Retail Payment System Bill

Thank you, Madam Chair. I rise to offer a few introductory remarks on the Retail Payment System Bill. Transactions, the exchange of money for goods and services, are a fundamental part of our economy. What makes these transactions possible is the retail payment system. These are elaborate networks that process different payment types, and the ones we’re most familiar with, of course, are credit, debit, and EFTPOS card payments. The costs of operating these networks are, ultimately, passed on to merchants in the form of fees and then subsequently, in large part, on to consumers.

Today in the committee, we’re progressing a Labour Party manifesto commitment to lower merchant service fees and bring them into line with comparable economies around the world. The bill does this by establishing a new regulatory framework for the retail payment system. It’s currently unregulated, and I would note for the committee, as has been noted before, that New Zealand’s merchant service fees are set much higher than they are in Australia, and they add significant overhead for retailers, who often pass these costs on to consumers through higher prices. So the outcome of this bill will benefit both small businesses and consumers. In fact, a conservative estimate has the benefit to small businesses at approximately $74 million each year, and, as I say, much of this gets passed on to consumers.

Before I draw this committee’s attention to some of the more notable features of the bill, I’d like to acknowledge again and repeat my thanks to the Economic Development, Science and Innovation Committee for its time considering this bill. They have made some suggested changes which I will touch on. The bill is designed to address certain inefficiencies which are resulting in poor outcomes for many merchants and consumers. As I mentioned before, the charges merchants face for accepting certain payments are high by international standards, particularly credit card and online debit transactions. It just so happens that consumers are incentivised to prefer those more costly payment methods in the current retail payment system.

So competition appears to be lacking in some aspects of the market. The largest retail payment networks are dominated by a few large banks who service both sides of the transaction. They sell payment products to consumers and charge merchants for processing payments that use those products. The various participants in the payment network are often incentivised to keep fees high. Moreover, difficulty accessing network infrastructure is thought to be stifling innovation and the entry of new competitors. So I expect parties in this House that support competition will be right behind the changes that we’re making here.

Small merchants are particularly disadvantaged in all this. They face disproportionately high merchant service fees and have limited bargaining power. On top of that, because smaller retailers cannot afford to lose customers, they are likely to feel they have to absorb the fees rather than surcharge or refuse certain card types. And, indeed, I’ve spoken to small businesses who feel the pressure to do just that and are reluctant to call the banks out on their pricing practices for fear of retaliatory action.

The bill’s purpose is to promote competition and efficiency in the retail payment system for the long-term benefit of merchants and consumers. There are broadly three ways it delivers on this promise. First, it empowers the Commerce Commission to scrutinise and regulate participants in a retail payment network if that network is designated by Order in Council. The commission would have a range of regulatory tools to address competition or efficiency issues in these networks, such as requiring participants to grant access to essential services or network infrastructure. The designation approach allows the regulatory regime to respond to any changes in the system, such as new payment methods that may emerge.

Secondly, the bill will more immediately reduce merchant service fees in the MasterCard and Visa credit and debit networks. It does this through an initial pricing standard that will cap the interchange fees in these networks six months after the bill has passed. I will note now, we thank some of the work that the select committee did on ensuring that that particular effect happens in the right way. Interchange fees are the largest component of merchant service fees and therefore have the opportunity to make the most material difference to the regime in the first instance. Those savings, of course, will benefit merchants and then may well be passed on to consumers. But it’s particularly important for those smaller merchants who don’t have the leverage and also those who rely on credit card or online sales.

The select committee, as I mentioned, has helped to ensure these provisions are effective, anticipating attempts to game the interchange fees by compensating card issuers, because we wouldn’t want to see those interchange fee caps gamed in any way that might be attempted to do that—for example, compensating card issuers for reduced income through other methods. So I do thank the select committee members who have worked on that and produced a more watertight way of dealing with what are called waterbed effects, as it happens.

Finally, the bill affords the commission some control over merchant surcharging practices to ensure they are transparent and do not exceed the actual costs to merchants. I don’t view surcharges as problematic if they merely pass on costs. If nothing else, it makes consumers aware of those costs of accepting certain payment types. But surcharging standards will be used to ensure consumers are not harmed by surcharging in excess of the caps and costs that are in place.

