Clark David; Salesa JennyRETAIL PAYMENT SYSTEM BILLIn CommitteePart 1 Preliminary provisionsHon Dr DAVID CLARK (Minister of Commerce and Consumer Affairs): Thank you Madam Chair. I rise to offer a few introductory remarks on the Retail Payment System Bill. Transactions the exchange of money for goods and services are a fundamental part of our economy. What makes these transactions possible is the retail payment system. These are elaborate networks that process different payment types and the ones we're most familiar with of course are credit debit and EFTPOS card payments. The costs of operating these networks are ultimately passed on to merchants in the form of fees and then subsequently in large part on to consumers.Today in the committee we're progressing a Labour Party manifesto commitment to lower merchant service fees and bring them into line with comparable economies around the world. The bill does this by establishing a new regulatory framework for the retail payment system. It's currently unregulated and I would note for the committee as has been noted before that New Zealand's merchant service fees are set much higher than they are in Australia and they add significant overhead for retailers who often pass these costs on to consumers through higher prices. So the outcome of this bill will benefit both small businesses and consumers. In fact a conservative estimate has the benefit to small businesses at approximately $74 million each year and as I say much of this gets passed on to consumers.Before I draw this committee's attention to some of the more notable features of the bill I'd like to acknowledge again and repeat my thanks to the Economic Development Science and Innovation Committee for its time considering this bill. They have made some suggested changes which I will touch on. The bill is designed to address certain inefficiencies which are resulting in poor outcomes for many merchants and consumers. As I mentioned before the charges merchants face for accepting certain payments are high by international standards particularly credit card and online debit transactions. It just so happens that consumers are incentivised to prefer those more costly payment methods in the current retail payment system.So competition appears to be lacking in some aspects of the market. The largest retail payment networks are dominated by a few large banks who service both sides of the transaction. They sell payment products to consumers and charge merchants for processing payments that use those products. The various participants in the payment network are often incentivised to keep fees high. Moreover difficulty accessing network infrastructure is thought to be stifling innovation and the entry of new competitors. So I expect parties in this House that support competition will be right behind the changes that we're making here.Small merchants are particularly disadvantaged in all this. They face disproportionately high merchant service fees and have limited bargaining power. On top of that because smaller retailers cannot afford to lose customers they are likely to feel they have to absorb the fees rather than surcharge or refuse certain card types. And indeed I've spoken to small businesses who feel the pressure to do just that and are reluctant to call the banks out on their pricing practices for fear of retaliatory action.The bill's purpose is to promote competition and efficiency in the retail payment system for the long-term benefit of merchants and consumers. There are broadly three ways it delivers on this promise. First it empowers the Commerce Commission to scrutinise and regulate participants in a retail payment network if that network is designated by Order in Council. The commission would have a range of regulatory tools to address competition or efficiency issues in these networks such as requiring participants to grant access to essential services or network infrastructure. The designation approach allows the regulatory regime to respond to any changes in the system such as new payment methods that may emerge.Secondly the bill will more immediately reduce merchant service fees in the MasterCard and Visa credit and debit networks. It does this through an initial pricing standard that will cap the interchange fees in these networks six months after the bill has passed. I will note now we thank some of the work that the select committee did on ensuring that that particular effect happens in the right way. Interchange fees are the largest component of merchant service fees and therefore have the opportunity to make the most material difference to the regime in the first instance. Those savings of course will benefit merchants and then may well be passed on to consumers. But it's particularly important for those smaller merchants who don't have the leverage and also those who rely on credit card or online sales.The select committee as I mentioned has helped to ensure these provisions are effective anticipating attempts to game the interchange fees by compensating card issuers because we wouldn't want to see those interchange fee caps gamed in any way that might be attempted to do that—for example compensating card issuers for reduced income through other methods. So I do thank the select committee members who have worked on that and produced a more watertight way of dealing with what are called waterbed effects as it happens.Finally the bill affords the commission some control over merchant surcharging practices to ensure they are transparent and do not exceed the actual costs to merchants. I don't view surcharges as problematic if they merely pass on costs. If nothing else it makes consumers aware of those costs of accepting certain payment types. But surcharging standards will be used to ensure consumers are not harmed by surcharging in excess of the caps and costs that are in place.When the bill was read a second time I discussed a few of the important questions raised by submitters—for example why do we target just the Visa and MasterCard types in the first instance networks in the initial pricing standard and why not American Express? As the responsible Minister I'm satisfied the House has now addressed those questions.I'd like to mention one other matter that I understand the select committee considered in some detail. Under clause 24 the commission needs to approve substantive changes to an operator's network rules. The select committee considered the practical implications of this requirement in the case of Visa and MasterCard networks whose rules are extremely complex and not confined just to the New Zealand market. In the end I understand the committee was reassured by a few observations. Whether the rules in a particular designated network are subject to this approval requirement is entirely at the discretion of the commission. I note the following: the commission must exercise this discretion in accordance with the purpose of the bill the principles in clause 4 and the criteria in clause 25. In practice I expect the commission will be selective in how it makes use of directions under clause 24. Before making any such direction the commission is required to publish its proposal and consult with affected parties. This will help it to identify any genuine practical issues.A direction requiring its approval of rule changes is just one kind of direction that the commission can make if it has concerns about the impact of rule changes on efficiency or competition. An alternative would be for the commission to require an operator to notify it of any rule changes. If a change then raises concerns for the commission it could make a direction changing the rule itself after following the same process. These directions do not have extraterritorial effect; they would only affect networks here in New Zealand.I'm confident the scope of these direction-making powers is appropriate. They're a good example of the way the bill affords the commission flexibility in finding the most targeted and effective way to intervene in the interests of competition and efficiency and similar provisions can be found in the UK's financial services legislation and in the Financial Market Infrastructures Act 2021. The commission ultimately has no interest let's acknowledge in imposing impracticable requirements whether for participants in the market or indeed for themselves and for the network itself. In any case there are good safeguards in the bill to prevent regulatory overreach.So to conclude reducing merchant service fees is a priority for the Government. It delivers on a Labour Party manifesto promise and it supports the recovery of the economy from the impacts of COVID-19. Consumers expect to be able to use easy and innovative payment methods like payWave and merchants want to accommodate these expectations but the fees as they currently stand in many categories are too high. This has been putting additional financial pressure on small businesses on small merchants in particular and we know that those costs are frequently passed on to consumers. This bill will deliver a more efficient more competitive retail payment system. It establishes a regulatory regime capable of ensuring the costs of retail transactions in New Zealand will be reasonable both in the short term but also in the future as the retail payment system evolves due to the opportunity for the Commerce Commission to involve itself as appropriate. This bill will ultimately benefit New Zealand consumers.CHAIRPERSON (Hon Jenny Salesa): Before we continue I want to remind members that we are debating Part 1 which is clauses 3 to 9 and Schedule 1.