3 Jul 2023

Explainer: How do Paywave charges work?

From Checkpoint, 6:07 pm on 3 July 2023

Contactless payment methods like PayWave are fast becoming the norm at the counter.

But for some, the convenience of waving a card is outweighed by the extra charges - sometimes as much as 4 percent on top of a bill.

The Commerce Commission is starting to regulate the industry and has so far approached 12 organisations that have been adding a surcharge that is too high.

These days, a cup of coffee could set customers back up to $7 but it could be hard to judge the final price when there was an extra charge tacked on at the last minute.

Mount Eden shopper Lucia Steadman could see the impact on her bank statements.

"It's very little, but at the end of a week or a month, it would add up quite considerably," she said.

"It'd probably be in the $20-30 range. That's a few coffees for me or a couple of drinks out. I prefer to spend my money that way."

Steadman said she was never in so much of a rush that she could not stop to insert her card and punch in her pin number to avoid PayWave surcharges.

It was a matter of principle for her.

"It is my money, and it's there, available. I shouldn't be paying any sort of surcharge, interest, or anything on it."

Charles Fairbairn was also prepared to forsake a bit of convenience.

"I'll be resolved to save that money, and when the prompt comes up on the screen, I'll look at it and go, 'No'.

"I'm determined to go through the manual part of it, even though it's an extra bit of handling."

But for others, Covid-19 lockdowns and concerns about touching contaminated surfaces had made PayWave and PayPass part of their routine when paying.

Mexicali store manager Cameron Wise said customers' habits had changed.

"People using regular credit or debit cards, that's actually the least popular. I'd say it goes PayWave, cash, cards."

Mexicali was a chain that absorbed the cost of its PayWave fees rather than passing it onto customers.

"It feels more convenient to them; it feels like we're not taking something extra. They're paying for their food, and that's it."

But many smaller businesses with smaller margins may not feel they have a choice but to pass the fees on.

Across the road at the Stop N Save Superette, Daven Kumar charged 2.5 percent extra for tap-and-go purchases, meaning a $4 bottle of milk could actually cost $4.10.

But he said none of the surcharge spilled over into his bank account.

"In the beginning, people who didn't know thought that we charged the money, but it's not us, it's the bank that charges the money."

An example of “appropriate surcharging” laid out by the Commerce Commission.

An example of “appropriate surcharging” laid out by the Commerce Commission. Photo: Supplied / Commerce Commission

Most banks who responded to Checkpoint said they did not make any profit from the payments and were just passing on their costs.

ANZ charged merchants a maximum 0.7 percent for contactless debit payments, a fee they said "covers the cost of the transaction to the bank" and its "investment in digital and fraud initiatives".

Westpac and BNZ charged about the same.

Credit cards came with a higher merchant fee of about 1.5 percent, while international credit cards came with an even higher fee of about 2.5 percent.

But most stores only had one terminal, and therefore one surcharge, to cover all these forms of payment. 

The Commerce Commission said this combined surcharge should be a weighted average of all fees, so if most customers were using contactless debit rather than credit, the charge should be lower.

However, the commission said some of the surcharges in stores were more than 4 percent - well above the highest merchant fees charged by banks.

Regulation Branch manager Nick Russ said in a lot of cases, even 2.5 percent was too high.

"There are two or three things that could be happening if someone is charging 2.5 percent," he said.

"They could happen to be using a payment provider that charges that high level of fee. We would encourage those merchants in those situations to shop around for a better deal.

"The merchant may believe that their fee is 2.5 percent, but due to not enough transparency from the provider, they might be overcharging for it inadvertently without realising.

"Or they might be charging in excess of their costs."

As of November 2022, the interchange fees set by companies like Visa and Mastercard had been capped at 0.2 percent for contactless debit and 0.8 percent for credit transactions.

The Commerce Commission expected these limits to drive the overall merchant fees down.

 Westpac NZ general manager of product, sustainability, and marketing, Sarah Hearn, agreed.

"We introduced a simplified merchant service fee structure for small businesses in October 2022, in advance of the Commerce Commission legislation capping domestic interchange rates in November," she said.

"This includes the option of a flat fee of 0.69 percent on contactless debit transactions.

"We believe this is leading to cost savings for the majority of our small business customers."

Commerce Commission educating retailers first

Since November, the Commerce Commission had received 96 enquiries about excessive surcharges and had approached 12 merchants to set out their expectations.

Russ said it was rare for retailers to knowingly overcharge customers, and the commission was taking an educative approach for now.

"We've had some positive responses from a number of merchants who have rethought their surcharging and [this has] resulted in it reducing."

But the commission also had powers of enforcement including fines for businesses that continued to overcharge.

On Mount Eden Road, Circus Circus cafe manager Nixon Sherchan applied a surcharge of 2 percent to PayWave purchases, which he said was a rough average of all the fees he was charged.

"Eighty percent of the customers say, 'Hey, I don't have time to do it'.

"Some people pay with their Apple Watch -- they're always on the run.

"But I've also seen people going, 'Oh, there's a surcharge, I'm not going to do it. I'll pay with a different card'."

'One of least efficient' payment systems

David Cunningham, head of mortgage company Squirrel and a former chief executive of the Co-operative Bank, said payment fees simply did not have to be this high.

"We've gone from probably the most efficient payment system in the world, with Eftpos in New Zealand 20 years ago, to one of the least efficient ones."

In the 80s and 90s, when New Zealand introduced Eftpos, the massive scale of the infrastructure ensured much lower fees for merchants, he said.

The move away from this domestic network towards the international Visa and Mastercard networks was where the higher fees came into play.

But Cunningham said New Zealand could look to its neighbours across the ditch for solutions.

Merchants in Australia could opt into a practice called Least Cost Routing, meaning contactless debit payments were automatically channelled through the cheapest network, which in many cases was Eftpos.

"The answer is to go back to the Eftpos network being the primary way payments are made in New Zealand," Cunningham said.

The Commerce Commission said it was looking into a range of solutions, including potentially implementing further caps on merchant fees.

It wanted to remind customers they should always have the choice to swipe or insert and avoid surcharges altogether.