Credit card settlements lower New Zealand business costs

The Commerce Commission has reached separate agreements with seven financial institutions settling the Commission’s claims that they breached the Commerce Act, and ushering in a new competitive landscape for the credit card industry in New Zealand.

The Commission claimed in High Court proceedings that the parties breached the Commerce Act by agreeing and implementing the Visa and MasterCard credit card scheme rules in New Zealand which, among other things, provided for the payment of multilateral interchange fees. The Commission alleged that these rules substantially lessened competition by artificially inflating the cost to retailers of accepting credit cards and ultimately raising prices paid by all consumers.

The agreements with the financial institutions follow settlements reached in August with Visa and MasterCard that paved the way for interchange fees in New Zealand to be set by competition. The institutions that have reached settlements with the Commission are: ANZ National, ASB, Westpac New Zealand Ltd, Bank of New Zealand, Kiwibank/New Zealand Post, TSB Bank, and The Warehouse Financial Services Limited.

As a result of the latest settlements, retailers will benefit from significant new product offerings, and interchange fees charged in respect of transactions in New Zealand using Visa and MasterCard credit cards will be lower on average.

“These settlements are an important spur to competition in credit card payment services following recent changes to the Visa and MasterCard rules in New Zealand,” said Commerce Commission Chair Dr Mark Berry. “The commitments made by the institutions will put immediate downward pressure on interchange fees while ensuring that those fees remain transparent and open to competitive forces in the future.”

“We expect the savings to retailers over the next three years as a result of these settlements to be in the order of $70 to $80 million. This represents a significant reduction in the cost of doing business for retailers who offer credit card payment options, and we would expect to see this passed on to consumers over time through lower retail prices.”

The commitments made by the institutions for the benefit of retailers and consumers vary depending on the circumstances of each institution. Those commitments include:

• significantly reducing the average interchange fees charged on New Zealand credit card transactions, ensuring that these fees in New Zealand are driven downwards from the rates that were centrally set by the Visa and MasterCard schemes;
• offering retailers the option of unblended service fees, as between Visa and MasterCard transactions, enabling retailers to see the costs of accepting each scheme’s credit cards;
• offering retailers the option of fully unbundled service fees as between all types of Visa and MasterCard credit card transactions, revealing the exact amount of interchange fees applicable to each card transaction, which will assist retailers to negotiate lower service fees and provide incentives to consumers to use their preferred payment methods; and
• refraining from any standard contracting practices that prohibit retailers from surcharging Visa and MasterCard credit cards as a condition of receiving credit card acceptance services.

Each of the financial institutions will contribute towards a combined total of $1 million to cover the unmet costs of the Commission’s proceedings. The Commission has previously recovered $5.6 million towards its costs from Visa and MasterCard.

“With credit card issuers in New Zealand now able to set interchange fees in competition with one another due to the Commission’s settlements with Visa and MasterCard, it is a priority to get this new competition in the credit card industry off on the right foot,” said Dr Berry. “The significant fee reductions that will be delivered through the settlements will achieve this on an industry-wide basis such that retailers and ultimately consumers will enjoy the tangible benefits of competition.”

“The Commission has taken a novel, forward-looking approach to settling this issue, and we are receiving a lot of interest from other jurisdictions in understanding what we have achieved,” added Dr Berry.

The Commission has today applied to the High Court in Auckland to discontinue the proceedings against all parties.

A public version of each of the settlement agreements can be found on the Commission’s website www.comcom.govt.nz under Media Centre/Judgments and settlements. Dr Berry is available today for media interviews on these settlements, via the Communications team contacts at the end of this release.

Background

Settlements with Visa and MasterCard. The media releases announcing the prior settlements with Visa and MasterCard are available on the Commission’s website www.comcom.govt.nz under Media Centre/Media Releases

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, the retailer or service provider that has incurred the interchange fee is not allowed to recover the fee from the cardholder, so must average out the cost of that fee across all of their sales. This increases the cost of every item or service sold by businesses which accept Visa or MasterCard. All customers of those businesses bear that averaged fee, regardless of whether the customer pays by credit card, cash, EFTPOS or another payment method.

Figure of Flow of Payments in a Credit Card Transaction (see above)

Credit card usage in New Zealand. Transactions on New Zealand Visa and MasterCard cards totalled $25 billion in 2008. (NB: This figure covers transactions made anywhere in the world, but the Commission’s action concerns only payments made in New Zealand.) In 2004 there were approximately 2.1 million Visa cards and 900,000 MasterCard cards in use in New Zealand. In 2004 Visa had 61 per cent of the New Zealand credit card billings and MasterCard had 29 per cent of the market.

Relevant sections of the Commerce Act. The proceedings are brought under sections 27 and 30 of the Commerce Act 1986. Section 27 prohibits contracts, arrangements or understandings that substantially lessen competition. Section 30 prohibits price fixing, which is when people or businesses that are in competition with each other agree to control, fix or maintain the prices for the goods or services that they supply. Price fixing is deemed to substantially lessen competition under section 27 of the Commerce Act.

Penalties. The Commerce Act provides for penalties for price-fixing of up to the higher of $10 million per breach, or either three times the commercial gain resulting from the breach or 10 per cent of a company’s turnover.

International action on interchange fees. Interchange fees have been scrutinised by many international regulatory agencies. In 2003, the Reserve Bank of Australia moved to regulate the level of interchange fees, reducing the fees over time from 0.95 per cent of transaction value to less than 0.50 per cent. Public and private competition enforcement actions have also been brought in respect of interchange fee arrangements in numerous jurisdictions, including the United States and the UK.

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