Australian prime minister Malcolm Turnbull may have put money behind his vision of an Asia-Pacific export explosion for the leaders of Australian financial technology (fintech), but on-the-ground innovation is proving somewhat scarcer, as innovation-hungry banks protect their domestic fintech investments and take a cautious approach to Apple Pay.
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The payments system could have serious implications for the country’s $A2.5bn merchant-fees market, with Australia being one of the world’s leading users of iPhones (the devices make up over 35% of the local market, compared with around 16% globally). Yet Apple Pay, which was launched locally in late November 2015, remains tied to users of American Express (Amex) cards only.
This might not be significant in other countries – where Amex happily co-exists with other cards and all are widely accepted – but in Australia Amex remains the black sheep of the retail market, largely because high merchant fees drive many retailers to add 2%-3% surcharges for Amex purchases. Many others simply don’t accept the cards at all.
These surcharges are well above the 1.45% that the Australian Taxation Office (ATO), which passes on merchant fees at cost to customers paying tax bills with cards online, pays for Amex transactions. MasterCard and Visa payments, by comparison, attract just 0.42% fees.
Apple’s Australian rates for Apple Pay are still not publicly known, but analysts are using as a benchmark the 0.15% surcharge Apple demands in the US, which would, based on a 0.42% benchmark, effectively increase merchant fees by over a third.
This situation highlights the challenge of introducing Apple Pay into a fee-phobic Australian market where customers’ dislike of even modest fees for accessing their money have kept Amex side-lined to business users, or as part of dual-card credit accounts that help fee-averse customers maximise their Amex spend to receive up to three times as many loyalty points than purchases with Visa and MasterCard.
With Amex and fourth-place Diners Club together comprising an estimated 20% of Australia’s card market, the affiliation with Apple Pay makes sense as a strategic play to boost the market cachet of what is still a niche card provider.
Likewise, for Apple, it represents a soft entry into a market where market longevity for Apple Pay will eventually require the involvement of MasterCard and Visa – which are both on-board with rival Google Pay.
The POS challenge
That involvement, however, may be longer coming to Australia than the UK, where, in April 2016, Apple finally added banking giant Barclays to its roster of supporting UK banks. Meanwhile, in mobile payments-mad China, Apple Pay only recently went live with support for cards from China UnionPay. Such deals reflect a broader scope than the Amex-only agreement in Australia (also mirrored in Amex-only markets including Canada, Hong Kong, Singapore, and Spain).
Any delays are due to more than just exclusivity on Amex’s part. Issuers’ ability to pass on Apple Pay surcharges by burying them in transaction charges may be limited by regulation.
Card issuers have little room to move given the Reserve Bank of Australia-enforced caps on MasterCard and Visa charges, and $A0.12 per debit-card transaction (these do not apply to Amex and Diners Club, which operate in Australia under different structures). These limits might push Australian retailers to pass on merchant fees to their customers, which would be a disincentive to the scheme’s widespread adoption.
Another problem for Apple Pay in Australia is that its success relies on productive partnerships with banks that have invested heavily in recent years to build out their own electronic payment infrastructures.
Recent massive refreshes of point-of-sale (POS) equipment have made features such as tap-and-pay (via MasterCard’s Paypass and Visa’s PayWave) ubiquitous among both retailers and users of credit cards in a country that switched to mandatory Chip and PIN operation nearly two years ago.
Although POS terminals are remotely managed and could theoretically add Apple Pay functionality relatively easily, it may be some time before Australia’s “big four” banks do this, as they remain loathe to hand over too much control of innovation around a retail process.
Leading its own charge for innovation is the Commonwealth Bank of Australia (CBA), which with 28% of the market is the country’s largest issuer of credit cards and recently invested heavily to differentiate itself from rivals through development of Albert – a larger, tablet-based POS terminal that is both designed with interactive features (such as bill splitting) and has the ability to add new functionality through complex apps.
Albert’s big screen and app support would suit an expanded interactive payments environment, but for now the bank is pushing its own apps and telling agitated Apple customers in an online support forum only that “We’ll be sure to announce any future enhancements to our apps when they’re ready for our customers.”
A recent media report suggested non-disclosure agreements with liabilities of up to $50m were keeping banks quiet during negotiations over the introduction of Apple Pay. Apple is reportedly insisting on its 0.15% fee, but the looming entry of Google Pay into the Australian market might soften its intransigence as the banks – which already offer electronic payments on NFC-enabled Android phones using apps such as Westpac’s Mobile Banking or ANZ Mobile Pay – deepen their commitment to the evolving Google ecosystem.
Competition has also heated since March, when US electronic-payment provider Square launched its reader in Australia and opened a Melbourne office to cover its predominantly small-business market.
When mobile banking is made available, mobile-mad Australians – the country has 132 mobile subscriptions per 100 citizens, ranking it in the top 20 nations in the world on a per-capita basis – have been quick to take up new payment services offered by banks curating their own electronic payment environments.
Although the National Australia Bank (NAB) was late to the market in launching its NAB Pay service this year, in April 2016 it reported that over 300,000 customers had downloaded the latest version of its NAB mobile app.
Yet, with several viable electronic payment systems now in the market, many argue that the battle for transaction fees is a narrow-minded view of a broader retail transformation designed not only around easy transactions, but easy integration with customer loyalty, in-store promotion and related campaigns.
While mobile wallets such as Apple Pay “are great things”, according to Andrew Rothwell, co-founder and CEO of Australia-based payments processor Tyro, ongoing competition has hobbled the electronic payments experience, while also killing off alternatives (such as PayPal Here, which launched in Australia in early 2014).
As an option that required a mobile app to access the PayPal account rather than leveraging the near-field communication (NFC) capabilities of chip-based credit cards, PayPal Here was “a big flop” in Australia. Tyro had coded PayPal support into its POS terminals but, Rothwell said, uptake of the system was “incredibly slow” and PayPal “capitulated overnight” once Apple Pay hit the market.
“Apple Pay was just such a cleaner experience, and people said ‘that’s it’ with PayPal,” Rothwell said. “The customer experience [with other options] turned out to be really poor and when Apple Pay dropped, people started using it even though it only had Amex cards on it.”
Much of the promise of the mobile wallet is being lost in the fixation around transaction fees, Rothwell added. “When you’re talking about card or chip, you’re talking about a payment method in isolation. But the world is moving on and everyone is now talking about the customer experience, of which the payment is just a piece,” he said.
Research firm Gartner highlighted this persisting gap in a recent analysis of mobile wallet apps, finding that despite strong adoption – 64% of US, UK and China smartphone users had used a mobile wallet app at least once in the past three months – a lack of value remains the top inhibitor to widespread market adoption as many smartphone users see “no need to use a mobile wallet”.
As a consequence, retailers should enhance their mobile payment services by “identifying and integrating the key value-added services that create a user experience that goes above and beyond simple payment,” Gartner report authors Mikako Kitagawa and Sandy Shen advised.
Suggested value-added features include ordering goods for delivery, price comparisons, checking stock levels, and order tracking.
“We’ve got some pretty advanced terminals out there,” Rothwell agreed. “The question is, ‘what is the next great customer experience that goes beyond tapping?’ Time will tell whether Apple can improve its relationships with the banks in time to get something done with them. In the meantime, I’m still just using plastic, and I think a lot of people still are.”