Interchange & surcharging - why customers lose

March 27, 2024

Read on to find out

  • What’s interchange and why was it regulated?
  • Why merchants didn’t get all of the savings.
  • How international companies are the ones winning.
  • How customers lost out through lack of choice.
  • Why shops surcharge and why they shouldn’t.
  • Where your rewards went.
  • Why, ultimately, customers have lost out.

Let’s start with what happened

In 2022, the Retail Payments Systems Act came into force. It capped:

  • Credit interchange fees at 0.8%
  • Online debit interchange at 0.6%

Interchange and merchant service fees can be complicated, here’s a very basic drawing showing the flow of fees.

Note: both interchange and the acquiring fee are paid to the acquirer as a ‘merchant service fee’ but this shows the purpose of the fees.

And what was regulated.

The 'interchange' portion of the transaction was capped

Pre-2022, interchange fees were uncapped, which meant merchants could end up paying close to 3% for the most expensive cards e.g. a Westpac Airpoints Platinum card (including the acquirer fee).

That’s pretty punchy, so the government capped fees.

A quick background on why merchants pay a merchant service fee

Before cards were available, most people carried cash. This means quite a few limitations for customers and merchants. Given the risk of carrying lots of money, most people didn’t have bundles of notes falling out of their pockets. If you went into a shop or out for dinner you may be limited by how much you could spend, or maybe you’d have to come back the next day (or forget to come back at all).

The introduction of credit cards changed that, suddenly people could spend there and then, merchants could upsell, a nice pair of driving gloves to match that jacket, or a creme brûlée to finish off your steak frites. Great for merchants.

Running a card program is expensive - you have to issue cards, take on fraud risk and service customers. So merchants paid a small commission to card companies to cover costs. Merchants got more sales, card issuers got a small commission and customers didn’t have to carry cash around.

Win / win / win.


In the 1980’s the NZ banks got together and decided they could make things better. They built a domestic network and made it free for merchants. There were only a few banks, so not many links to build. They paid a small fee to each other and it balanced out quite nicely. Good for merchants, good for the banks, and good for customers.

Win / win / win.

The four major banks had equal shares in Paymark, but in 2019, they sold Paymark to French company Ingenico, which then became part of Worldline in 2022.

The EFTPOS network saw very little investment from the main banks, and without Visa and Mastercard agreeing to run debit over EFTPOS rails for a decade we’d still be stuck with magstripe and PIN.

There are potential innovations on the way, but don’t expect them to be free. It’s not Kiwi banks building a network for the good of New Zealand any more.

EFTPOS also set an expectation for merchants that they should be able to accept payments for free - which only works if you have card issuers (banks) that can absorb the costs of issuing cards by already being big banks.

Bundled vs Unbundled pricing

You may have heard these terms before. Now that we’ve got a bit of background let’s quickly define what they mean:

  • Bundled pricing - your merchant service fee includes all your acquiring fees and you pay an average of all the possible interchange fees on different card types - from contactless domestic debit, to international credit. Think of it like paying $40 for an all you can eat buffet and then filling up on $4 worth of bread. If you partner with Stripe, you’ll pay 2.7% + 30c per transaction.
  • Unbundled pricing aka ‘Interchange plus’ - This should be mandatory now in NZ. It means that merchants pay the correct price per transaction. You pay interchange (the variable card fee) and the ‘plus’ - the fee you pay the acquirer for 'switching' the transaction and settlement.

Let’s say you tap your ANZ debit card at a shop. With unbundled pricing, merchants will pay about 0.5% - The 0.2% interchange fee plus 0.3% to the acquirer. That’s why it’s called ‘interchange plus’.

So if you get a terminal from ANZ or Windcave (or another NZ provider), you’d pay about 0.5% for a contactless transaction.

If you use a non-NZ provider (which can be easier to set up), you’ll likely pay close to 3%:

  • Shopify do have a 1.7% tier, but it comes with a $500NZD+ monthly fee.
  • Stripe charge 3.7% + 30c for international cards online. On a $100 transaction that’s 50c for unbundled pricing in-store vs $2-4 elsewhere for bundled.

About 87% of transactions in NZ are contactless (mainly debit)...that difference adds up quickly.

Those unbundled fees grow quickly. No wonder some merchants feel they need to surcharge. Credit: Alamy

Since interchange was regulated, merchants should have saved about 0.8% per transaction. But most providers that use bundled pricing (which was already expensive) didn’t pass that on.

Stripe fees pre-2022 - 3.7% + 30c.

Stripe fees post-2022 - still 3.7% +30c.


So we’ve just put a nice bit of margin in the pockets of (mostly) international providers that offer bundled pricing.

Visa and Mastercard

Visa and Mastercard are also called ‘card schemes’. A simple way to think of them are as "big post offices".

