When exchanging goods and services, consumers pay merchants using various methods, such as cash, debit or credit cards, online bank transfers, or digital wallets. Each payment method is processed differently, with varying levels of complexity. Cash payments are relatively simple. On the other hand, facilitating secure online credit card payments from one bank to an account at another bank requires technical infrastructure.

The “retail payment system” refers to this web of technical infrastructure. It is made up of various “retail payment networks”, which are operated by different providers. For example, the Visa, Mastercard, and EFTPOS retail payment networks are separate from each other, and each network has its own standards and rules.

Within each card network are several “participants”:

• Issuer—provides debit and credit services to consumers, and issues debit, credit, and EFTPOS cards. Issuers are usually the consumer’s bank.

• Acquirer—financial institution that processes credit and debit card payments on behalf of merchants. Acquirers are often the merchant’s bank.

• Scheme—organisation, such as Visa or Mastercard, that provides the underlying card technology and branding, and sets the card network’s commercial model and rules.

• Switch—Infrastructure that sends information between network participants, so that funds can be taken from the consumer’s account and delivered to the merchant’s account. New Zealand’s three main switch service providers are Paymark, Verifone, and Windcave.

For many types of payments, the acquirer must pay an “interchange fee” to the issuer, a “scheme fee” to the scheme, and a “switch fee” to the switch in exchange for clearing the payment. The interchange fee is usually a percentage of the transaction value. The acquirer wholly passes these fees on to the merchant as “merchant service fees” (MSFs). MSFs vary based on the payment method used. MSFs for credit card and online payments are significantly higher in New Zealand than in other countries.

High MSFs may cause merchants to not accept some payment methods. They may also pass MSFs on to customers through higher prices for goods and services, or surcharges for using higher-cost payment methods.

A few large banks dominate both sides of New Zealand’s largest retail payment networks, as acquirers and issuers. In their role as issuers, charging high interchange fees would increase profits. As acquirers, they have limited incentive, or ability, to negotiate for lower fees as they can simply pass these on to merchants.

New network participants must negotiate with switch providers to connect to the rest of the retail payment system infrastructure. However, New Zealand’s switch market is dominated by one company. This may limit competitors from accessing the market, thereby reducing competition.

Many issuers provide rewards programmes and other benefits to customers for using their products. To pay for these programmes, issuers may charge acquirers higher interchange fees, which result in higher MSFs.

If merchants apply surcharges to these high-cost payment methods, they may lose customers to other merchants. If they do not apply surcharges, they must recoup these costs in other ways. Often, they do this through increased prices for goods and services. Higher prices affect all consumers, meaning consumers who do not use high-cost payment methods may be subsidising other customers’ rewards programmes.

The COVID-19 pandemic has caused a shift away from cash and towards higher-cost payment methods, such as contactless and online payments.

High MSFs disproportionately affect small businesses. Acquirers often charge small businesses more due to their smaller scale and limited bargaining ability. This places small businesses at a disadvantage and reduces their ability to compete and grow.

Clause 12 would enable the Commission to recommend to the Minister that a retail payment network be designated. Clause 13 of the bill as introduced sets out the process the Commission must follow before making such a recommendation. One requirement is that it must “notify” the network operator and “consider any submissions made”.¹

We heard from several submitters, including the Commission, that the bill should expressly require the Commission to consult with affected parties before making recommendations. The Commission told us that clause 13 could suggest it would ‘notify’ the operator that a recommendation for designation had been made. However, it said in practice it would seek to first consult operators about any proposed designation.

We agree that this provision should be clearer. The intent of this provision was to protect the principles of natural justice, and good governance, by requiring consultation with affected parties. We believe it should more clearly reflect this intent, and expressly require the Commission to consult affected network operators before recommending that the network be designated.

Some submitters recommended that the bill should also contain specific requirements for consultation. For example, they suggested that the Commission be required to publish draft decisions and accept submissions for a set period of time.

However, we do not agree that it is necessary to include a list of steps the Commission must take when consulting. Different situations will require different levels of consultation and we believe that the Commission can determine an appropriate process, at its discretion.

