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The History of Payment Cards in New Zealand

New Zealand’s domestic payments landscape increasingly looks like the global western average - Visa and Mastercard dominate both in person and online transactions. There’s nascent open banking, cash is rarely used and cheques have been phased out. The exception is EFTPOS, a domestic debit debit network from the 1980s. What makes EFTPOS interesting and unlike any other system around the world is EFTPOS has zero marginal transactions fees.

How we got here

Spelunking through digitised newspaper archives1 establishes a timeline. Credit cards arrived in the early 1960s in New Zealand with Diners’ Club, following by American Express. They gain modest success - The Press reporting Diners’ Club as the largest with 28,000 members in late 1977.

In October 1978 BNZ started to issue Visa cards - possibly the last in the western world. Unlike everywhere else BNZ offered debit cards at first, with planned credit facilities arriving later. Immediately the NZ Retailers’ Federation began a campaign against credit cards. The issue - merchant services fees - a small percentage fee on each transaction (1.5-5.5% at the time) which is split between parties in the card scheme. Big shops like department stores, which had a system of customer accounts derived substantial profit and market power from extending credit to customers directly2.

Complaints were made to the Examiner of Commercial Practices, resulting in an investigation which lead to this 1980 Commerce Commission inquiry [PDF].

The inquiry is to establish whether bank cards cards should be added to the list of ‘examinable trade practices’ under The Commerce Act of 1975. This set of papers from the Legal Research Foundation provides helpful colour on what that means:

It is important to bear in mind that it is not an offence per se to carry on one of the listed trade practices. Such practices are, however, examinable and there are extensive powers of investigation into them. Ultimately the Commerce Commission is empowered to make orders prohibiting the continuance or introduction or repetition of any of the listed trade practices which are found to be contrary to the public interest.

Here are some highlights:

The banks maintained that the extra cost to be borne by the merchant, through paying the charges, was more than offset by the increased sales […] the service would substitute, either in whole or in part, for other costly services currently provided by stores. Examples given were “in-house” credit, and security costs attendant on the risks of holding cash, etc. In the case of a smaller retailer, the cards would constitute a marketing tool, allowing that store to compete more effectively.

The Commission recognises that all extra services provided by stores to attract customers, be it by means of free delivery, distinctive packaging, advertising, free parking and so on, have a cost, and agrees with one BNZ witness, Dr R. W. Johnson, who stated “The costs of all extra services are necessarily covered in the selling prices of the retailers’ merchandise”. It seems, to the Commission, inescapable that costs and prices must increase in relation to the service itself, no matter how infinitesimally.

It is not necessarily an answer to say that customers are at present totally free to elect to use or not use the cards. The future may reveal an incidence of “leverage”, or a pattern of inducing customers to move to “extended credit” more costly than overdraft or personal loans, or the much canvassed “domino effect”.

The retailers were concerned at “leverage” being exerted on their members to take the cards.

It may be that the best way of dealing with the present situation would have been to grant a kind of provisional approval, that to be then reviewed by the Commission after a period of time or the occurrence of some event or events. However, such a power is not vested in the Commission by its Act.

What has been proved to the Commission’s satisfaction is that the costs to the banks for services to their customers will increase, and that the prices to be charged to customers for certain services may also increase, as a direct effect of the introduction of the practice of issuing bank cards.

The report goes on to conclude

the balance of probability indicates that the bank-based credit card systems could give rise to the kinds of mischief which are designated in Part II of the Act, … This leads the majority to the opinion that it should make a recommendation pursuant to section 23(1)(n) which, if adopted, would have the effect of adding such systems to the list of categories of examinable trade practices

It’s fascinating to read with the benefit of hindsight. It should also be stressed that the report’s authors wrote it with the benefit of hindsight too - it had been more than two decades since the predecessor to Visa had launched, and the 1960s saw it spread to Canada, the UK and Europe along with the launch of what became Mastercard. The report is quick to dismiss overseas experience, lingers on nonsensical issues and denies agency to any party except the banks.