They have links to all the banks in the world. If you use a NatWest UK card at The Warehouse, The Warehouse doesn't need to have a link directly to Natwest to get approval. They send it to their acquiring bank, who then ask Visa or Mastercard to send it to NatWest for approval.

Visa and Mastercard provide a service to both acquirers and issuers, a bit like both you and a friend would pay Vodafone and Spark to be able to make a call to each other.

Disclaimer: this is not an accurate representation of Visa and Mastercard switching transactions in 2024 (that I know of)

Visa and Mastercard set the interchange rates, but they don’t take a cut of it, they charge their own fees to acquiring banks and card issuers. These weren't regulated, so card issuers are left with the same scheme fees as before.

What happened to the big banks?

Well at least those greedy banks got their comeuppance and suffered from getting less from the merchants right?

Well…not really. The way that credit cards have worked traditionally is that banks make money on the interest you pay on your credit card, and then they use the interchange they earn to give you sweet, sweet rewards - think Airpoints, Flybuys and good old fashioned cashback.

So interchange was regulated and banks, started, to, cut, rewards. Except for Amex…they weren’t part of the regulation. That’s why we allow a US company to have the best rewards in market.

Post 2022 holiday rewards from NZ cards

Not a great customer outcome, although some people do believe that merchants shouldn’t have been funding these big rewards programs in the first place, which is a fair challenge.

And what about FinTechs?

At SquareOne and Emerge, interchange fees helped us innovate. As mentioned above it’s really expensive to run a card scheme. Most banks make very little on transactional accounts. And they generally subsidise them by making money on other products e.g. mortgages.

Regulated interchange makes it even harder to get up and running. The recent ComCom study into competition in personal banking made it pretty clear that more competition is required, but we’ve taken away one of the revenue drivers that can spark competition, which ultimately leads to less customer choice. Another area where customers will miss out in the long term.

OK, let’s talk about surcharging.

Hands up if you love surcharging? I can Thought not.

Everybody. Hates. Surcharging… Everyone.

So why do merchants do it? Well, as mentioned above, some are on bundled pricing, and they think that contactless transactions are expensive. If you like you can quickly check out the interchange fees for Visa and Mastercard transactions in New Zealand. They’re all public. You probably can’t be bothered, and there’s a lot in there, but let’s look at Mastercard domestic contactless interchange.


Think about that next time a restaurant charges you 3% because you want to carry your phone rather than carry a handbag with a purse, or shove a wallet into the pocket of your skinny jeans.

"Can I use any of these to avoid the surcharge?"

Granted it works out at about 0.5% once you factor in the acquiring fee…but it’s still 5c on a $10 transaction.

What would you rather happen? Pay $7.67 for an overpriced bottle of milk at the dairy…or pay $7.62, and then have to pay a surcharge when you pay? Do we pay a surcharge for the bleach used to clean the floors? Or the electricity to power the fridge? Payments are a cost of doing business, so please…please just price it in.

As mentioned above, around 87% of payments now are contactless, it’s how people want to pay - so let them pay that way, and don’t charge them for the privilege.

But what about the monthly fee terminal providers get for allowing surcharging?


Yep, some terminal providers will charge a $9.99 monthly fee if the merchant turns on surcharging.

So if you’re a merchant, and you’re having your kit installed, and someone says - “Hey, you can turn on surcharging for $9.99…but within a day your customers will have covered that if you chuck a 3% fee on credit and contactless surcharging”, what are most people going to do?

Great for the terminal provider, good for the merchant, absolutely terrible for the customer. How is this allowed?

So what’s the solution?

This is what I’d love to see:

  • Enforce unbundled pricing - this is the only way merchants will realise how cheap accepting payments are, post regulation.
  • Ban surcharging - That’s a personal preference, but at least cap it at 1% which is about the average a merchant will pay. If the terminal provider allows it, you could even make it per card type to reflect the true cost of doing business. Surcharging isn’t meant to be a profit line for merchants.
  • Make EFTPOS, Credit & Contactless mandatory on all terminals - most of us want to be able to leave the house without a card, but it’s still not possible. Some people are voting with their wallets (or their phones) and just not paying at places that don’t take contactless.

Final thoughts

If you’re a merchant and in control of your own pricing - please, think about customer experience, allow the customer to pay on their terms, and don’t surcharge. Shop around for the best terminal price, and then accept that it’s a cost of doing business.

As an example, everyone loves free shipping. Yes, you could argue it penalises people who shop in-store, but customers will put merchants that offer free shipping top of mind.

The same goes for surcharging - offer great payment experiences and customers will come back. Do you really want the last interaction a customer has with you to be an ugly surcharging sticker, stuck on with peeling sellotape, a payment tax, and a bad taste left in their mouth?

Sound interesting?