Will Apple Pay win its fight against Aussie banks and retailers?

Apple is currently in a major scrap with Australian banks and retailers over its control of the NFC chip on eligible iPhones. A consortium of banks and retailers have asked the Australian Competition and Consumer Commission (ACCC) to rule that they can collectively negotiate with Apple rather than having to negotiate individually. Apple is fighting this because it says that the collective behavior would amount to “cartel conduct” and be detrimental to customers.

The banks and retailers would like to be able to deploy their own wallet apps onto eligible iPhones, but currently can’t do so because only Apple’s own wallet, Apple Pay, can access the NFC chip. This means that Apple currently controls the terms on which card issuers can load their cards onto the Apple Pay wallet. On the flip-side, Apple says that it needs to control access to the NFC chip from its own wallet due to security and user experience considerations.

Of course, not all of the Aussie banks and retailers are playing ball with each other. Of the “big four”, ANZ allows its cardholders to use Apple Pay. The other big banks don’t …Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation. And neither does Bendigo & Adelaide bank. These “big three” and Bendigo & Adelaide control around two thirds of cards on issue. However, the Australian Financial Review reported on 10 February that Macquarie Bank and ING Direct will turn on the service by March (as have 44 other smaller institutions). So perhaps the tide is starting to turn?

In reality, the “big three” are scared of the power that Apple possesses via its control of the wallet, and Apple’s ability to influence which cards are loaded into those wallets. Another concern is that Apple wants a share of the interchange that card issuers receive every time their cards are used at a merchant location. The issuers holding out claim that since they (and the retailers) have built the payments infrastructure (the “rails”), then it should actually be Apple that is paying them and not the other way around. Apple obviously disagrees and wants to retain the right to negotiate individually about fees, access and every other aspect of Apple Pay.

An interesting aspect of this is also the performance of Apple Pay since its initial deployment in Australia. There seems to be some uncertainty about the usage stats, but here’s my estimate using ANZ as a proxy for all Apple Pay usage given that it will have by far the largest proportion of users.

1. According to the RBA, there were around 16 million credit cards and 45 million debit cards on issue in Australia as of December 2016 (see http://www.rba.gov.au/statistics/tables/). ANZ’s share of this is believed to be around 5 million cards.
2. According to ACMA, around 13.75 million Australians have a smart phone (see http://www.acma.gov.au/theACMA/Library/researchacma/Research-reports/communications-report-2015-16).
3. According to the latest Kantar Worldpanel ComTech report, the iPhone 6 has an 11% share of the smart phone market, which means that around 1.5 million Australians have an iPhone 6. (Some may have an iPhone 7 which would increase the number of eligible phones for Apple Pay).

ANZ claims that 26% of its customer base is now using Apple Pay, generating 10 million transactions since April 2016. So that would imply that around 1.3 million customers are using Apple Pay with each one doing 7-8 transactions over the 9 months or so. (That is not very many transactions, and so even if the 26% figure is to be believed, the volume of Apple Pay transactions is very low).

But this figure also means that nearly all eligible iPhone users in Australia are using Apple Pay with an ANZ virtual card. This seems rather high at face value, based on the statistics above, so the real figure is very likely less than this. Probably much less. Which all means that Apple Pay usage as a proportion of all payment card transactions in Australia is probably pretty low.

So who should be concerned by the stoush? Apple customers? Bank customers? Retailers? Or Apple itself?

Certainly it’s in the interests of consumers that the various players be subject to competition, but does that mean that the banks and retailers should be granted a pass by the ACCC? Apple claims that 3,500 other card issuers across 13 countries are all subject to the same terms and conditions, so why should the Aussie banks and retailers get a special deal?

The ACCC is due to reveal its view sometime in March 2017, so we shall see what transpires next in the battle of the giants!

PS. Read more about the threat that Apple (and Google) represent to Visa and MasterCard here.