Credit card reward schemes see poorer households subsidise the well-off

Poorer households in New Zealand are subsidising higher-income households to the tune of $59 million a year through credit card reward schemes, an issues paper from the Ministry of Business says.

The paper estimates the total cost of merchants increasing their prices to fund rewards for credit card users is $187 million dollars a year. The total additional cost to the economy of the current system is put at $45 million a year.

Credit cards make up 42% of transactions by value, 36% of transactions are through eftpos, 15% by traditional debit card and 7% by contactless debit card. The report notes that New Zealand has the lowest proportion of cash in circulation compared to the size of its economy of anywhere in the world.

The report notes that merchants in New Zealand appear to pay higher fees to accept payment via credit card than merchants in some overseas countries, with fees roughly comparable to the US and Canada. Fees are significantly higher than in the EU and Australia, where they are regulated.

It also warns that similar dynamics are starting to emerge with debit cards, with contactless and online debit card use rising from 2% of transactions two years ago to 15% today. It estimates that fees to merchants could rise by $216 million a year if contactless transactions rise to 60% of debit payments.

Smaller merchants are also paying more, the report says. "There appear to be systemically higher costs placed on smaller merchants to pay for the processing of retail transactions," with interchange fees sometimes two-and-a-half times the rates for the largest merchants.

The paper, which is out for consultation, says the ministry believes further investigation is needed into the costs and benefits of regulating interchange fees on credit card transactions. It also proposes looking at whether eftpos, which doesn't charge fees, can be made into a sustainable alternative to debit products and whether the entire system should be viewed as a utility.

Industry lobby group Retail NZ welcomed the paper. "Fees in New Zealand are continuing to increase while in other comparable jurisdictions, they are going down over time," said Greg Harford, general manager public affairs. "Costs are rising rapidly as customers increasingly transition from traditional eftpos to contactless debit transactions."

Bankers' Association chief executive Karen Scott-Howman took issue with the report's assumptions.

"It's not correct to say businesses will always pass on merchant service fees to consumers through the price of goods and services. It's up to individual businesses to decide how they set their prices and there are likely to be many factors they will consider." 

Payments NZ declined to comment.

(BusinessDesk)