iPhone and apps are trumping cards for payments – but be cautious

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You don’t have to look far to find evidence of technology giants muscling their way into the financial system: it’s happening in shops all over the country.

Payments on smartphones – especially iPhones – are well on the way to overtaking those on plastic cards, and accounted for more than a third of card transactions in the June quarter, the Reserve Bank says. Commonwealth Bank data shows nearly half of all in-store payments are made via apps on phones, and these numbers will only rise.

Payments on smartphones are expected to overtake those on plastic cards.Credit: AFR

No prizes if you guessed that the big banks are not fans of this encroachment from the likes of Apple and Google. By inserting itself into the payment system, Apple has not only grabbed a small but growing revenue stream. More importantly, it’s also gained a closer relationship with customers that could allow it to sell other products like savings accounts or credit cards, as it does in the US.

So what, you ask? The threat of new competitors is a vital part of capitalism, and bank investors should face that risk just like those in any other company.

However, recent commentary from regulators suggests that as well as being a long-term competitive threat for bank investors, the rise of big tech in finance also brings potential risks (and benefits) for customers – i.e. all of us.

Bank complaints about competitive threats from others should be treated with a healthy dose of scepticism (especially when many think the banking oligopoly is a bit too cosy). But when regulators highlight the competitive risks from tech companies’ move into a wider range of sectors, including finance, it’s worth listening.

‘Once big techs have established a captive consumer base, they can abuse their dominant position in the market.’

The Australian Competition and Consumer Commission (ACCC) has long been alive to these risks, and chair Gina Cass-Gottlieb reminded us of some of them in a speech this week. A paper from the Bank for International Settlements also showed how the rise of big tech in finance overseas raises new competition risks.

To understand why regulators are looking at this, though, it’s useful to go back to “digital wallets” such as Apple Pay.

Digital wallets took off during the COVID-19 pandemic, and are unregulated, growing fast, and dominated by Apple and Google. Consumers like the service, which is convenient and more secure than using a plastic card. But the Reserve Bank also says digital wallet payments on average attract “materially” higher fees that are ultimately passed on to merchants. Google doesn’t charge fees for its wallet, but Apple does. How much? It won’t say, so the government is stepping in.

Treasurer Jim Chalmers recently unveiled changes that will allow the Reserve Bank to force Apple to reveal what it’s charging, and potentially regulate how it behaves in the payments market. But the fight over Apple Pay is really just the tip of the iceberg when it comes to the competitive threat to banks from big tech.

Experience overseas suggests that disrupting the payments market is how tech giants establish a relationship with customers, before expanding into other products such as lending, insurance, or savings accounts. So far, this hasn’t happened much in Australia, and there’s no guarantee it will.

But a BIS working paper published this week explains how big tech has shaken up banking markets overseas.

It says big tech players have been particularly good at breaking into finance in countries including China, Indonesia, Kenya and Korea. In China, it says big tech lending in 2020 and 2021 grew much more rapidly than traditional credit from banks.

This rise of big techs in finance overseas has had its benefits: the authors say big tech firms’ huge troves of customer data have allowed them to provide finance to people who were previously denied it. Big tech firms were also more likely to finance businesses without requiring them to put up collateral such as a property – a type of lending that’s also been growing in Australia.

ACCC chair Gina Cass-Gottlieb says competition concerns and consumer harms are “becoming increasingly apparent in digital platform markets”.Credit: Natalie Boog

But the BIS also says big tech’s move into finance brings new risks. It says digital platforms – businesses that allow buyers and sellers to transact with each other – are particularly prone to competition problems. The more buyers and sellers you have on the platform, the more useful it is to both sides. Size matters in so much that there’s a far higher chance of ending up with a handful of dominant players with enormous power, whether that’s China’s Alibaba, or Google, Facebook or Apple.

“Once big techs have established a captive consumer base, they can abuse their dominant position in the market to prevent the entry of competitors, increase switching costs, bundle products and promote their own products at the expense of third-party sellers,” the BIS paper says.

Cass-Gottlieb also said that around the world, competition concerns and consumer harms were “becoming increasingly apparent in digital platform markets”.

She pointed out that digital platforms have “unique” characteristics that make them prone to competition concerns. One such characteristic is the vast amount of customer data platforms they hold, which they can use to their advantage when moving into new sectors such as health, artificial intelligence, information storage, and finance. Another is that platforms often act as a “gatekeeper” between businesses and consumers – meaning you need to go through the tech giant to access some other business you’re dealing with.

Cass-Gottlieb wasn’t speaking about banking specifically, but her concerns sound very similar to the bankers’ worries about how tech giants have inserted themselves into the payments system. No wonder the banks aren’t thrilled about Apple and Google’s foray into finance.

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