Apple’s big financial threat


“The engagement war”

Tensions between CBA and Apple have erupted, not coincidentally, amid a major shift in the way Australians pay at the checkout. Smartphones will spoof plastic cards as the most popular form of contactless payment by the end of the year, the ABC expects, and the trend comes at a cost to banks.

Every time a payment goes through Apple Pay – a service that banks claim they basically have to provide – Apple charges an undisclosed fee to provide the hardware that turns phones into wallets. Google’s digital wallet doesn’t charge a fee for this, but unlike Apple, it uses consumer data for its business.

The rise of digital wallets has been fueled by the pandemic, which has accelerated the digitization of finance, with CBA seeing 90% growth in digital wallet transactions over the past year.

However, this fight goes far beyond Apple Pay and its associated fees.

More fundamentally, it is a fight over what professional clients use in their banking operations: the bank or the technological platform? It is also about how the government regulates payments – one of the most critical services provided by banks.

The rise of digital wallets such as Apple Pay has been boosted by the pandemic.Credit:Josh robenstone

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

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

“This is a battle in a larger war: the war for engagement,” he said. “You really have to be the real estate that people have on their screens, that they turn to five to ten times a day.”

As Afterpay has shown, providing an app-based payment service can be a way of nabbing millions of bank customers. Tech giants with deep pockets 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 disqualified manufacturers.

“It’s Silicon Valley against the banking system. I think it has the potential to be important because Apple gets in between the bank and the customer. ‘

Matthew Wilson, Analyst at Evans and Partners

Today, the cut Apple gets from Apple Pay itself isn’t particularly important. But over five to ten years, Wilson says it’s possible the tech giant will also allow disruptors on its platform.

Such a move could intensify competition in the banking industry by allowing fintechs to target younger customers in the same way Afterpay uses its app to nip bank customers.

“It’s Silicon Valley versus the banking system,” Wilson says. “I think this has the potential to be important because Apple stands between the bank and the customer. Everyone wants to own the customer, distribution / network feedback is more valuable, ”he says.

Bankers have warned of these potential risks for years, with former NAB chairman Ken Henry declaring in late 2017 that banks could be “challenged beyond our ability to cope by large platform providers. computer forms “.

The difference today is that the disruption is clearly happening.

In the US, Apple already offers a credit card (issued by Goldman Sachs) and is reportedly working on a buy now, pay later offer. Google last year announced plans to offer deposit accounts, although the money is held by licensed banks.

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


Yet Johnson says there are also opportunities for banks with systems to tap into the sheer mass of customer data they hold.

Graham Rothwell, who heads Accenture’s payments practice in Asia-Pacific, also said he was not entirely convinced that the encroachment of big technology on payments would marginalize banks.

Rather, he says the entry of the tech giants emphasizes digital experiences and features like reward programs.

“Those who should be concerned are those who struggle to design and create great customer experiences,” says Rothwell.

Despite the tech giants’ obvious encroachment on financial services, the money Apple made in this area is still a relatively small beer for the iPhone maker.

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

The main goal of Apple Pay is to help it sell more of its most important product: the iPhone.

Regulatory arbitrage

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

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

Yet even if the big tech players have no plans to become banks, they can expect more regulation.

Apple has so far dodged the regulations because it doesn’t actually hold the money on behalf of customers, and it has argued in a submission to a parliamentary inquiry that it isn’t even a payments service or an app. of payment. Rather, it claims that its application provides the “technical” architecture that allows customers to make payments with their bank cards.

But it looks like the distinction may soon become less relevant, as the regulatory void it has filled is likely to be filled.

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

Banks have shown strong support, with an ABC spokesperson saying rapid technological changes and new business models are clearly creating challenges for the regulatory framework. “As technology continues to transform payments in Australia, regulations must evolve to ensure a level playing field is maintained and strong competition leads to better outcomes for Australians and Australian businesses,” the spokesperson said.


And the power of big tech in banking seems to be something Labor, the coalition and the government can generally agree on.

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

Liberal Senator Andrew Bragg said tech giants already have a lot of power in the economy and society, and although he is instinctively liberal, he fears they will gain more leverage in payments.

“The pandemic has amplified the foray of major technologies into the payment system. This has all happened outside of the normal regulatory environment, so there is regulatory arbitrage going on, ”Bragg said.

“We need to make sure Canberra is in charge of politics, not the RBA, and not Silicon Valley.”

Time may be running out for digital wallets to be an unregulated area. But the rivalry between the banks and the tech giants is probably only just beginning.

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