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‘War for compromise’

Tensions between CBA and Apple have flared, not coincidentally, amid a major shift in the way Australians pay at the checkout. Smartphones will usurp plastic cards as the most popular form of contactless payment by the end of the year, the CBA hopes, and that trend comes at a cost for banks.

Whenever a payment is made through Apple Pay, a service that banks argue they basically have to provide, Apple charges an undisclosed fee for providing the hardware that turns phones into wallets. Google’s digital wallet doesn’t charge a fee to do this, but unlike Apple, it uses consumer data for its business.

The rise of digital wallets has been accelerated by the pandemic, which accelerated the digitization of finances, with the CBA reporting a 90 percent growth in digital wallet transactions in the last year.

However, this fight is about much more than Apple Pay and its associated fees.

More fundamentally, it is a fight over what business customers use when banking – the bank or the technology platform? It’s also about how the government regulates payments, one of the most critical services banks provide.

And the risk is not unique to CBA, even if it has been the most outspoken about Apple. But why is Apple considered a threat?

AirTree Ventures partner James Cameron says that while it is “a bit rich” for CBA to warn of market share given its own dominance, the critical battle between banks and fintechs is to engage customers through apps. .

“This is a battle in a bigger war: the war for compromise,” he says. “You really need to be the space that people have on their screens, which they turn to five to ten times a day.”

As Afterpay has shown, providing an elegant app-based payment service can be a way to get millions of customers out of banks. Big-pocketed tech giants could do something similar, but on a larger scale.

Evans and Partners analyst Matthew Wilson says there is a long-term risk that Apple’s popularity with young people in particular will leave banks relegated to being disenfranchised manufacturers.

“This is Silicon Valley versus the banking system. I think it has the potential to be significant because Apple is standing between the bank and the customer. “

Evans and Partners Analyst Matthew Wilson

Today, the cut Apple gets from Apple Pay itself isn’t particularly great. But for five to 10 years, Wilson says the tech giant may also allow disruptors to enter its platform.

Such a move could increase competition in banking by allowing fintechs to target younger customers in a way similar to how Afterpay uses its app to attract banking customers.

“This is Silicon Valley versus the banking system,” says Wilson. “I think it has the potential to be significant because Apple is standing between the bank and the customer. Everyone wants to own the customer, the return from distribution / network is more valuable, ”he says.

Bankers have warned of these potential risks for years, with the former NAB president Ken Henry saying late 2017 that banks could be “challenged beyond our ability to deal with the big IT platform providers.”

The difference today is that the disruption is clearly happening.

In the United States, Apple already offers a credit card (issued by Goldman Sachs) and is rsupposedly working on buy now, pay later by offering. Google last year announced a plan to offer deposit accounts, although the money will be in the hands of authorized banks.

Jefferies analyst Brian Johnson says a bigger threat from tech giants is in business lending, where tech companies like Square can use a company’s payment data to assess creditworthiness. “If you have the payment data, you probably have the best data there is on the borrower,” he says.

Charging

However, Johnson says there are also opportunities for banks with the systems to exploit the vast amount of data they have on customers.

Graham Rothwell, who heads Accenture’s Asia-Pacific payments practice, also says he’s not entirely convinced that big-tech intrusion into payments will sideline banks.

Rather, it says that the entry of the tech giants puts a premium on digital experiences and features like reward schemes.

“The ones who should be concerned are the ones who are struggling to design and create great customer experiences,” says Rothwell.

Despite the clear invasion of the tech giants into financial services, the money Apple is making in this area is still a relatively small beer for the iPhone maker.

Apple discloses revenue from finance along with “services” revenue, which also includes its Apple TV subscription service and warranties. Revenue from these activities was $ 50 billion ($ 67.5 billion) in its latest nine-month results, less than a fifth of the total $ 282 billion of company-wide revenue for the period.

The main purpose of Apple Pay is to help you sell more of your most important product – the iPhone.

Regulatory arbitration

Insync Funds Management portfolio manager John Lobb says Apple Pay allows the company to turn phones into safe substitutes for an old-fashioned wallet, but he doesn’t think a major expansion in finance makes sense for the tech giant.

“I just don’t think the financial side of things is really going to turn off the lights. [for Apple]”Says Lobb, who owns Apple shares in the funds he manages.

However, even if big tech companies don’t intend to become banks, they can expect more regulation.

So far, Apple has bypassed regulation because it doesn’t actually hold money on behalf of customers, arguing in a submission to a parliamentary inquiry that it wasn’t even a payment service or payment app. Rather, it says its application provides the “technical” architecture that enables customers to make payments with their bank cards.

But it appears that the distinction may soon become less relevant, and the regulatory gap it has been through is likely to close.

A landmark review of payments regulation led by King & Wood Mallesons partner Scott Farrell, published this week, proposed a new system that would give the Treasurer more power over payment policy, with the flexibility to regulate digital wallets. if necessary.

Banks voiced strong support, and a CBA spokesperson said that rapid technological change and new business models were clearly creating challenges for the regulatory framework. “As technology continues to transform payments in Australia, regulations must evolve to ensure that a level playing field is maintained and that strong competition leads to better outcomes for Australians and Australian businesses,” says the spokesperson.

Charging

And the power of big tech in banking seems to be something that Labor, the Coalition and the government at large can agree on.

Labor Sen. Deborah O’Neill, a member of a committee investigating digital wallets, accuses the government of taking too long to publish Farrell’s report and not paying enough attention to regulatory gaps. But ultimately he shares concerns about Apple’s power, saying it already has a “huge” share of the market.

Liberal Senator Andrew Bragg says tech giants already have a great deal of power in the economy and society, and while it’s instinctively free-market, he fears they will gain more influence over payouts.

“The pandemic has amplified the incursion of big technology into the payment system. All of this has happened outside of the normal regulatory environment, so regulatory arbitrage is taking place, ”says Bragg.

“We need to make sure Canberra is in the driver’s seat of policy, not the RBA, not Silicon Valley.”

Time may be running out for digital wallets to be a regulation-free zone. But the rivalry between the banks and the tech giants is probably just beginning.

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