Banking on the credit card: Why retailers and consumers are on the losing side

Retailers pay a merchant fee to banks every time someone pays by credit card. Photo / File

The battle by credit card networks to win over the banks is heating up, while concerns about the flow-on costs to retailers and consumers remain high.

Two major banks - BNZ and Kiwibank - have revealed plans to switch their allegiance from Mastercard to Visa in the past six months, which means four out of the five major banks will now use the Visa network.

Just Westpac remains a user of the Mastercard network. That has some commentators worried about what Visa has offered the banks to convince them to switch and what Mastercard will offer in return to try and win the business back.

Banks charge retailers a merchant fee every time someone pays with a credit card, debit card or uses contactless payment and part of this fee is used to pay the bank which issues the card a person pays with - this is called the interchange fee.

Credit card networks set a maximum amount for the interchange fee and have been under pressure to bring them down here after a warning from the Government it could follow overseas jurisdictions and regulate the market if they don't fall.

Research by Retail New Zealand in 2018 found the average merchant fee in New Zealand was 1.6 per cent of the value of a transaction for credit cards - double the 0.8 per cent charged in Australia where they are regulated.

For contactless debit cards, the fee averaged 1.2 per cent in New Zealand and 0.6 per cent in Australia.

Retail NZ chief executive Greg Harford. Photo / File

A study by the Ministry for Business, Innovation and Employment in 2016 found the cost of merchant service fees was likely to be passed on to consumers through the price of goods and services and some of the cost was passed on to fund rewards and other inducements for using credit cards.

"We estimate that merchants have to increase their prices to all consumers by around $187 million per year to fund rewards paid to certain credit card users."

The study also noted that because of the way credit card reward schemes are structured, this led to a transfer of wealth between low-income households and high-income households of about $59 million a year.

Interchange fees allow banks to incentivise credit card use, through cash-backs and rewards schemes, which encourage consumers to use credit cards rather than the Eftpos system, which is much lower cost to retailers.

And it found the situation was getting worse.

"...there is evidence that the inefficiencies generated are increasing, with recent competition driving up interchange fees and the value of rewards."

That prompted Commerce and Consumer Affairs Minister Kris Faafoi to issue a warning to the industry in 2018.

In April last year Visa led the charge by bringing down the limit for interchange fees, which Mastercard followed suit on.

CreditCards

Retail New Zealand chief executive Greg Harford said the big issue for retailers was the cost of merchant fees charged by the banks and the fact those costs were not transparent.

"Retailers pay merchant service fees to their banks - and the banks pay interchange fees to each other. Banks also pay scheme fees to Visa and Mastercard, but there is no published data on what those fees are."

"To give them credit, Visa and Mastercard both made changes to maximum interchange fees last year, but we are not yet sure how or if this has been passed on across the market to retailers. We have some research underway on this now, but we expect to see some reduction overall in merchant fees - we would be concerned if they were increasing."

Harford said he was not sure if it made a difference whether three or four banks used the same credit card network.

"The issues are more systemic."

While banks were competing to get more of their customers to use credit cards, the credit card companies wanted the banks to come on board and offered incentives to encourage that, he said.

"That's driven up the costs because the people who benefit are not the ones that pay the cost directly."

One retail source said the problem was that it was impossible to know the arrangements between Visa and the BNZ or Kiwibank.

"We don't know if there is a rebate in the fees Visa charges. My guess is that Visa offered a sharper deal."

A technology source said Visa must have made a "real play" for the banks last year and he believed Mastercard would now fight to try and win some of that business back.

"They will say we will start charging 3 per cent and we will give you half of that. It is the only industry where they can put the prices up and attract business by putting the price up."

"That's because their customers are the banks, not the consumers or the retailers."

He said the biggest losers were customers and retailers, as retailers paid the fee and then passing the cost onto consumers.

"We end up paying more for the joy of using the network."

Kiwibank began moving its customers from Mastercard to Visa in July last year. Photo / Dean Taylor

A Kiwibank spokeswoman said it decided to switch to the Visa network to make it easier in future to introduce new features and services.

Kiwibank began moving its customers to Visa cards in July last year and plans to complete the transfer by June.

She said customers had a month after getting access to their new card to update all their payments with the new account details.

"We acknowledge updating regular payment details for a new card can be inconvenient, but due to privacy restrictions we can't update these payments for our customers."

BNZ will also move its customers from Mastercard to Visa; the first tranche is set to transfer by March.

A spokesman for the bank said the move to a single scheme platform meant the BNZ's security teams would have a single set of new tools it could use to monitor and prevent fraud.

BNZ is switching its customers from Mastercard to Visa while ASB already uses Visa. Photo / Michael Craig

But it seems the loss of business hasn't dented Mastercard's appetite for the New Zealand market.

In a statement, Ruth Riviere, country manager for Mastercard New Zealand and Pacific Islands, said it was committed to the New Zealand market.

"Our local team is growing our business here with existing and new partners. We are committed to providing New Zealand customers with leading technology solutions enabling fast, secure and convenient payments."