HomeFEATURESDip, swipe, tap – but what happens out back?

Dip, swipe, tap – but what happens out back?

Credit card processing can seem like voodoo to the uninitiated. Jai Breitnauer takes a look at how it’s done, and what you need to know.

Electronic payments are an increasingly popular way for New Zealanders to make a purchase, be it in store or online. In 2017, there were 337 card transaction made per person – almost one a day – and 69 electronic payments per person according to Payments NZ. While Eftpos, which offers payment processing at no additional cost, is still the most popular way for the consumer to pay, credit cards are swiftly catching up. In 2017, Kiwis made an average of 123 credit card payments at point of sale (POS) each, and 69 electronic credit card transactions compared to 214 eftpos transactions per person. In addition, the customer is more likely to spend more money on a credit card, with the average transaction value for POS credit at $65 in 2017, compared to $39 for eftpos in the same year. Electronic credit payment values averaged out at $2790, compared to $1305 for direct debits.

There is obviously high value in retailers accepting credit cards, but of course they come with a cost attached. Understanding the pricing, the different types of payments and how different payment processing providers work can help you maximise your profit and minimise red tape for the customer. 

What actually happens when a customer pays with credit card?

Whether you are accepting payments at a POS terminal in a bricks and mortar store, or via a virtual terminal online, the same process applies:

  1. Your customer’s card engages with your payment processing software.
  2. The software sends a request to the acquiring bank – your merchant bank – asking if it will accept the credit card payment. 
  3. The acquiring bank sends a message to the cardholder’s bank – the issuing bank – asking if they will underwrite the payment. It does this using infrastructure that is owned and maintained by the credit card company itself, for example Visa or American Express, not via the banking system. 
  4. The issuing bank either agrees to the cardholder’s payment or declines it, sending a message back to the merchant to that effect. 

This all happens in less than a second, which is quite incredible really.

Even though the customer may have left the store or moved away from the screen they ordered from, the credit card processing, er, process, is still happening behind the scenes. Even though the credit card company has authorised the purchase, it hasn’t settled yet. That happens later, at the end of the banking day, then the merchant sends its sales information electronically via its processor to its bank – the acquiring bank – who then sends it on to the various issuing banks. Both the acquiring and the issuing bank deduct fees, and the rest of the money is paid to the merchant. They could receive that money the very next day, or as much as a month after the sale, depending on what type of merchant they are and what terms the processor agreed on their behalf with the acquiring bank.

Your credit card processor enables this process to happen. Their fee might be a monthly charge that incorporates a full ecommerce platform, or it might be a small mark-up on the interchange price. Different type of businesses benefit from different charging formats. 

What do I need to consider about payment processing?

Here are some questions to ask when researching which company to use.

  • Do you accept multiple currencies? Not all payment processors are set up to process foreign currency. If you are expecting to do business overseas, it’s important to know your processor supports this and the costs are reasonable.
  • Do I need a merchant account? Traditionally, a merchant needed a merchant account in order to do business. These days, many processors offer a holding account facility and will pay out to a nominated bank account. This means it’s faster to set up, and cuts through the red tape of business plans and proof of income often needed for merchant accounts. This is great for the more flexible landscape of the start-up.
  • Will you accept a high-risk business? You may not even know that your business is high risk until you try and find a payment processor. If you deal in gambling, adult entertainment, online pharmacy, and even web design, then your business has a higher risk of chargebacks, disputes and credit card fraud. Many mainstream processors keep their costs down by avoiding these businesses, and you may need a custom option.
  • When will I be paid out? Some processors automatically pay out the next day, with others offering a same day option for a small charge. This is great for SMEs, especially microbusinesses, for whom cash flow is important for business survival. Larger volume businesses using a traditional merchant account may find they are paid bulk sums every fortnight, or even monthly, although this is changing as the more traditional providers compete with the more agile, cloud-based payment gang. High risk businesses could wait as long as two months for their transactions to be paid out, and may find 10 percent is held back as a deposit against chargebacks and fraud. 
  • What developer tools do you offer? Some payment processors offer just a simple button solution you can add to your site. Others offer a virtual terminal that fully integrates with your in-store POS. A few offer bring your own developer tools that allow for a fully customisable payment gateway solution that meets the needs of your customer and offers a seamless front and back end experience for all users. 
Westpac senior manager business payments, Shelley Powell.

