Apple Pay just dismantled the control of banks and giant cards over merchants

A small but pivotal change happened in the broader economy on Wednesday last week, as Apple came good on its promise to release Tap to Pay in Australia, only the second jurisdiction outside the US to have the powerful ‘cash killer’ technology turned on.

Make no mistake, this is a launch primarily about redefining Apple’s relationship with competition, financial services and telecommunications regulators and the stakeholders in those sectors.

The reason why it is happening in Australia, a small but handsomely profitable market for Apple, is because it will have the best shot at setting lasting precedents that carry across to Europe and Britain, Canada and eventually the United States.

When it comes to influencing or shaping regulations, multinationals choose their fights and the jurisdictions rings they take place in very carefully and strategically.

Apple successfully defeated a bid by three of the big four banks (CBA, NAB and Westpac) to be exempted from the Australian Competition and Consumer Commission’s anti-cartel provisions so they could collude and fix the price of Apple Pay transactions.

Few would argue the collusive price-fixing effort by the banks was brazenly anti-competitive, especially after institutions had successfully stalled so many other innovations like digital identity, transportable customer data and enabling online transactions for eftpos.

After banks lost their bid, they briefly tried an unofficial boycott of Apple Pay, launched a bank-owned competitor (now known as Beem), only to later climb on the can’t beat’em, join’em Apple Pay bandwagon.

Apple’s basic game plan this time is to get in ahead of the banks and regulators by using the iPhone’s tap-payments acceptance capability to open the market to bank competitors (think Tyro, Square, etc) by removing the proprietary hardware element.

Why rent a terminal when you have one in your pocket already?

Quiet but deadly

There was the predictable flush of giddy media activity surrounding any Apple launch (well, a little less than usual, to be honest) followed by the obligatory brow furrowing and pearl clutching over the all-pervasive encroachment of BIG TECH.

To summarise what happens at a product level: turning the humble iPhone into an eftpos terminal lets merchants tell banks and their clunky rented machines that their outrageous merchant service fees and their stupid proprietary printer rolls to shove off.

It’s not a massive leap in technology by any means, especially as most terminals these days are just glorified handsets in a branded box anyway.

But it is a massive shift in terms of the loss of coercive control banks and giant card schemes like Mastercard and Visa have had over the merchant community, which they’ve been bleeding dry for more than 20 years.

Apple’s Tap to Pay launch matters big time for regulators like the Australian and Competition and Consumer Commissions and its digital platform service inquiry, plus a swag of other regulations, because the plush rug they are used to resting their feet on just got yanked out from under them.

Here’s why.

Regulatory homeopathy

Remember the bad old days when your mobile or landline number used to be fixed to your carrier? That was a classic technology lock-in, and Telecom Australia told us the world would end if that system was ever changed. Yeah, nah.

Banks, and their symbiotic global card schemes, have been pulling the same stunt with businesses and government for the past 40 years, ever since electronic payments were introduced in Australia in the early 1980s.

Want to change banks? First you’ll have to rip out all that electronic gear and start from scratch.

Not anymore.

Apple just changed the payments landscape in a single software release, arguably doing more to enable real competition on the digital services front in one small step, especially for small businesses, than the ACCC and Reserve Bank of Australia have achieved in the past 25 years.

While it’s first-grade regulatory hardball, it’s also an indictment of Australia’s glacial pace of regulatory reform and competition policy now so heavily diluted they ought to qualify as homeopathic remedies, which is just how Australia’s safe but perennially greedy banking oligopoly likes it.

Soon, all merchants need to do is pick the authorised transactional iOS app and service they find to be the best value, and then accept payments from cards and digital wallets from a provider of their choice, as opposed to being stuck with a bank. (The funds will need to settle in a bank, or authorised deposit-taking institution (ADI), but it won’t control the payment service.)

That’s been a three-decade fight. Banks will likely complain about Apple’s market power and size, but their argument will necessarily be that their oligopoly is in the public interest and prices need to stay high and be protected from competition.

Importantly, Apple isn’t designated, or regulated, as a payments scheme in Australia. Yet.

Swipe left to delete your bank

The two first providers off the blocks are Westpac and Tyro, the latter of which floated on the ASX with a business model sticking it to banks. The rest of the payments industry will soon climb onboard as Apple’s software developer kit (SDK) does the rounds.

Banks are exposed here, especially the big ones.

Don’t like how much the Commonwealth Bank charges to accept an Amex card? Switch to a different payments app or delete them altogether, no plumbing or messy wires required.

Looking for a solution that lets you route debit payments to the cheaper eftpos network instead of Mastercard and Visa? Pretty soon there’ll be an app, in fact lots of apps for that.

And when there is, it will give a lot of very comfortable transactional providers reflux and leave them looking pretty silly — including regulators and policymakers who should have cracked down on endemic gouging in payments decades ago.

