In October of this year the New Zealand Government’s Ministry of Business, Innovation & Employment (MBIE) released an issues paper outlining the current state of the country’s retail payment systems. The paper is part of a broader conversation about payments, technology and banking efficiency that many governments are starting to take a keener interest in as they look for economic growth levers.
The MBIE identified 5 key issues facing the local market, many of which some of you will notice resonate with conclusions government bodies in Australia and the European Union have also reached. These issues were:
- Market incentives that drive credit card use over and above low cost alternatives are adding $45 million per year in additional costs to the economy. The number represents approximately 5% of the total resource cost for processing electronic card payments.
- Increased card processing costs have seen merchants increase their prices to all consumers (high and low income earners alike) by around $187 million per year. This has led to low-income households cross-subsidising high-income households credit card reward programs to the tune of $59 million per year.
NB: There is growing evidence of banks ‘flipping’ credit card users to higher cost premium cards, that offer higher rewards. These cards incur higher charges for merchants, who are faced with steeper interchange fees.
- Scheme debit cards are steadily encroaching on the market share of New Zealand’s free and proprietary domestic EFTPOS network. This could result in similar market distortions occurring in the future, as has been seen in credit card markets.
- The interchange model is blocking innovation and new entrants to the market, by giving card issuing banks significant financial incentives to favour payment systems that offer interchange income.
- Interchange fees charged to small businesses can be up to two and a half times as great as those charged to large businesses. Any increase in this spread could harm retail competition.
Interchange fees in particular dominate the conversation when it comes to retail payment networks, and it is no different in this paper. And while the report notes these fees are a ‘perfectly rational profit maximising mechanism from the perspective of the network owner’ and useful in the context of first growing a two sided market, the question remains as to whether they continue to be the best pricing mechanism for today’s mature market.
The Reserve Bank of Australia seems to be leaning towards no when it comes to answering that one. In May of this year it released a report reviewing card payment regulation in Australia. It states ‘there is little justification for significant interchange fees in mature card systems’, calling for continued regulatory intervention in the market to keep interchange fees at acceptable levels. No doubt the MBIE will be taking note of this finding.
Regulation and possible government intervention isn’t the only battle issuers have on their hands when it comes to protecting their margins. In Australia, several of the largest banks are attempting to collectively stare down Apple Pay in its battle for a share the interchange fee income. However, in a blow to the negotiations, just last week Apple announced it had struck a deal with payments provider Cuscal, allowing the 31 credit unions and smaller banks Cuscal serves to shortly begin offering Apple Pay to customers. Locally they’ll join ANZ and American Express who have already come on board. Given Apple Pay is a carrot for acquiring deposits, a much needed source of bank funding, the last remaining banks will no doubt be looking to reach a resolution with Apple as soon as they can to avoid churn.
Innovation is certainly picking up speed. Last week Paymark, the company responsible for maintaining the local debit network in New Zealand launched Online EFTPOS, allowing customers to pay for goods online directly from their cheque or savings account. If this is cheaper for merchants compared to traditional online payment methods of scheme debit and credit, they will do their best to steer merchants towards this payment method.
Payments innovation is a rising tide that will lift all ships – merchants and consumers alike. Could that same tide seem more like a tsunami to issuers and schemes? Undoubtedly they will still have a role to play, however the writing seems to be on the wall that it will possibly be a more marginalised one.