When the bill was read a second time, I discussed a few of the important questions raised by submitters—for example, why do we target just the Visa and MasterCard types in the first instance networks in the initial pricing standard and why not American Express? As the responsible Minister, I’m satisfied the House has now addressed those questions.

I’d like to mention one other matter that I understand the select committee considered in some detail. Under clause 24, the commission needs to approve substantive changes to an operator’s network rules. The select committee considered the practical implications of this requirement in the case of Visa and MasterCard networks, whose rules are extremely complex and not confined just to the New Zealand market. In the end, I understand the committee was reassured by a few observations. Whether the rules in a particular designated network are subject to this approval requirement is entirely at the discretion of the commission. I note the following: the commission must exercise this discretion in accordance with the purpose of the bill, the principles in clause 4, and the criteria in clause 25. In practice, I expect the commission will be selective in how it makes use of directions under clause 24. Before making any such direction, the commission is required to publish its proposal and consult with affected parties. This will help it to identify any genuine practical issues.

A direction requiring its approval of rule changes is just one kind of direction that the commission can make if it has concerns about the impact of rule changes on efficiency or competition. An alternative would be for the commission to require an operator to notify it of any rule changes. If a change then raises concerns for the commission, it could make a direction changing the rule itself after following the same process. These directions do not have extraterritorial effect; they would only affect networks here in New Zealand.

I’m confident the scope of these direction-making powers is appropriate. They’re a good example of the way the bill affords the commission flexibility in finding the most targeted and effective way to intervene in the interests of competition and efficiency, and similar provisions can be found in the UK’s financial services legislation and in the Financial Market Infrastructures Act 2021. The commission ultimately has no interest, let’s acknowledge, in imposing impracticable requirements, whether for participants in the market or, indeed, for themselves and for the network itself. In any case, there are good safeguards in the bill to prevent regulatory overreach.

So to conclude, reducing merchant service fees is a priority for the Government. It delivers on a Labour Party manifesto promise and it supports the recovery of the economy from the impacts of COVID-19. Consumers expect to be able to use easy and innovative payment methods like payWave, and merchants want to accommodate these expectations, but the fees as they currently stand in many categories are too high. This has been putting additional financial pressure on small businesses, on small merchants in particular, and we know that those costs are frequently passed on to consumers. This bill will deliver a more efficient, more competitive retail payment system. It establishes a regulatory regime capable of ensuring the costs of retail transactions in New Zealand will be reasonable, both in the short term but also in the future as the retail payment system evolves due to the opportunity for the Commerce Commission to involve itself as appropriate. This bill will ultimately benefit New Zealand consumers.

Before we continue, I want to remind members that we are debating Part 1, which is clauses 3 to 9 and Schedule 1.

Oh, that was a very nice speech from the Minister. Thank you. There’s a few things and questions I’ve got for the Minister. So it is designed to, obviously, cut down the costs for retailers so that they don’t have to then pass those on, but is it also going to be useful when it comes to things like retailers who now can’t access banks during normal working hours, when they’re busy themselves, to actually drop off cash? Because that’s one of the issues that I’m getting from retailers. Particularly in Papakura, not one bank is now open and so people are having to go to Manukau, and I think it’s going to be the next stage that the Government is going to look at. Is this bill designed in any way, shape, or form to be able to be amended during the stages of this particular bill to take that into account, Minister?

Thank you. Just in a similar vein, I note that Minister David Clark talked about this helping small businesses. As we’ve canvassed in the first and second reading, the economic or financial impacts of this for many small businesses is an absolutely small percentage when compared to the avalanche of costs that the Labour Government has imposed on small businesses, particularly around employment practices etc., which we estimate are nearly $3.5 billion. Yet this bill deals with a very small element, which is the interchange fee charged on transactions. So, in the light of that, the purpose statement in Part 1 talks about “The purpose of this Act is to promote competition and efficiency in the retail payment system”.

