Clampdown on banks’ merchant fees could sink credit card loyalty schemes

The Government’s plans to clamp down on how much banks charge businesses when people pay by credit or debit card could have an unintended consequence which hits credit card holders in the back pocket.

Businesses, however, are set to gain $74 million a year from the merchant fee changes which should see lower surcharges for credit and debit card payments and open the door for more businesses to offer contactless payment.

It will hit banks in the pocket and could result in a watering down of credit card loyalty programmes which offer benefits like cash back, airpoints or other points which can be used for shopping.

Commerce minister David Clark on Wednesday announced plans to cap the interchange fee – a fee that makes up a large part of merchant fees – as part of a new law that will be overseen by the Commerce Commission.

Clark said New Zealand’s merchant service fees were unregulated and much higher than they were in Australia adding a significant overhead for retailers who often passed on the cost to consumers through higher prices.

“Reducing the merchant service fees that New Zealand businesses are being charged is a priority for this Government, and critical to the recovery of the economy.”

The interchange fee – the fee paid between banks for the acceptance of the card transaction – will be capped at 0.8 per cent for credit card payments – in line with Australia – and the interchange fee for online debit card transactions at 0.6 per cent.

Contactless debit card interchange fees will stay at 0.2 per cent or less and swiped and inserted debit card fees would stay at zero.

The retailers industry body and Consumer New Zealand have welcomed the move.

But a banking industry source said there would be a “significant impact” on loyalty schemes.

“The rewards are closely tied to the revenue – the points, the benefits, all the things people are used to – hot points, whatever points each bank offers are closely tied to fees.”

New Zealanders have millions of dollars tied up in credit card loyalty schemes.

Canstar New Zealand managing director Jose George said when interchange fee caps were introduced in Australia it watered down the credit card loyalty schemes.

“Providers will have to water down their loyalty programmes to keep it viable for themselves. At the end of the day it is one of their big lines of revenue. To keep it viable the rewards will have to pare back.”

That meant consumers would likely have to spend more to get the same level of loyalty points or rewards that they got in today’s environment.

George said it was a third big impact on the credit card market as the low interest rate environment had meant more people paid down their credit card debt in the last 18 months and at the same time there had been a rise in buy now pay later usage.

“This is almost the third piece which will make it challenging.”

George said for high spenders it would likely still be worthwhile having a loyalty card although they would get lower levels of rewards but for those who potentially spent less than $40k a year it might not be worth it.

He said consumers would need to weigh up whether they would be better off forgoing the rewards and getting a low fee card.

A New Zealand Bankers Association spokesman said it couldn’t comment on the possible effect the change might have on credit card loyalty schemes.

“That would be a commercial decision for individual banks. We couldn’t comment on that.”

Asked if the change could affect its credit card loyalty scheme an ANZ spokeswoman said: “We’re still looking at the detail of the announcement so we can’t comment further at the moment.”

Other banks also said they were still weighing up the announcement.

A spokesman for Westpac New Zealand said: “We are in the process of reviewing the changes put forward by the Government to understand what the impact will be for our customers and our business.”

A Kiwibank spokeswoman said it was still working through the impact of the decision and what it meant for its business.

Jessica Wilson, head of research at Consumer New Zealand, admitted reward schemes were likely to change as a result of the merchant fee changes.

“If banks want to continue to offer the schemes in the same way, they’ll have to look for other options to fund them.”

Wilson said high interchange fees had allowed banks and card schemes to encourage consumers to opt for pricier credit cards with reward schemes attached.

“However, these reward schemes deliver poor value for many shoppers.

“Our analysis shows reward programmes only benefit big spenders who use their card frequently and are able to pay off the balance each month. Low spenders, and those with interest-bearing debt, don’t benefit from rewards and are effectively subsidising high spenders.”

She said a 2019 banking satisfaction survey revealed only 31 per cent of consumers through that credit card reward schemes offered “very good value”.

Greg Harford, chief executive of Retail New Zealand, said there may be some scaling back of reward schemes over time.

“Effectively the people who win from high interchange fees are the customers who get expansive reward programmes paid for by other people. So you might see a bit of scaling back of that over time.

“But for your average New Zealander who is paying for some people to have airpoints rewards it is a good thing.”

Harford said he would expect to see credit card surcharge fees drop or be eliminated on lower merchant fees.

“One of the odd things recently we have seen is the rise of the surcharge for contactless debit transactions where the costs should be relatively small – certainly I would be expecting those to disappear I think.”

Wilson said regulation of merchant fees was long overdue.

“Other countries have already moved to regulate these fees. We are among one of the few that haven’t.”

She said the key to merchants passing on the savings to consumers would be good monitoring and enforcement to make sure the caps were adhered to.

“What the change should do is mean those fees that consumers end up being charged if they pay by credit or debit card are reduced.

“If that is not happening then the changes haven’t worked and there will need to be further intervention in the market. As well as setting the fees there needs to be effective powers for the Commerce Commission to intervene where a trader or card company or bank is not compliant.”

Asked if the ComCom had been given enough powers to do that Wilson said it would need to see what the final details of the legislation were.

“That will be instrumental in determining how effective the regulation is. That ability for the regulator to step in and ensure that the rules are being followed and … fees aren’t being passed on regardless of the new law.”

The Government plans to introduce a bill called the Retail Payments System Bill that would require deductions in interchange fees as soon as possible and enable direct intervention by the Commerce Commission to regulate participants in the retail payment system.

It would also introduce a disclosure and reporting requirement to enable the Commerce Commission to monitor the retail payments system.

The Government aims to make final policy decisions on reducing merchant fees mid-year with the aim of the full regulatory regime coming into force next year.

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