Credit card wars: Who pays the price?
As four out of five big banks choose Visa, user fees remain a concern
The battle among credit card networks to win over the banks is heating up, while concern remains high about the costs to retailers and consumers. In the past six months, two major banks — BNZ and Kiwibank — have revealed plans to switch their allegiance from Mastercard to Visa, meaning four out of the five major banks will now use the Visa network.
Just Westpac remains as 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 winning the business back.
Banks charge retailers a merchant fee every time someone pays with a credit card, debit card or uses contactless payment. 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 those fees down here after a warning from the Government that it could follow other countries and regulate the market if they don’t fall.
Research by Retail New Zealand in
2018 found the average merchant fee in this country 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.
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 pay for 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 around $59m a year.
Interchange fees allow banks to encourage credit card use, through cashback and reward schemes. Those schemes give consumers an incentive to use credit cards rather than the Eftpos system, which is much lower cost to retailers.
And the study 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, and in April last year Visa led the charge by bringing down the limit for interchange fees, followed by Mastercard.
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 that 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
We estimate that merchants have to increase their prices to all consumers by around $187m per year to fund rewards paid to certain credit card users.
MBIE study
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 back some of that business.
“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, with those retailers paying the fee and then passing the cost on to shoppers.
“We end up paying more for the joy of using the network.”
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 over 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, with the first group set to transfer by next month.
A spokesman for the bank has said its decision was based on Visa offering better security features and simpler processes for customers wanting a new card.
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 NZ market.
“Our local team is growing our business here with existing and new partners,” she said.