Editorial: Card charges make users pay

Photo / NZ Herald

Opinion

Credit card giant Visa risks underestimating the intelligence of the public when it says that surcharges for credit card payments are "harmful to consumers".

The new regime, which allows card charges to be passed on to customers, is due to take effect in April, but some retailers have jumped the gun and already started charging.

This week, not for the first time, Visa New Zealand railed against the change. Spokesman Sean Preston criticised the charges as unfair and discriminatory to consumers.

A few shoppers may be touched at Mr Preston's concern for their wellbeing, but somewhat more may scent a whiff of disingenuousness, because the changes will hurt Visa more than any cardholder.

The new regime, it should be remembered, results from agreements freely entered into by credit card companies last August.

Faced with the prospect of being dragged through the courts by the Commerce Commission, which planned to charge card companies with price-fixing and force them into greater disclosure, the companies - first Visa and, a week later, Mastercard - decided that discretion was the better part of valour and buckled.

Visa even paid $2.6 million toward the costs the commission incurred in achieving a result which, far from being discriminatory to customers, was all about improving competition in the lucrative credit-card sector.

Banks and card companies have long charged merchants a fee for providing a credit facility. Some of this charge was a so-called interchange fee - essentially a charge to the merchant for having the card's validity checked and the payment authorised.

Typically, that amount is just under 1 per cent of the purchase cost - about twice what is charged by the banks elsewhere, including Australia - but merchants often reported paying at least twice that. The lack of transparency about how the charges were made up and the suspicion of collusion among card companies to keep fees high quite properly prompted the commission's interest.

In settling out of court, the card companies admitted no wrongdoing, although their customers will draw their own conclusions. The same goes for the loyalty schemes offered by the various companies.

When customers are given airpoints or annual cash rebates, there are two possible explanations: the credit card companies and the banks are desperate to demonstrate boundless generosity towards hard-pressed working people or they are making so much money they can afford to give some of it away to persuade cardholders to keep spending money they don't have.

The charges that retailers may start imposing on their customers have always existed, but retailers' agreements with the card companies prevented them from passing them on.

The incentive for the retailer, of course, has always been that consumers might make purchases they didn't actually have the money for: a sale, the reasoning goes, is better than no sale even if you're paying 1 or 2 per cent of the proceeds to the card company.

And offering instant consumer credit to anyone waving a piece of plastic is a lucrative business.

At any given time, billions in unpaid balances are being charged around 18 per cent in interest - even though the Official Cash Rate, a major determinant of retail interest charges, has dropped from 8.25 per cent to 2.5 per cent in the past two years.

Retailers have, in effect, been delivering business to the credit card companies - and been charged $500 million a year for their efforts.

The new system makes transparent what was opaque: if shoppers want to spend their own money, they will pay no fee at all; but if they want to use credit facilities that will cut into retailers' already tight margins, they may - and only may - have to pay for the privilege.

Cash shoppers have for years been subsidising credit card users because the card charges inevitably end up being passed on in higher prices. The cannier among them have asked for discounts for cash, particularly on big-ticket items, which have been routinely granted.

Such discounts may soon be a thing of the past, but retailers' charges for credit card use should have the same effect. They will remove one source of pressure for price rises and force competition in the card sector on the fees charged. Visa's Mr Preston will have a hard job explaining just how that is unfair to consumers - or indeed to anyone but the card companies.