Instead, they were mesmerised by complex pea-and-cup tricks like interchange fees that are designed to bore people to death so they lose interest.

When Matt Comyn, CBA’s chief executive, was asked several years ago what a Productivity Commission thought bubble to abolish interchange fees altogether would cost banks, he reckoned it would come in at around $2 billion. That’s the size of the prize in payments processing protection racket.

The glacial methodology

At a regulatory level, the two biggest immediate losers from Apple’s Tap to Pay will be the ACCC and the Reserve Bank of Australia (RBA), who, between them, have carriage of competition policy and payments system regulation.

The RBA’s regulatory powers over payment systems, through the powerful Payment Systems Board, were not covered by the recent review of the central bank (more’s the pity), leaving its functions there intact.

This is despite previous treasurer Josh Frydenberg vowing to give the office of the treasurer the power to declare a ‘designation’ of a payment system to bring it under the purview of the RBA regulations.

This promise, never delivered, was done partly as a reaction to the proliferation of digital wallets like Apple Pay and Google Pay, which have all but replaced plastic cards by virtualising card tokens onto phones. It was a major for small businesses at the time, one that seems to have evaporated.

Apple will exploit that void, Hoovering-up a big part of the clip that banks extract from merchants when consumers present a bank-issued card from their Apple Wallet that can also store airline and other tickets, digital identity credentials and various certificates (think vaccination).

On the flip side, the RBA has been coming after the Big Four banks, Mastercard and Visa for 20 years over their use of the opaque hairball of interchange fees (a fee levied from a bank that accepts a card payment by the bank that issued the card) to create a goldmine of gouging.

Again, Apple could achieve what regulators have attempted and failed to do by taking competition to banks.

FinTech to BinTech

The RBA has, for many years, been trying to force down interchange fees to relieve costs imposed on merchants. This has been successfully resisted thanks to a fundamental lack of competition between the Big Four, especially around letting merchants route transactions through the cheapest network.

When the bank doesn’t matter anymore at a technical level by controlling the rails, competitors can run on that track and bring to market different goods not reliant on a constrained channel.

This is essentially what FedEx did with parcel freight that was reliant on commercial airline ‘can’ capacity (containers that go into an aircraft’s hold) charged at exorbitant prices. Fed Ex founder Fred Smith bypassed the airlines by buying his own dedicated planes which many airlines opposed.

Imagine if your cloud-based accounting software provider offered cheap payment processing as an app, inclusive of their tax-deductible licence fee or as a value-added service. Imagine if, every month, that software provider shopped around for the best deals around and bowled them up.

Imagine if telecommunications providers also white-labelled payments processing capacity alongside secure e-commerce hosting.

Bank fee apocalypse? You betcha. Crypto, schmitsko. This is the real coin.

Trifecta dividend

What happens now is three things.

The first is the banks will gird their loins for massive fee leakage. Fortunately for them, interest rates are going up.

The second is that software developers who are way smarter than fast-and-loose credit arbitrageurs play in the style of Buy Now, Cry Later (think Afterpay bought by Block [nee Square] and Twitter’s Jack Dorsey) and get a crack at creating sustainable, low-cost financial infrastructure.

The third is that the much-hallowed and highly exclusionary Australian payments ecosystem for the first time in 30 years is exposed to competition and innovation.

Apple is not a bank. Apple doesn’t want to be a bank. No company with profit margins of +30% (that’s the App Store tax) would even go near that kind of regulation.

But Apple has unleashed its well-tested, superior and defining payment services into the Australian market to again displace banks at a merchant level with no loss to its market share and everything to gain.

Fraud on the biometrically verified Apple Wallet is effectively non-existent compared to bank-issued cards. Banks, let alone government, are yet to agree on a common digital identity credential that comprehensively de-risks transactions. When they do, it will likely have to slip into an Apple Wallet.

Apple has never ceded control of the so-called “secure element” that enables smartcard transactions, like ‘contactless’ or ‘Tap and Go’, and that means they own their own ecosystem, not banks or card schemes.

Most dual-network cards (that’s cards that have eftpos functionality as well as Mastercard and Visa) sneakily set these to default to the US-run schemes, which are more expensive for merchants, and then back that in with proprietary terminal services that also route to the US schemes.

But as merchants switch to iPhones as payment terminals, they’ll be able to choose their own rails by switching apps for debit transactions that are now the bulk of card payments. For businesses.

In brutal contrast, banks are actually trying to shift liability back to the consumer as scams usurp technical card fraud (think just under $500 million in ‘card not present’ fraud losses vs +$2 billion in recorded scam losses).

The very public handwringing by banks over such losses are Gucci-grade crocodile tears: these losses now get sheeted back to either businesses or consumers and, in the main, consumers are now being slugged with the shift in fraud to scams.

Apple gets this big time.

And it’s just acted.

This article was first published by The Mandarin.