year and attract new fintech competitors to Visa and Mastercard.
There is no dispute that some overcharging of customers through surcharges is taking place. Simpson told the Herald that businesses are over-charging through surcharges by up to $65 million a year.
That figure appears to be derived from the Commerce Commission’s work, which puts merchant surcharging at $150m annually, of which it estimates $45-$65m is in excess of cost recovery.
The cost of card payments is something of an iceberg; surcharges for card use are visible to shoppers, but of the payment system expense is not.
The Commerce Commission estimates that card payments cost roughly $1 billion annually and, of that, some $600m is made up of interchange fees.
These fees are paid by businesses, in the form of a merchant service fee, for accepting Mastercard and Visa card payments.
In a separate process, the Commerce Commission recently decided to mandate a reduction in interchange fees, which it said are largely driven by Mastercard and Visa’s incentives to win market share through provisions ranging from fraud protection to reward programmes.
The new interchange fee cap is expected to reduce merchant service fees by some $90m annually. The new regime will come into force in December for domestic personal credit cards, and in May of next year for foreign-issued cards (commercial credit cards, such as corporate or company credit cards, are not affected).
Simpson said this separate cost reduction will flow through to merchants, who will be able to “consider the impact of these changes [including the surcharge ban] as a package”.