Regulating the retail payments system in New Zealand, BERL submission on behalf of RetailNZ

Thursday May 11, 2017

As of 10th May 2017 MBIE has made publicly available submissions on their Retail Payments Systems Issues Paper. BERL was commissioned by RetailNZ to prepare a submission on their behalf. RetailNZ represents retailers in New Zealand.


Our submission to went as follows: We formulated the economic theory behind our identified issues, then we considered the evidence, finally we considered the policy response.


The issues we identified were: Inefficiency, Competition, Inducements and the recent introduction of contactless debit cards to the market.


We found that internationally policy makers have been quite heavy handed in response to this issue. With many jurisdictions going so far as to dictate the price that should be charged to the market. We made the case for a softer approach in New Zealand, one of increased transparency to correct for the information asymmetries between retailers and banks. And also to help inform consumers how their decision of which payment method to use affects retailers.


RetailNZ’s concerns reflected the concerns of its members – retailers. In the New Zealand payments systems market it is retailers who are charged a fee while consumers are subsidized.


The retail payments systems market is an example of a platform (or “two-sided”) market. Where there are multiple groups who want to interact with each other, but cannot unless they both belong to the same platform.


In a simplified retail payments systems market you have consumers, retailers, and the payment platform. Consumers want to spend their money on goods and retailers want to give their goods to consumers in exchange for payment. Such payment, one assumes, can only occur by way of the platform.


Naturally, firms in these markets often exhibit pricing behaviour that looks anti-competitive when viewed from the lens of textbook Econ101. Such pricing mixes include platforms seeking to charge one group of users higher prices than the other – price discrimination.


Consumers want lots of retailers on the platform and retailers want lots of consumers on the platform. The problem is, if joining the platform costs even a nominal amount why should a consumer decide (before the fact) to belong to a platform when she knows retailers will be thinking the exact same thing.


The solution to this problem is well established; the platform will charge one group of customers a fee and subsidize the other group. This pricing mix is seen as necessary in order to incentivise one group of users to use the platform in the first place, so as to attract the other group.


Of course the real world departs significantly from the simplified model presented. It includes actually an amalgamation of two platform market games.

  • One between: consumers, retailers, and the payment network.

flowchart 01

  • And another between: the payment network, consumers (as bank customers), retailers (as bank customers) and retail banks.

flowchart 02

I haven’t attempted to draw them explicitly but there are multiple flows of information and inducements between the platform and the two banks.


Included in the real world game are payments between the retailer’s bank and the customer’s bank – the “interchange fee”. These payments are interesting in and of themselves as, in theory, they exist to induce the banks to cooperate and induce the optimal number of transactions (the number that makes customers and retailers happy). This cooperation is what looks anti-competitive.


However, as we argued in the submission, and as is argued in the relevant literature: the payments between banks (that get passed on to retailers) essentially force the competing banks to act as a single bank for each particular transaction. Therefore, any attempt to control these payments serves only to reduce the number of transaction on the system. This is bad for both retailers and customers. That’s why we favoured a softer approach of increased transparency by payment platforms of what the merchant is being charged.