Why is payment processing so expensive in Aotearoa?

You don’t have to be a maths genius to see that it costs significantly more here to process credit card payments than it does in many places overseas. 

Retail NZ’s annual payments survey shows that, for credit and contactless debit card transactions, average weighted merchant service fees are between two and three times higher than they are in equivalent markets such as the Australia, the UK and the EU.  “The reasons for this are unclear, but may reflect the unregulated nature of the market in New Zealand, and the high-cost rewards programmes offered by many banks to their customers, which are effectively paid for by the retailer” says Retail NZ chief executive Greg Harford. 

Westpac senior manager business payments, Shelley Powell notes that Westpac is working with the industry to ensure the transparency and fairness of merchant fees, but believes that overall New Zealand doesn’t get a bad deal.

“Unlike in other Western countries, debit transactions in New Zealand (made by Eftpos or by using a scheme debit card selecting ‘Cheque’ or ‘Savings’ at a terminal) incur a small monthly fee, but the transactions themselves are effectively free. When these transactions are taken into account, the average rate for New Zealand transactions is in line with the rest of the Western world.”

Roger Beaumont from the Bankers’ Association of New Zealand agrees.

“The card schemes set interchange fees for banks. Our credit card interchange fees are in the middle of the pack compared to other countries – higher than some and lower than others. Here Eftpos provides a unique difference. In Australia, for example, a form of interchange is charged on all transactions, including their Eftpos scheme, so looking at costs in isolation does not provide a like-for-like comparison.”

The way interchange fees work is quite complicated, but a quick look at the April 2019 reimbursement fees for Visa in the USA show that interchange rates for card present retail transactions is 2.10 percent + USD .10c for most products (dropping to 1.43 percent + $0.10 for some other products). In New Zealand, there are six rates ranging from 0.50 percent to 0.98 percent, correct as of July 2019. 

From that data, it certainly seems that New Zealanders are better off than their American counterparts. And yet, a quick Google shows that pricing structures in the US are on a par with, or offer a better deal than, a lot of credit card processing providers in NZ. Stripe, for example, offer the exact same price offering in both countries – 2.9 percent + .30c. Yet in the US, they could be paying 2.10 percent to Visa, while in NZ it could be as little as .50 percent.

“In New Zealand, we only offer one account type. It’s free to set up with no monthly charges, and offers a flat 3 percent per transaction charge,” says Benedict Leslie, of Australia-based processor Paymate. He admits this is slightly more expensive than its equivalent account in Australia, which is 2.6 percent + .55c per transaction. He also notes that across the Tasman, Paymate offers a variety of account types suitable for a wider range of businesses. Leslie says it’s not that processors are restricting New Zealand merchants or refusing to pass on savings, it’s about secondary costs and restrictions placed on then by their banking partners.

“Our own costs to operate in New Zealand are much higher than in Australia,” he says. “Plus, due to the need for certification from a local banking partner for things like mobile card reader devices, we are more restricted as to what services and account types we can offer in New Zealand.”

Leslie agrees that the fee structures and charges in New Zealand are a bit behind the rest of the developed world, although Paymate has now developed a good relationship with ASB, he says, and is working on a new project around unattended micropayments. Leslie feels the reasons for New Zealand’s credit card processing costs are complicated, and related to the relationship between the card schemes and the banking sector, rather than the processors.

The Bankers’ Association, of whom Visa and Mastercard are members, would not be drawn on that topic, but in a small market where a handful of banks are competing for overlapping business, it’s easy to see how a self-fulfilling prophecy of higher prices/costs could develop. 

