The Retail Payment System Act 2022 (the Act) establishes a new regulatory regime to govern New Zealand's retail payment system and entities involved in the retail payment system (such as merchants, banks, non-bank merchant acquirers and card schemes).
The Act seeks to reduce merchant service fees on credit and debit transactions by capping interchange fees and confers monitoring functions and intervention powers over the retail payment system on the Commerce Commission (Commission). The Act received royal assent on 13 May 2022 and the majority of the provisions came into force upon receiving royal assent.
On 7 September 2022, the Commission released draft guidance on the initial pricing standard (IPS Guidance) and set a deadline for submissions on this document of Wednesday 5 October 2022.
In this article we set out the legislative background to the Act, summarise the main provisions of the Act, highlight some key consequences of contravention of the Act, and summarise the draft IPS Guidance.
If you would like assistance in understanding how these changes might impact you, require advice on payments regulation, or would like assistance in preparing a submission on the draft IPS Guidance, please contact a member of our financial services regulation team.
What is the retail payment system?
A payment system is the arrangement that allows entities to transfer funds by facilitating the movement of payment instruments such as cash and electronic payments. A retail payment system relates to the transmission, settling and clearing of financial transactions between consumers and merchants in exchange for goods and services.
Other parties involved in such transactions include an issuer (the consumer's bank), an acquirer (the merchant's bank), a card scheme (entities that develop payments products and set system rules) and a switch (the infrastructure that sends transaction information to the issuer and acquirer, noting that schemes can also perform switching functions).
Merchant service fees are payments that a merchant makes each time a transaction occurs and can be made up of several different types of fees (including interchange fees, switching fees and scheme fees). Interchange fees are paid by the acquirer to the issuer to cover the cost of processing payments and any profit margin. Card schemes do not receive interchange fees - instead, they receive scheme fees from issuers and acquirers and set a range of interchange fee caps that issuers can charge acquirers.
The Ministry of Business, Innovation and Employment (MBIE) has noted that the interchange fee "is generally the largest component of the merchant service fee". An interchange fee is commonly described as a percentage of the value of a transaction.
In February 2016, the Government asked MBIE to examine whether New Zealand’s retail payment system was producing efficient economic outcomes following merchant concerns about rising costs for electronic transactions (in light of technological developments and regulatory developments overseas). In October 2016, MBIE announced a public consultation and released an accompanying issues paper setting out five key issues identified from its study of the retail payment system.
Following a period of stakeholder consultation, MBIE released a further public consultation paper in December 2020 which noted that New Zealand's merchant service fees were higher than Australia and the UK (where interchange fees were regulated) and proposed options for regulating merchant service fees. For a full outline of the consultation history and policy development please see MBIE's retail payment system webpage.
In April and June 2021 Cabinet agreed to establish a new regulatory regime to reduce interchange fees enabling the Commission to regulate and directly intervene in the retail payment system. Subsequently, the Retail Payment System Bill (Bill) was introduced to Parliament on 11 October 2021.
Overview of the Act
In a media release, the Government noted that the Act would "help lower the fees charged when credit and debit transactions are made" and "save New Zealand businesses around NZ$74 million a year".
The Act seeks to achieve this reduction in fees and "promote competition and efficiency in the retail payment system" in three key ways:
- Designated networks - the Act allows for retail payment networks to be "designated" for regulation and sets out some initial designated networks to which the initial pricing standards apply
- Initial pricing standard - the Act sets "initial pricing standards" that seek to reduce merchant service fees by setting a cap on interchange fees
- Commerce Commission - the Act confers broad powers and functions to the Commission to regulate and monitor the retail payment system.
Designation of retail payment networks
Under the Act, the Commission can recommend to the Minister of Commerce and Consumer Affairs that a retail payment network be "designated" for regulation (following a prescribed consultation process).
Under the Act, Mastercard credit, Mastercard debit, Visa credit and Visa debit are "initial designation networks" to which "initial pricing standards" that cap interchange fees will apply.
In addition to setting caps on interchange fees, the Commission also has various other powers and functions under the Act which will apply to designated retail payment networks (as set out below).
Initial pricing standard
The initial pricing standard (IPS) sets a cap on interchange fees and comes into force six months after the date of royal assent.
In the first reading of the Bill, Minister David Clark noted that "the initial measures target card products issued by MasterCard and Visa because they cover the lion's share of the market for retail payments".
The Act introduces the following IPSs for the MasterCard and Visa networks:
- Interchange fees for credit card transactions are capped at 0.8%, which is in line with Australia
- Interchange fees charged for online debit card transactions are capped at 0.6%
- Contactless debit card interchange fees stay at their current levels of 0.2% or less, and for swiped and inserted debit, stay at 0%.
On 7 September 2022, the Commission released the draft IPS Guidance and set a deadline for submissions on this document of Wednesday 5 October 2022.
The draft IPS Guidance:
- Explains the scope and applicability of the IPS
- Sets out how the Commission interprets certain key provisions of the IPS, and the information it will require to assess compliance with the IPS.
Chapters 2-4 of the draft IPS Guidance provide relevant context and background on the retail payment system and the Act.
Chapter 5 of the draft IPS Guidance states that "the designated network operators (Mastercard and Visa), and issuers and acquirers of the initial designated networks … have a principal responsibility for ensuring compliance with the IPS". This chapter sets out:
- The Commission's understanding of how interchange fees are set, charged, and processed
- Two high-level scenarios in which the IPS may be breached and the extent to which participants would be responsible for the breach.
Chapter 6 of the draft IPS Guidance sets out the Commission's approach to determining applicable interchange fee caps as well as the regulation of “net compensation”, which it sees as an "anti-avoidance mechanism" that is intended to prevent the policy of interchange fee caps being subverted by compensatory payments or other incentives.
Chapter 7 of the draft IPS Guidance sets out the Commission's expectation as to the range of information it will require in order to assess compliance with the IPS and to understand whether net compensation has been provided.
Chapters 5-7 also ask relevant queries to parties wishing to make a submission, clarifying whether the Commission's understanding is accurate and whether there are other relevant factors the Commission should consider.
Commerce Commission as regulator
Under the Act, the Commission has broad regulatory, monitoring and enforcement powers:
- The Act allows the Commission to issue "network standards" that can be flexibly applied to either: all of; a class of; or a particular:
- designated network
- participant or
- The Act sets out a criteria and process for issuing these network standards. The network standards can deal with matters such as information disclosure, pricing principles and limits on fees, pricing methodology and access
- The Commission may direct operators of a designated network to set or amend network rules
- The Commission may set standards that impose requirements on merchants to ensure that payment surcharges for payment services are no more than the cost to the merchant of the payment services
- The Act also provides the Commission various monitoring and investigation powers consistent with its powers under the Commerce Act 1986 (such as requesting information).
Consequences of contravention
Courts may make pecuniary penalties orders for certain contraventions of the Act. The amount of the penalties is contingent on the nature of the contravention.
The maximum penalty for a contravention of a pricing standard is NZ$500,000 for an individual and, in any other case, NZ$5 million. There are also different pecuniary penalties for other contraventions such as contraventions of an information disclosure standard or merchant surcharging standard.
The Act also empowers the Court to take other action such as ordering compensation and granting injunctions.