So clearly this bill—and we’ll talk more about it when we get to the subsequent parts of the bill—imposes specific costs, or caps the cost that can be charged on the interchange component of a merchant fee. But what I’d like to understand from the Minister is, given the intent of this bill—which is to limit cost and be much more prescriptive around who can be a network operator and the rules that must apply—how in the dickens does this bill help promote competition and efficiency in the retail payment system? Because if you’re a retail payment operator around the world, you’d look at this bill and go, “Gee, that’s a lot of regulation.” Albeit we might be bringing ourselves up to other jurisdictions around some parts of the world, but I don’t see how this is actually going to promote competition and efficiency. Because many people would actually argue this is actually not going to do that—we’re going to get a reverse outcome. So I’d be keen to understand the Minister’s view on that.

Thank you, Madam Chair. The Green Party is supportive of this bill. As we mentioned in the second reading, we noted that the estimated $70 million in savings while not huge in the context of the broader economy—what we want to understand from the Minister is whether he has an understanding of the distributional impacts of the savings. Who’s likely to benefit, and just for him to give us some broader analysis on that to understand exactly—you know, we talked about the regressive nature of how some of these fees end up affecting consumers. So I guess I’d be keen to get his perspective on how he sees those savings being passed on to those who need it the most.

[Member removes mask] Taking off the mask might actually help. Thank you, Madam Chair, and thank you to the members who have actually asked some questions. This Retail Payment System Bill was considered by the Economic Development, Science and Innovation Committee and I’d like to thank my colleagues in the select committee for giving this really good consideration, but as always, with select committee bills, they come in and we deal with it and it actually gets passed back to the House, and we move on to the next bill and sometimes you forget what the bill was about. So I had to go back to my notes to actually try and figure out what this bill was actually all about. Because, you know, sometimes financial things sort of go out of my head.

But in terms of the merchant payment fees that the Minister talked about, I think it might be really important, particularly for people who watch Parliament TV and who are actually listening to this debate, is to perhaps actually talk about what this Retail Payment System Bill literally deals with. I think when we actually talk about the bank charges, a lot of people would have experienced in their time, when they’re either using credit cards or EFTPOS, that there are some fees attached to the services that they are wanting to use. For example, particularly during COVID, people were not able to use the insert option for the EFTPOS terminal because they didn’t want people to touch them, so the contactless payWave system was used and that actually incurred fees as well. So the high merchant services fee that the Minister actually talked about is the interchange portion, which is actually the biggest portion in the merchant service fee that customers are actually charged, which is often what the merchants, as in the shops that we go to, pass on, because it is the banks who actually charge these things to the merchants and the merchants basically pass it on to the customers.

So, effectively, what happens is that the transaction fees are for the use and the, I guess, privilege of using those services, whether it’s actually credit card or contactless payment, and it is literally passed down from the issuer, the bank, who actually goes through, for example, the Visa or MasterCard who actually provide those cards, and the system that actually provides the transaction infrastructure, effectively, means that us, the users of these cards, end up paying for the service. What literally happens is that apparently in New Zealand we pay the highest fees compared to our close neighbours.

So one of the things—I mean there are lots of things to talk about, but I think the Hon Judith Collins actually asked a really, really sensible question, especially because technology is actually moving. I would like to ask the Minister: is the Minister confident that the changes put into this bill will keep up with the emerging technology and digital innovations, including those we may not be able to anticipate due to technological innovation—

Andrew Bayly: What a great question!

MELISSA LEE: —yeah—that we may not even think about today? And is this bill written for futureproofing to make sure that we actually look at those technological advancements in the banking services or transactional services that we may not even think about? So I would like the Minister to answer that if he could, please.

Thank you, Minister. It really is great to see that the Labour Party is embracing competition, and it’s essential, this process, to the economy and we hope to see more of that.

But, as we discussed, we still have a couple of concerns around the competitive landscape in this bill. In the ACT Party, we like to promote a transparent market with a level playing field, so one question I have which we’d like clarification on is that the bill only regulates MasterCard and Visa, and not other card payment systems such as American Express or Diners Club. Just to declare an interest, I do have an American Express card and a MasterCard, but with an American Express card, as an example, there is a higher cost to small business. Leaving them outside the payment system regulation increases the cost to small businesses, especially if their usage grows, and it’s not just one card but there are a series of companion cards you can get, as well. So we’d just like to ask the question that the Minister will ensure a level playing field, just like other jurisdictions in Europe and Australia that have included American Express in their regulatory frameworks.