Perhaps one of the biggest differences between New Zealand and the USA is the lack of transparency over pricing. While in the US upfront pricing is becoming more common, in New Zealand, most credit card processing service providers, be they banks or a merchant solutions business, do not openly advertise their rates. Retail NZ members are able to access a deal with Westpac which offers an acquiring fee of 0.28 percent for card present transactions.

Meanwhile, ANZ says it can’t advertise its interchange plus pricing as this is dependent on what type of business the merchant operates and what goods or services they are providing. It put my Visa and Mastercard processing rate at around 2.29 percent – this was for a bricks and mortar retail business based in Auckland taking mostly in-person credit card payments at a volume under $4000 per month.

Perhaps the answer is more regulation in the industry? This would surely provide more transparency at least. While Payments NZ was asked to negotiate with the card schemes by the Minister of Commerce and Consumer Affairs in 2017 on the quality and usefulness of information they provided, it has no explicit regulatory remit. Once again, it would not be drawn to comment on the issue, which it has now stepped back from, except to say that it did speak to Visa and Mastercard, which committed to providing a six-monthly weighted average interchange report.

In the EU, interchange fees were capped at 0.30 percent for credit cards and 0.20 percent for debit in March 2015 by a parliamentary resolution. While in Australia, limits are currently imposed by the Reserve Bank of Australia that keep most in-person retail credit card payments at under 0.25 percent, although some other payments can command interchange fees as high as 0.80 percent. However, some research has shown that these savings are not being passed on to either the merchant or the consumer.

“While some markets are regulated at lower rates, evidence has shown that regulating interchange rates can lead to a number of unintended consequences,” says Powell. “[Regulation has] limited or no benefits passed on to consumers.”

I spoke to the office of Hon Kris Faafoi, the Minister of Commerce and Consumer Affairs, about whether regulating interchange was an option. Here’s what they said.

“In April 2018, Visa and Mastercard voluntarily reduced interchange fee caps across many of their credit card products. We understand that this has led to modest reductions in merchant service fees. The Minister of Commerce and Consumer Affairs has set clear expectations that there should not be any further increases in interchange and merchant service fees.

Interchange regulation is still an option, particularly if fees were to increase again and the gap in fees paid between large and small merchants widened further. However, the government would prefer to see industry working to provide solutions that both merchants and consumers are happy with by setting reasonable fees for payments. The government is also working with Payments NZ and wider industry to promote the development of new, potentially cheaper methods of payment that do not involve the use of credit or debit cards.”

With options like Poli and Afterpay also becoming increasingly popular, perhaps New Zealand will buck the international trend and find alternatives to credit cards that streamline the payment process, and remove the interchange fee and margin altogether. 

Grater Goods.

Case study – Grater Goods

Flip Grater launched vegan deli, Grater Goods, in Christchurch in 2018. She talks to us about her experience of setting up credit card payment processing.

“We decided to go with Shopify as our ecommerce platform. I’d used them for Yumbo, my previous business, and found it was an easy template system with add-ons I could use for my lunch box subscriptions. 

Shopify has a POS app we can use on iPads instore. We also have Eftpos machines supplied by SmartPay. The two don’t link together which is a pain.

We’ve stayed with Shopify because of the integrations. It has great subscription ads-ons, links with our accounting system Xero and until recently it also linked with MailChimp, although this has now changed. The reporting and analytics are great which means I can keep a close eye on what’s happening in store even if I’m not there. 

At $80p/m subscription, it’s cheaper than most POS providers in New Zealand right now. The credit card processing is powered by Stripe. 

When I started Grater Goods, it was only an online store so it made sense to use Shopify again. Now we have a physical store and a café so we are looking to move to a system that allows paused bills/tables. Shopify is a great solution for e-tail and retail but our businesses growth and change in direction means we now need to rethink. 

This story originally appeared in NZ Retail issue 764 October/November 2019.

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