Retail Payments System Act 2022
The Retail Payments 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 law aims to reduce merchant service charges on credit and debit transactions by capping interchange fees and confers oversight functions and powers of intervention over the retail payment system to the Commerce Commission (Commission). The Act received Royal Assent on May 13, 2022 and the majority of the provisions came into force after receiving Royal Assent.
In this article, we set out the legislative background to the Act, summarize the key provisions of the Act, and highlight some of the key consequences of breaching the Act.
If you would like help understanding how these changes might affect you, or if you need advice on payments regulation, 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 is concerned with the transmission, settlement and clearing of financial transactions between consumers and merchants in exchange for goods and services.
Other parties involved in these transactions include an issuer (the consumer’s bank), an acquirer (the merchant’s bank), a card scheme (entities that develop payment products and establish the rules of the scheme), and a switch (the infrastructure that sends transaction information to the issuer and acquirer, noting that schemas can also perform switching functions).
Merchant service fees are payments a merchant makes each time a transaction takes place and can be made up of several different types of fees (including interchange fees, switching fees and plan fees) . Interchange fees are paid by the acquirer to the issuer to cover the cost of payment processing and any markup. Card schemes do not receive interchange fees – instead, they receive fees from issuers and acquirers and set a range of interchange fee caps that issuers can charge acquirers.
The Department for Business, Innovation and Employment (MBIE) noted that the interchange fee “is generally the largest component of the merchant service fee”. An interchange fee is generally 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 delivering efficient economic outcomes following merchant concerns about rising costs of electronic transactions (in light of developments technologies and regulatory developments abroad). In October 2016, MBIE announced a public consultation and published an accompanying document outlining five key issues identified from its study of the retail payment system.
After a period of stakeholder consultation, MBIE released another public consultation document in December 2020 which noted that New Zealand’s merchant service charges were higher than in Australia and the UK (where interchange fees were regulated) and offered options to regulate merchant service fees. For a complete overview of the consultation and policy development history, please see the MBIE Retail Payments System web page.
In April and June 2021, Cabinet agreed to establish a new regulatory regime to reduce interchange fees allowing the Commission to regulate and intervene directly in the retail payment system. Subsequently, the Retail Payments System Bill (Bill) was introduced in Parliament on October 11, 2021.
Overview of the Act
In a press release, the government noted that the law would “help reduce fees charged on credit and debit transactions” and “save New Zealand businesses around NZ$74 million a year”.
The law aims to achieve this fee reduction and “promote competition and efficiency in the retail payment system” in three main ways:
- Designated Networks – the Act allows retail payment networks to be “designated” for regulation and defines certain initial designated networks to which initial pricing standards apply
- Front-End Fee Standard – the law establishes “front-end pricing standards” which aim to reduce merchant service charges by capping interchange fees
- Commerce Commission – the Act grants broad powers and functions to the Commission to regulate and oversee the retail payment system.
Designation of retail payment networks
Under the law, the Commission can recommend to the Minister for Commerce and Consumer Affairs that a retail payment network be “designated” for regulation (following a prescribed consultation process).
By law, 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 duties under the Act that will apply to designated retail payment networks (as discussed below).
Initial pricing standard
The initial fee standard sets a cap on interchange fees and comes into effect six months after the date of Royal Assent.
During the first reading of the bill, Minister David Clark noted that “the initial measures target card products issued by MasterCard and Visa as they cover the lion’s share of the retail payments market”.
The law introduces the following initial pricing standards for the MasterCard and Visa networks:
- Interchange fees for credit card transactions are capped at 0.8%, consistent with Australia
- Interchange fees charged for online debit card transactions are capped at 0.6%
- Contactless debit card interchange fees remain at their current levels of 0.2% or less, and for swiped and inserted debits, they remain at 0%.
Commerce Commission as regulator
Under the Act, the Commission has broad regulatory, supervisory and enforcement powers:
- The law allows the Commission to issue “grid standards” which can be applied flexibly either: to all; a class of; or an individual:
- designated network
- participant or
- The Act establishes criteria and a process for issuing these network standards. Network standards can address issues such as information disclosure, pricing principles and fee limits, pricing methodology and access
- The Commission may direct operators of a designated network to establish or modify network rules
- The Commission may establish standards which impose on merchants the obligation to ensure that payment surcharges for payment services do not exceed the cost to the merchant of the payment services
- The Act also gives the Commission various supervisory and investigative powers consistent with its powers under the Commerce Act 1986 (such as requesting information).
Consequences of violation
Courts can make monetary penalty orders for certain contraventions of the Act. The amount of the penalties depends on the nature of the contravention.
The maximum penalty for breaching a charging standard is NZ$500,000 for an individual and in all other cases NZ$5 million. There are also different monetary penalties for other violations such as violations of an information disclosure standard or a merchant surcharge standard.
The law also empowers the court to take other actions such as ordering compensation and granting injunctions.