Even when gesturing towards a ‘wait and see’ approach, it’s dismissed as not having a mechanism to provisionally approve - everything which is not allowed is forbidden. There’s little doubt that’s what the report’s authors intended - despite the circuitous route. One thing the report is sure about is that credit cards will raise prices, which is specified as being contrary to the public interest in the Commerce Act of 1975. Making credit cards examinable would enable the Examiner of Commercial Practices to start a new investigation into the harms of credit cards and if found contrary to the public interest, prohibit them altogether. The Examiner of course being the individual which had already found sufficient harm to establish the committee to write the report. It’s hard to see this is anything other than a de facto ban.

Luckily, for New Zealanders who engage in commerce, when presented to the Minister of Trade, he declined to follow the recommendation, preferring to wait and see how things develop, stating “Evils that were thought to be in bank cards and credit cards have not been shown to be there”.

Despite the opposition, credit cards gained popularity. In 1979, National Bank introduced Visa credit cards, while Australian banks launched Bankcard3. All of these cards spread across New Zealand incredibly fast, in August of 1980 it was reported NZ had 250,000 Visa card holders, 270,000 Bankcard holders and 51,000 Amex members, while New Zealand’s population was just over 3 million. There was of course grumbling, with fights over surcharges, with service stations taking particular issue. It was the future - it was 1980s currency.

A better way to pay

The process of using one of these cards was entirely manual. A merchant would use a card imprinter (also called a Zip-Zap machine or knuckle buster) by placing the customers card on one of these machines, under a carbon paper form. By running the sliding component back and forth the embossed numbers of the card were transfered to the paper. There was a copy for the merchant, a copy for the customer and one for the bank/card scheme4. Merchants would send the card scheme copy away and then would receive payment. Merchants would keep a list of bad card numbers and check them, and large transactions meant a call to the bank to authorise it.

EFTPOS - Electronic Fund Transfer at Point Of Sale - changed all of that. An electronic terminal with a connection to the bank (through a phone line) allowed real time settlement of funds. This all but removes credit risk entirely meaning you could give the cards to every customer and every merchant still knows they will definitely be paid. Terminals were connected to Databank which handled settlement and coordination between the banks, a natural extension from its role processing cheques. The downside was the electronic terminal rental and the Telecom connection fees - around $136/month in 1985. The program started with with a single Shell service station5, and expanding to other retailers, mainly service stations and liquor stores. Like every other payment card introduced into New Zealand, EFTPOS saw rapid adoption. At the end of an 8 month pilot, there were only 81 retailers limited to Auckland and Wellington, but had already processed $1 million across 55,000 transactions. By December of 1986 there were 1,000 terminals doing 20,000 transactions with an aggregate value of $500,000 every week - without a single customer dispute.

In 1987 Trust Bank launches EFTPOS for its customers. As Trust Bank wasn’t a member of Databank, their EFTPOS system was incompatible with the trading banks’ Quick Smart EFTPOS network and required each merchant to have a second terminal to accept EFTPOS from Trust Bank customers’. Trust bank had a large consumer base (previously had a government guarantee making them essentially riskless) but few merchant customers (by regulation of the Trustee banks). In order to quickly ramp up card usage Trust Bank’s general manager, Don Brash6, announced a 25c payment to the retailer for every Trust Bank EFTPOS transaction they processed. This bold strategic move didn’t exactly please the trading banks - with Westpac’s electronic banking manager stating “there’s no free lunch”. From Trust Bank’s perspective there might just have been: firstly, since it wasn’t a Databank shareholder, their marginal cost of cheque processing was likely higher. Second, the faster their EFTPOS network gained traction the better their negotiating position with the trading banks in talks about making the networks interoperable.

Crisis hits

In October of 1987, global financial markets crashed - Black Monday being the single largest daily drop in history. This reverberated around the world, and resulted in a particularly deep and prolonged recession in New Zealand. Cheques were expensive for a bank, they were table stakes to be a functional bank - whereas EFTPOS was nice to have, but unnecessary. As banks looked to reign in spending, maintaining the EFTPOS system became unappealling.

