Is there an easy fix to card surcharge problem?

Could redirecting point-of-sale systems so that contactless payments go to eftpos transactions, rather than Visa or MasterCards, be the answer to New Zealand's surcharge worries?

While Australia has moved to ban credit card surcharges, plans have stalled on this side of the Tasman.

The Commerce Commission has introduced limits on the interchange fees that can be charged on credit card transactions but so far the impact on consumers has been muted.

Organisations such as Consumer NZ are still calling for a surcharge ban, because they do not think the reduction in fees will be passed on. Retail NZ has called for a full investigation to determine what sort of surcharge cap might be appropriate for businesses to charge to cover their costs.

But David Cunningham, chief executive of Squirrel, said he had prepared a submission to the Reserve Bank's modernising retail payment systems consultation, arguing that there was an easy fix.

"When you tap your card, it goes through Visa or MasterCard. That is criminal in my mind. It should go through our eftpos network, which is a fraction of the cost, a fraction of the cost. It gets rid of this whole surcharging thing."

He said it would save New Zealand businesses $100 million in fees if people could be directed to eftpos instead.

"Tap payments that aren't credit should be routed through the eftpos system rather than the Visa or MasterCard system. And that will create efficiency for New Zealand … and it can be implemented in months."

Peter Hansen, general manager of Eftpos New Zealand, said it was possible but not simple.

"It's very complicated and would require a lot of change across multiple industry participants. At the very least it would require a combination of regulatory and/or industry agreement on changes to current routing rules for card transactions, and technical changes at terminal, switch and card issuer level to support the different card acceptance profile."

He said because eftpos transactions require a PIN, while contactless payments below $200 do not, even if transactions were rerouted through the eftpos system they would decline.

"To solve that, we would need to either prompt for PIN on all contactless transactions, requiring terminal development and impacting the consumer benefit of contactless, or get issuers to agree to new transaction types that can be authorised without PIN, which requires switch and issuer development and increased risk for the issuer, as well as change routing rules at a processing level.

"And even then it wouldn't necessarily solve for mobile wallets that use a card token instead of a card number and include other costs - Apple charge fees per transaction - that the current eftpos commercial model doesn't currently support."

Julia Nicol, head of public affairs for Paymark said the main hurdles were rules set by international card schemes.

"Banks and merchants are bound by these rules so they can't just decide to change it. In some other jurisdictions like Australia, US, Europe and Singapore merchants can choose to use either a local processor or the international card schemes.

"In NZ, how the transaction is processed depends on the way the bank set the card up, the way customer chooses to pay and the payment options available on the terminal."

Nicol said a single debit card could be processed two ways in New Zealand. "Which way it goes is decided by scheme and industry rules, not by the merchant, not by the consumer, and not by any technical constraint."

When a card was tapped, it had to go via the international schemes, she said. When it was inserted or swiped, it was settled by the merchant servicing bank at materially lower cost.

"There is no security, fraud or cryptographic reason for the difference. Least cost routing (LCR) or merchant choice routing means giving the consumer and/or the merchant the choice which network it wants to use. Here in New Zealand, this can be enabled at the terminal or, similarly to Australia, 'dual-network' cards could be issued, allowing consumers to choose how they want their contactless transactions to be routed."

She agreed businesses could save well over $100m a year if they could route contactless debit cards locally.

"This estimate does not account for the change in consumer behaviour that would likely result from the ability to access LCR through contactless, rather than being obliged to access it through the cumbersome insert and swipe method.

"The Commerce Commission could require it by issuing an access standard under the Retail Payment Systems Act. For example, Visa's rulebook already contains a payment system selection rule for Australia, Europe and the United States; New Zealand is simply outside its scope."

Drew Franklin, associate dean at the University of Auckland business school, said he expected Commerce Commission limits on interchange fees to eventually bring the costs down for shoppers.

"The extent to which consumers benefit depends on how those savings are carried through the system - through two main stages. Banks and payment providers need to reflect lower interchange fees in what they charge businesses, and businesses then need to reflect those savings in surcharges or prices. Because interchange is only one component of the overall payment fee, we'd need to look at the total cost businesses face before knowing how much pressure this might have on downstream pricing. Lower fees are a useful start, though. The test is whether the savings reach the checkout, so to speak.

"This is a familiar or similar argument around structural separation in supermarkets, so I think these interventions are rather complementary, as well as the calls for more competition in the payments market. Fee limits and structural reform should work together - caps reduce one component of payment costs, while opening the payments system to independent competitors gives retailers alternatives and puts pressure on providers to lower their overall fees. Together, these changes should lower retailers' payment costs and give them more scope to reduce surcharges."

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