Credit-card giants facing court

New Zealand's two largest credit card companies and 11 banks and finance companies are being taken to court for alleged price fixing of a fee on credit card payments which is passed on to all consumers in price increases.

The Commerce Commission has filed High Court proceedings against MasterCard and Visa, as well as the financial institutions which are their customers, claiming the companies were anti-competitive in setting interchange fees of up to 1.8 per cent on each transaction.

The retailer is charged the fee, but cannot recover it directly from cardholders so is left to raise prices across the board to recoup the costs, leaving customers who paid by cash or eftpos to subsidise credit card users.

The action follows similar investigations into the size of the fee in Australia, Britain and the United States.

The court proceedings are against Visa International and MasterCard International, as well as Cards NZ, ASB, BNZ, Westpac NZ, ANZ, TSB, Kiwibank, HSBC, NZ Post, The Warehouse Financial Services and GE Finance and Insurance.

Visa and MasterCard, whose card transactions totalled $19 billion in 2004, said they would contest the charges.

John Albertson, chief executive of the Retailers Association, welcomed action against the fees, which he estimated cost business $350 million to $400 million a year, which meant higher prices for consumers.

He said Australia's fees were now less than half those in New Zealand, after the Australia Reserve Bank regulated for the fees to drop from 0.95 per cent to 0.5 per cent of the transaction.

"[New Zealand] fees are substantially higher than they should be in a competitive market. Intervention is well and truly due."

Retailers pay the fee but are not allowed to charge customers extra to pay by credit cards, so the cost was passed on in price increases to all customers, including those who paid by cash or eftpos.

MasterCard Australasia said the action did not reflect the vigorous competition that existed between different payment systems in New Zealand. It said MasterCard operated in the best interests of its cardholders and merchants. Visa also said its payment system benefited cardholders.

Massey University director of banking studies David Tripe was not surprised the commission had followed international trends but queried whether legal action was the answer.

"I'm not sure [the commission] has taken the right approach. What there may be a good case for is to say the fee is too high."

He said customer loyalty reward programmes could be a casualty of any clamp-down on the fee.

A spokesman for American Express said it used a different fee structure which did not include interchange fees.

Penalties for price fixing in the Commerce Act are up to $10 million per breach or 10 per cent of the company's turnover.

How the fee works

* A customer buys a meal from a restaurant by credit card.

* The restaurant's bank, Bank A, sends it to the bank which issued the card, Bank B.

* Bank B pays Bank A the price of the meal, less an interchange fee.

* Bank A pays the restaurant the price of the meal, minus a service fee.

* Bank B takes the price of the meal alone out of the customer's account.

* The restaurant has paid the interchange fee but is not allowed to recover it by adding it to the bill, so has increased all meal prices to average out the cost of the fee.

* When another customer pays cash, he or she is helping to pay for the credit card fee.

Author • More by Claire Trevett • Email Claire Trevett