BNZ is the first to break suddenly announcing it’s pulling out of EFTPOS on 13th of September 1988, citing costs 40% higher than cheques and with only 5% of customers using the service. Westpac follows as does ANZ. Westpac changes its mind and actually buys the EFTPOS system from Databank and sets up a joint venture with the National Bank. This joint venture pushes ahead to integrate the Trust Bank network and credit cards into a single terminal. In mid 1989, this starts to become a reality, with Trust Bank and ASB entering the joint venture. This joint venture was known as Electronic Transaction Services Limited (ETSL), which later became Paymark. In 1991, BNZ reconsiders its stance on EFTPOS and joins ETSL. ANZ ended up developing its own EFTPOS network - which was fully interoperable with ETSL and formed EFTPOS New Zealand.

EFTPOS Dominance and slow decline

EFTPOS comes to dominate NZ retail spending, peaking in the early 2000s. Then very little of anything happens with EFTPOS - from 2005 banks begin rolling out Visa/Mastercard debit cards, which use EFTPOS in person within NZ and the card scheme online or overseas. Contactless payments arrive, which is always routed over the card scheme, bypassing EFTPOS entirely. Building on contactless payments Apple Pay launches in 2016. While Paymark launches Online EFTPOS in 2016 - which despite the name is unrelated to the EFTPOS cards and is a form of proto-open banking.

In 2012 ANZ sold EFTPOS New Zealand to Verifone (a French company, since purchased by American private equity). In 2018 Paymark is sold to the French company Ingenico (which was later purchased by Worldline - also French), leaving NZ banks with no stake in the future success of EFTPOS.

The strength of EFTPOS - zero marginal cost payments - is its greatest weakness. The revenue for EFTPOS is from a monthly connection fee that merchants pay to their EFTPOS network, usually bundled with terminal rental. The fees are around $15 to $25 per terminal per month. Therefore the incentives for the EFTPOS networks are to keep EFTPOS significant enough to justify a merchant continuing to pay the fee. In contrast the card schemes have incentives carefully designed to align everyone’s incentives to increase payment volume. A small percentage of each transaction is divided between the participants which aligns incentives of every party to facilitate the transaction. The merchant services fee is split between the scheme (Visa etc), the acquiring bank (the bank the merchant uses) and the issuing bank (the customer’s bank), with the issuing bank often returning some portion of their revenue to the customer in the form of rewards or insurance. These fees also enable zero liability guarantees. EFTPOS has no mechanism for chargebacks, with banks refunding as a gesture of goodwill. EFTPOS has stagnated because there’s little incentive to improve the technology or customer experience. While Worldline demonstrated contactless EFTPOS in 2023 it’s yet to launch, and it seems unlikely that it will be available on mobile platforms without regulatory intervention since there isn’t the revenue to go around.

There is a push in New Zealand to follow the EU and dramatically reduce merchant services fees through regulation. The European model is a reasonable equilibrium, but there are tradeoffs. By pushing the card schemes to operate closer to EFTPOS, we shouldn’t be surprised by outcomes closer to EFTPOS.

Footnotes

  1. It’s just the Christchurch newspaper The Press available online from this time period, thanks to the Christchurch Libraries and the National Library digitisation effort detailed here ↩

  2. They were well aware of the threat that a general credit card posed - this 1960 advertisment for Hay’s department store illustrates with their ‘credit card’. ↩

  3. Widely reported to be 1983, but it’s October 15 1979, making the front page of The Press a few days later. ↩

  4. I am old enough to have seen this exactly once in my life and it was so unusual the taxi driver operating it managed to chew up the card and broke the magnetic stripe. Naturally this was at the airport before an overseas flight. ↩

  5. I’m yet to find the exact location - if you know, get in touch! ↩

  6. Yes - Don Brash - who very graciously answered some questions I had while researching this period. ↩