Impact of comcom chasing Credit Card MSF’s

NZ credit card interchange fees, which dictate the minimum merchant service fee (MSF), are under attack by the commerce commission. That seems to be a great thing – these days the infrastructure and transactional costs should be trivial.

The ComCom is also chasing merchant rules that prevent merchants from charging surcharges to credit card users – passing on the cost of doing business with more expensive cards (e.g. Amex and some debit cards). That is tougher to like for consumers, but it makes sense that retailers should be able to offer promo discounts for, say, Visa, and surcharges for expensive cards. It will make things really confusing though, and consumers will hate that, and dual pricing will create horrible price disclosure requirement problems.

The other issue is that credit card banks make their money from ‘revolvers’ – (those that hold (and pay interest on) an account balance each month – using the card as a loan). Lowering the merchant service fees will decrease the net present value of the ‘transactors’ (those that use the card to buy stuff but always pay off each month) even further –  already it would be much lower than revolvers. This change in relative value will increase banks’ propensity to chase and encourage balance holding customers.

Let’s do some numbers. I’ll assume the annual charges cover the card (non rewards) benefits and billing/admin costs, and have ignored default rates.

A transactor that spends $10,000 per year on credit card has a yearly revenue to the bank of $10,000 x 1.8% = $180,   which would equate to a revenue NPV (at 12%) of $650 over 5 years.

But we need to subtract from that any flybys or airmile costs. I get 1 Air New Zealand Airpoint Dollar for each 150 BNZ Gold reward points. To put that in perspective, I currently have 27,825 BNZ Gold reward points, which represents $27,825 of spending since I last redeemed points, which implies $27,825 x 1.8% = $500 of income for BNZ. If I transfer the rewards to Air New Zealand Airpoints dollars (which are worth $1 per airpoint dollar) then I get just $33.30. BNZ gets $500, I get $33.30 – so rewards points don’t really change the NPV, even if they are redeemed.

Regardless, the $650 is extremely high versus numbers I recall from the USA, where the NPV was well under US$100 for transactors. The differences would come from USA’s lower merchant fees acruing to the card holder bank (<1% I think), higher real costs (perhaps the acquiring banks take more),  far greater churn in the USA (many more card issuing banks, and they aggressively chase customers), more cards per consumer in the USA, all mitigated by a lower GDP per capita and spend per capita in New Zealand. Of course my numbers could be wrong – there is quite some guesswork going on here..

Meanwhile, a balance holding revolver that maintains a $5000 balance on their account would generate $750 (at 15%) in income per year, but that financing comes at a cost – call it 7.25% – the current OCR rate. That works out to be an NPV of $1500 over 5 years, or $1000 over 3 years.

So revolvers are worth say double or triple that of transactors. Reducing the 1.8% will encourage banks to chase revolvers more than transactors, and probably increase the attractiveness of less credit worthy debt. This in turn will decrease savings rates and increase default rates, and encourage generally bad personal banking behaviour.

Or maybe our banks are smarter than that.

A revolver would have A revolver may have an NPV of $40 in the competitive US market, but a transactor is worth perhaps $20. Overall this has a negative effect on savings rates and exposes the economy to higher downside risk, while giving a short term boost in spending by those that cannot afford it….

My reaction as a card issuer would be to lower the charges for bigger retailers, but to keep the smaller merchant charges about the same. The right thing to do would of course to publicly drop the ‘minimum’ requirement, while  holding existing contracts until roll-over time and dropping bigger retailer rates only slightly. In New Zealand you do not need a paper trail to maintain healthy margins – the oil companies have been doing this for years.

Published by Lance Wiggs


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