We therefore recommend amending clause 13(1) by replacing paragraph (b) and removing paragraph (c). We recommend that new paragraph (b) require the Commission to consult affected network operators about the proposed designation before making a recommendation to the Minister.

Similarly, clauses 19(1), 26(1), and 31(1) outline the processes which the Commission must follow before issuing network standards, directions, and merchant surcharging standards, respectively. Under these provisions, the Commission must “send a copy” of the proposed instrument, and the Commission’s reasons for issuing it, to affected persons or their representatives. It would also be required to “consider any submissions received” about the proposed instrument.

For the reasons discussed above, we believe that these clauses should all be amended to require the Commission to consult affected parties before issuing network standards, directions, or merchant surcharging standards. Accordingly, we recommend amending clauses 19(1)(b), 26(1)(b), and 31(1)(b) to align with the changes made to clause 13(1)(b) about consultation.

Clause 12(1) of the bill would allow the Commission to recommend to the Minister that a retail payment network be designated. Clause 12(2) lists factors which the Commission must consider when deciding whether to make a recommendation.

Under clause 16, a designation made under clauses 10 to 14 could be amended or revoked. However, clause 16 states that clause 12 does not apply to a revocation order, or an amendment order where the Commission is satisfied that the amendment is minor in nature.

We heard concerns that clause 16’s construction could lead to unintended procedural issues. Under clause 11, the Minister may only act after receiving a recommendation from the Commission. The Commission told us that, if clause 12(1) does not apply to revocation orders, then the Commission would need to infer from clause 11 that it can recommend revocation orders. Otherwise, there may be no way for designations to be revoked.

We recommend amending clause 16(a) and (b) to refer to clause 12(2) only, rather than all of clause 12. This would allow the Commission to recommend that a designation be revoked without needing to consider the factors in clause 12(2).

Clause 15 states that a designation order would also continue in force until it was revoked or replaced, or expired (which must be no later than 10 years after its commencement). However, the bill does not contain any express provision stating what would happen when a designation order ceased to have effect.

For clarity, we consider that the bill should expressly state that if a network ceased to be a designated network, any network standards or directions that applied to that network would also cease to apply to that network. We recommend inserting clause 15(3) to this effect.

Clause 20 details the matters that could be included in network standards. Under clause 20(1)(a), standards could require participants to disclose information relating to payment services, or the designated network, to “all or any of merchants, consumers, and the public”.

We are concerned that this list does not include the Commission. In the bill as introduced, a standard could require public disclosure of information, but there is no mechanism for private disclosure directly to the Commission. We believe that including the Commission in this list would strengthen its regulatory oversight. We recommend amending clause 20(1)(a) to state that network standards could require participants to disclose relevant information to the Commission.

Clause 32 contains a similar provision regarding information disclosure requirements in merchant surcharging standards. We recommend amending this provision also.

Part 3, subpart 1 of the bill would regulate surcharges that merchants might apply to retail payments, such as a surcharge for using a credit card.

Clause 29, as introduced, states that the purpose of subpart 1 is to ensure that surcharges for payment services are “not excessive and reflect the cost to the merchant” of the payment services used for accepting retail payments. The intention behind this provision was to stop merchants from applying surcharges that are higher than the actual cost of accepting that payment. Under clause 29 as introduced, an “excessive” surcharge was intended to be one that was higher than the merchant’s actual cost.

Some submitters noted that the bill does not expressly define this intent, so the definition of “excessive” would be subjective. We agree that the term “excessive” may be subjective. We recommend amending clause 29 to clarify that merchant surcharges for payment services should be “no more than the cost to the merchant” for accepting that retail payment. This would provide a clear, objective purpose for this subpart.

Clause 38 of the bill as introduced would give the Commission certain information-gathering powers. Among other things, they would allow the Commission to:

• investigate how effectively and efficiently a participant is supplying retail payment services

• investigate how any proposed standard or direction has been, or may be, applied

• require any participant to provide documents in relation to payment services, or their payment services’ prices or operations

• require any participant to prepare and produce forecasts, forward plans, or other information.

We consider that these monitoring and investigating powers are critical to the success of this legislation. However, under clause 38 as introduced, these powers would be limited to matters in Part 2 of the bill which relates to designating networks, and issuing network standards and directions. The Commission would not be able to use its information-gathering powers in relation to developing or monitoring merchant surcharging standards.