The bill also calls out MasterCard and Visa for regulation where other existing players are not included in the proposed initial regulation, so we’re trying to get the commission to make sure that there are no regulatory gaps and imbalances. International experience does show gaps and imbalances will be exploited, with potentially poor outcomes for consumers and businesses.

The final part of our question set is that the interchange flows between the merchant bank, the cardholder’s bank. In other markets which have regulated a reduction in the interchange, it has not been clear that the savings have actually been passed on to the merchant banks or to other participants in the ecosystem. So actually being confident that retailers and consumers will get that is questionable, and in terms of the cost-benefit analysis, there seems to be a lot of money to set up the administration of this, whereas if you take the millions of transactions that are out there, the savings are relatively low. All of the main issuing banks in New Zealand are also acquiring banks, so they’re all superior to just issuers or just acquirers. So the final part of the question is: what guarantees do we have that the proposed $74 million will not get stuck in the system and will get to businesses and consumers? Thank you.

There’ve been quite a number of wide-ranging calls so far. Many of them have offered some commentary on the general flavour of the bill, and very few questions pertaining to the part we’re in, but I’ll work my way through each of the contributors none the less. In answer to the Hon Judith Collins’ question: no, cash is not a payment network so it does not address the issue that she’s raising on behalf of her local constituents.

Andrew Bayly—well, as he himself pointed out, his initial contribution addressed a number of issues that we’d come to when we came to that part of the bill, and so didn’t really address Part 1 of the bill. He spent a lot of time talking down the economy and not acknowledging the 5.6 percent GDP growth that there has been in the economy and the triple A ratings that New Zealand’s had from the rating agencies recently—something that’s very rare in the world. The extraordinary leadership of the finance Minister, Grant Robertson, has to be acknowledged. As a result of his general negative talk about the economy, he doesn’t seem to have faith in businesses in the way that the Labour Party does, but there we are—that’s his prerogative. I’m sure he will raise relevant provisions in the other parts; he frequently does.

In respect of Ricardo Menéndez March’s question around how savings are passed on and, given the regressive nature of some of these fees, I think that is worth picking up. And the point I’d make is that EFTPOS is free to merchants to use, including small merchants. Often you’ll see with small merchants they say “no payWave” or “no credit”, and they apologise for it. It’s because they can’t bear the costs of doing business associated with those other networks. And under the designation here in the bill, EFTPOS will remain free. So actually one thing people can do to help support small businesses, which are often local or doing it tough, is to use EFTPOS where they can. Of course, payWave, in times where we’re concerned about a pandemic, has its merits too, and that doesn’t have particularly high fees. So we are regulating to make sure that they do not go higher. But there is a regressiveness built into the system currently whereby often those who are using those methods are, effectively, subsidising those who have rewards systems through some of the more sophisticated credit card networks. And we want to put a cap on that kind of behaviour, and that’s one of the things this bill achieves, so I do thank that member for raising that issue.

Melissa Lee suggested that she would in her contribution remind herself and the House what the bill is about, so that was most of her contribution. But she did ask the question whether changes in the bill will enable—well, whether the bill is futureproof for future changes. As I mentioned in my initial contribution, yes it will be. And that’s one of the reasons we’ve given the Commerce Commission discretion, because there will be adaptation and new payment methods that come on to the market.

In respect of the member Damien Smith’s contribution, he raised again the question that was covered in previous readings around why we’re regulating MasterCard and Visa and not American Express or Diners. The reasons have been canvassed in the House before, but I think it’s useful to air them again. That is in large part because they’re a very small part of the market. They don’t charge interchange fees, which is the thing that we are regulating here, but they can be designated. The Commerce Commission will have the power to designate them if it feels that is becoming a problem issue there. But I would acknowledge as well, while the other cards have capped fees in order to be competitive in the market, those smaller players will have to adapt to the conditions.

Thank you, Madam Chair. I see the Minister’s starting out in the normal vein—he normally does something very dismissive. So, first comment, can he confirm the annual savings this will have for all the small businesses he’s reputedly standing up for, whether in fact it is $6 million a year, because the figure was quoted before. That would be nice if he could confirm that this is a $6 million saving to the roughly 530,000 small businesses across New Zealand.

