The Commerce Commission is undertaking some analysis of the impacts of an innovative settlement the Commission reached in 2009 with banks and credit card companies.

In October 2009 the Commerce Commission reached separate agreements with Visa, Mastercard and several financial institutions settling the Commission's claims that they breached the Commerce Act with their credit card scheme rules. The Commission alleged that the ‘interchange fee’ rules substantially lessened competition by artificially inflating the cost to retailers of accepting credit cards and ultimately raising prices paid by all consumers.

The Interchange settlement agreements involved several changes to the way credit card schemes are operated. They included:

  • Credit card issuers would now be able to individually set the interchange rates that apply to transactions using their credit cards. (Previously this fee was set through a collective agreement between the respective scheme and card issuing banks.)
  • Merchants would no longer be prevented from applying surcharges to payments made by credit cards or by specific types of credit cards. Merchants would also be able to encourage customers to pay by other means.
  • Non-bank organisations or companies who might wish to provide acquiring services to merchants were now permitted to join the credit card schemes as acquirers if they met relevant financial and prudential criteria.

As well as monitoring compliance with the settlements, the Commission is also currently surveying retailers to find out what impact the new rules have had at the ‘shop-front’.

“We want to know what their experience has been since the credit card scheme rules have changed. For example, have they been able to negotiate a better deal with their bank as a result?” asks Commerce Commission Chair Dr Mark Berry.

The Commission’s survey is not an investigation. The results of the survey will not result in any further enforcement action. The survey will help the Commission to complete a detailed analysis evaluating the impacts of the changes to the credit card markets resulting from the Interchange settlement agreements. The results of that analysis are simply to inform the Commission (and other interested agencies) about the effectiveness of this intervention.

The retail survey is going out to more than 3,000 retailers around the country.

Background

Interchange fees. Each time a New Zealand Visa or MasterCard cardholder makes a purchase the card accepter (usually a retailer or service provider) pays a fee to their own institutions as part of the payment authorisation process. That fee is comprised mainly of the interchange fee, which is paid to the cardholder's bank.

Visa and MasterCard purchases occur in a four-party card system, which operates as follows:

  • cardholder purchases goods or services from a merchant;
  • merchant sends the transaction details to its own bank (acquiring bank);
  • acquiring bank sends the transaction details to the bank or financial institution that issued the card (card issuing bank);
  • card issuing bank pays the acquiring bank the retail price of the goods or services less the interchange fee;
  • acquiring bank pays the merchant the retail price less a merchant service fee; then
  • card issuing bank debits the retail price from the cardholder's account.

Under the scheme rules challenged in the Commission's proceeding and changed as a result of the settlements, the retailer or service provider that incurred the interchange fee was not allowed to recover the fee from the cardholder, so had to average out the cost of that fee across all of their sales. This increased the cost of every item or service sold by businesses which accept Visa or MasterCard. All customers of those businesses were bearing that averaged fee, regardless of whether the customer paid by credit card, cash, EFTPOS or another payment method.