We are also concerned that the bill would limit these powers to “participants” of a retail payment network, which clause 7 defines as excluding merchants.

We recommend that clause 38 be expanded so that it also applies to subpart 1 of Part 3 of the bill, and so that it refers to “any person”, rather than “any participant”.

Clause 41 would allow the Commission to apply to the High Court for pecuniary penalties against a merchant for specified contraventions of the bill. Pecuniary penalties are a civil penalty, rather than a criminal sanction. As such, an applicant must prove their claim “on the balance of probabilities” rather than “beyond reasonable doubt”.

Clause 9(2) would exempt the Crown from paying pecuniary penalties. However, there could be situations where, for example, Crown agencies act as merchants and are subject to merchant surcharging standards. Under clause 9(3), the High Court could make a declaration that the Crown had contravened the legislation if it was satisfied of this “beyond reasonable doubt”.

We do not think it appropriate that civil applications against the Crown should require a higher standard of proof than for private individuals. We believe that the bill should apply a “balance of probabilities” standard to all alleged contraventions. We therefore recommend amending clause 9(3) to state that the Court may make a declaration if it is satisfied, on the balance of probabilities, that the Crown has contravened a provision of the legislation.

Subpart 3 of Part 1 of Schedule 1 would create an “initial pricing standard” which would come into force 6 months after the bill received Royal assent. The initial pricing standard would apply in respect of four initial designated networks listed in Subpart 2 of Part 1 of Schedule 1.² It would require these networks to cap interchange fees (which the issuer charges to the acquirer, and typically make up a large proportion of merchants’ servicing fees). Fees would be capped at levels defined in the bill for different payment methods, or their 1 April 2021 levels (whichever is lower).

In Schedule 1, clause 7(4) and (5) of the bill as introduced, the initial pricing standard prohibits scheme operators from providing “net compensation” to issuers. The intention behind this prohibition is to stop participants from avoiding the interchange fee caps. For example, a scheme operator could provide rebates or other monetary or non-monetary rewards to issuers to make up for lower interchange fees.

Several submitters told us that the prohibition on net compensation is unclear. They suggested that the broad wording of the clause, as introduced, could limit schemes’ ability to incentivise issuers to switch schemes. This may limit competition between Visa and Mastercard, and innovation.

We agree that this provision could be clearer. We recommend removing clause 7(4) and (5) in Schedule 1. Instead, we would amend the wording of the pricing standard in clause 7(2) and 7(3) to state that “total interchange fees” per transaction must not exceed the rates specified.

We recommend inserting definitions of various terms in new clause 7(4). The “total interchange fees” would be the sum of the interchange fee and any net compensation that can reasonably be attributed to a transaction (for example, a monthly rebate could be split across transactions within that period). “Net compensation” would be defined as the net value of any monetary and non-monetary payments, rebates, or incentives that have a purpose of compensating issuers for the pricing standard’s effect.

We believe this would better link the net compensation provisions to retail payment transactions, similar to interchange fees. This would better serve the bill’s purpose of providing for competition between the retail payment networks and allowing for future innovation.

Clause 7 of Schedule 1 states that the initial pricing standard excludes “commercial credit payment products”, and “payment instruments that are issued outside New Zealand”.

Some submitters recommended that the bill include a definition of “commercial credit payment products” so it is clear which products the initial pricing standard’s interchange caps apply to. They suggested the bill adopt the wording of the Credit Contracts and Consumer Finance Act 2003 (CCCFA), section 11, which defines a consumer credit contract as one in which the “credit is to be used, or is intended to be used, wholly or predominantly for personal, domestic, or household purposes”.

We agree that adding a definition of “commercial credit payment products” would strengthen the bill. However, we believe that the definition used in the CCCFA is too narrow. That definition could preclude business consumers that use non-commercial products for business from benefitting from the interchange caps.

Instead, we recommend defining a “commercial credit payment product” in clause 7(4) of Schedule 1 as any credit product that is issued to businesses for use wholly for purposes other than personal, domestic, or household purposes, and that is charged directly to the account of the business.