The second thing, in relation to my question—it was quite a specific question, it was actually related to clause 3, the purpose—and I’ve read it out to him just to be very helpful to him. My question was: how does this Act promote competition efficiency? Not in the general economic or “New Zealand Inc.” perspective which he responded to, around what Labour was doing to help New Zealand businesses—but the purpose relates to the retail payments system. So what does it do to promote competition efficiency? I understand where the bill seeks to reduce the cost of certain elements, but that’s different from promoting competition and efficiency. And how does this go about actually allowing other network operators to come into New Zealand and making sure that we are ending up with an even lower cost that is driven by the market rather than through regulation, which is the chosen method that the Minister always likes to take in relation to the financial markets industry: regulate, rather than allow the markets to operate more efficiently?

I completely agree with my colleague who just sat down, Andrew Bayly. In terms of the purpose, in this part the bill actually does talk about promoting competition and efficiency in retail payment systems. But I just want to add and ask the Minister specifically: what benefit, what long-term benefit this actually has on the merchants and consumers? I know that, you know, when consumers go shopping or whatever and use their cards, they want to actually not have to pay the extra 2 percent or extra 3 percent that the merchants actually put on for the privilege of using the credit card or whatever payment methods. I guess one of the issues that I actually foresee is what it does actually provide—long-term benefit—for the merchants. By reducing the interchange fees, does it really promote competition for the merchants, for example? And how will this bill interact with the digital identity bill is another question that I would actually like to ask the Minister—which is awaiting the second reading. As we transition into a different digital world, how will this bill interact with the digital identity bill?

Thank you. I see the Minister scrawling furiously. I’m just hoping he’s got sufficient time to answer this question because I’d hate to think that we’re going to move through Part 1 without having a response.

So on my reckoning, if it’s $6 million saving per annum and there’s 536,000 businesses, that would be a benefit of $11 per business per annum. But, of course, all businesses won’t use these types of facilities. So (a) I really would like to know whether $6 million is the estimated saving and, secondly, how many businesses might benefit from this because I’d quite like to know what the contribution—given, as I said in my opening remarks, the Government has imposed $3.5 billion of additional costs on small businesses to date.

Thank you, Madam Chair. In response to the member, I’m not sure where he’s plucked $7 million from. As I said in my initial contribution, the very conservative estimate is $74 million per annum—a little different to six. That has been canvassed across the various readings of this bill to date.

I would also note that it falls very unevenly because it’s the small merchants that benefit disproportionately from capping these fees.

Andrew Bayly: How many might that be?

Hon Dr DAVID CLARK: As the member knows, a large number of New Zealand businesses are small businesses. But the access to priority, or lower, fees tends to dominate amongst the very large businesses currently. So this bill will disproportionately benefit small business, as opposed to the bigger businesses that the member might want to support.

In respect of the growing economy, I mean, he will repeat his assertions; I’ll repeat mine. New Zealand’s economy has been growing at a remarkable rate considering the COVID period we’ve been through. It’s a better position than most economies around the world. In fact, many others acknowledge that; the ratings agencies give it a triple A rating for New Zealand. That’s very rare around the world, but two agencies have recently given New Zealand that rating, saying that we’re on very sturdy, sound financial grounds and the conditions for growth are there in the recovery from COVID-19.

The member did ask, I thought, quite a good question around how competition will be achieved. If a network is designated, the network can be required to allow other competitors to access its infrastructure and services. And that is, effectively, the way into ensuring competition through that mechanism.

Melissa Lee asked how the bill will interact with the digital identity bill. I’d make the initial observation that that bill—the digital identity trust bill—has an important role to play in building trust in online services, transactions, and amongst our population more broadly. We want a population that can take advantage of the advantages that come with digital, and can trust and securely transact online. So that bill goes to trust and confidence, and that all underpins a successful economy.

This bill, too, goes to having a reasonable and fair economy where people can transact fairly, where we can have competition in the market. A lot of this does go to ensuring we live in a country where everyone who wants to get involved in business can have a crack and can participate on a level playing field in a trusted environment. So I guess I’m extrapolating on the fly on that, but I do see those kinds of connections existing in response to the member’s question.

Members, this debate is interrupted. I will resume the Chair after dinner at 7 p.m.

Sitting suspended from 6 p.m. to 7 p.m.

Part 2 Designated networks