March 27, 2024
Read on to find out
In 2022, the Retail Payments Systems Act came into force. It capped:
Interchange and merchant service fees can be complicated, here’s a very basic drawing showing the flow of fees.
And what was regulated.
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.
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.
You may have heard these terms before. Now that we’ve got a bit of background let’s quickly define what they mean:
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%:
About 87% of transactions in NZ are contactless (mainly debit)...that difference adds up quickly.
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.
Oh.
So we’ve just put a nice bit of margin in the pockets of (mostly) international providers that offer bundled pricing.
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.
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.
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.
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.
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.
Hands up if you love surcharging? I can wait...no? 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.
0.2%.....0.2%!!
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.
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?
Errrr….
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?
This is what I’d love to see:
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?
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