regulator should draft merchant fee regs – not MBIE

Lower merchant fees are on the way! Hooray.

The Government has begun a review into regulating merchant fees, which it announced last month. The Ministry of Business, Innovation and Employment (MBIE) is in charge of the review. The Honourable Dr David Clark – the new Minister of Commerce and Consumer Affairs – will advise the Government on what to do about the fees, based on what MBIE discovers.

MBIE explains why merchant fees are high in New Zealand, how it proposes to fix this, and invites any and all New Zealanders to have their say about this stuff.

MBIE also sets out ‘objectives’ for the payments system. It aims to ensure the system provides “long-term benefits for end users” (e.g. consumers and businesses) through improving competition, innovation, efficiency and fairness.

Australia and the UK both have similar objectives for their payments systems. Australia has already seen merchant fees drop and the UK is investigating merchant costs as we speak.

So, we are on the right track. Double hooray.

regulation in Australia and the UK

However, there are a number of important differences between how regulation works in those places and how MBIE proposes it would work here.

First, regulations in Australia and the UK came about because of major government reviews into the entire financial system (not just payments), which took quite a bit of time.

Second, both countries recognised the excruciatingly complex and peculiar nature of payments. Both concluded that a payments-specific regulator needed to be created, and that it would be responsible for the whole payments system (not just merchant fees).

Third, the Australian and UK reviews did not prescribe specific regulations. Rather, the specialised regulator, given the power to regulate the payments system, was also given the power to decide which payment systems should be regulated and how. Makes sense, right?

Indeed, MBIE notes that other countries usually have a “dedicated payments regulator” and asks for feedback on who should be the regulator in New Zealand. Yet, MBIE has also been tasked with proposing specific regulations itself that, presumably, the future regulator would have to uphold. Doesn’t that seem a bit odd?

It also says, rather inconsistently, that it will consider “consistency with relevant international standards and practices…”

To be clear, MBIE does great work. But it already has scores of responsibilities, such as energy markets, immigration, the America’s Cup, environmental sustainability, intellectual property, urban development, corporate governance, digital media, consumer protection, international trade, ACC, cyber security... Oh, and it is also New Zealand’s Space Agency.

Instead, the Government should direct MBIE to create a new specialised regulator, formalise objectives for New Zealand’s payments system, and develop the legal framework to make all this happen. But it is the regulator who must be given powers to develop regulations. Not MBIE.

broader than merchant fees

Moreover, if we only regulate merchant fees, another problem will rear its ugly head elsewhere. Indeed, Dr Clark has told the Government that “given the complexity of the [payments] system, there is likely no single solution… and a high risk of unintended consequences.”

Let’s not fool ourselves, the banks and credit card companies aren’t going to take this lying down. If they get less money from merchant fees they’ll just find another way to get it. They might simply change the definition of a fee so it falls outside the regulations.

As usual, the most vulnerable in our community – small businesses and poorer people – will bear the brunt of this. That conflicts with MBIE’s objective to ensure users of the payments system benefit.

Furthermore, if we don’t create a broad, duly considered regulatory framework that covers the whole payments system, other problems will arise, including in payment systems that don’t yet exist. Then we will have to go through this process again, and again. That would lead to a bolted together regulatory framework, which is never going to be as effective or efficient as policy properly thought through from the outset.

That’s not to say that the options posed by MBIE aren’t valid; but they should only be a starting point for the new regulator.

policy on a platter, perhaps

We should borrow policy from Australia and the UK. Both countries have comprehensive payments regulation regimes and have been doing it for years. The upshot? They know their stuff.

The Payments System Board (PSB), which is part of the Reserve Bank of Australia (RBA), has been the payments regulator since 1998, and its responsibilities and powers are underpinned by elegant legislation.

Fortunately, the RBA has kindly published a wealth of information about all this, including how the PSB was set up and how it approaches regulation. Not to mention the mountain of handy documents on the regulations themselves. And it’s all free! Better yet, the good folks at the RBA will probably talk to us about what they’ve done.

The situation is similar in the UK, which created the Payment System Regulator (PSR) in 2015. The PSR is also generous with information, and their people might talk to us too.

Notwithstanding Australia’s success in reducing merchant fees, much has changed in payments since it introduced its regulatory regime, particularly with technology. Recognising this, the Australian government is currently investigating whether the regime is still “promoting competition, innovation, efficiency, resilience and stability of the system” appropriately. This could mean changes to how the PSB regulates payments.

The PSR is right now looking into how much it costs UK merchants to take cards and how easy it is to switch between providers of merchant services (e.g. banks). Spoiler alert: fees are expensive and it’s hard to switch. Then the PSR will take action to fix it.

tight timeframe

The timeframe indicated by Dr Clark and MBIE is incredibly short by international standards. (There goes that inconsistency again.)

Australia and the UK took years to establish a new regulator and then introduce regulations. In contrast, Dr Clark is due to report to the Government with a “proposed general policy direction” in April this year, and plans are already afoot to “carry out a further round of consultation setting out one or more options in more detail.”

We need not take as long as Australia and the UK took – because we can learn from their experiences – but we must not rush this policy. At the very least, we should wait until Australia and the UK have finished their investigations. Neither is likely to happen before the middle of this year.

please get it right

New Zealand is in an enviable position. We have virtually a blank slate, and we can stand on the shoulders of giants. Let us not waste this golden opportunity to get it right.

I implore Minister Clark and the Government to take the same path as Australia and the UK: establish a new specialised regulator; then let it determine payments system policy and set regulations itself.

And take enough time. Nothing good ever came from policy on the fly.

Anyone can write to MBIE with their thoughts on the review (called a ‘submission’), which needs to be sent in by 19 February 2021. Go here if you would like to do that: https://www.mbie.govt.nz/have-your-say/regulating-to-reduce-merchant-service-fees/

About Rebecca

I founded the industry association Merchant Advocacy & Guidance Network (Magnet) to represent businesses and influence Government policy, to make merchant fees fairer and promote innovation in payments.

Magnet will be making a written submission to MBIE calling for the Government to get regulation right. We are consulting with our members in preparing this.

If you would like your voice heard too, hit us up here: https://magnet.org.nz/contact