The Apple Pay way: Small banks win, big banks lose

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The battle between banks and Apple Pay in Australia has global implications, but there is a notable rift within the banks' ranks that drives home just who benefits and who suffers by Apple getting its way.

As four of Australia’s largest banks remain locked in a bitter dispute with Apple over the tech giant’s control of its hardware, two more banks in the region — ING Direct and Macquarie — have agreed to accept Apple Pay under its existing terms, bringing the total number of Australian banks now supporting the mobile wallet to 48.

But why are four dozen banks so willing to break rank with the country's giants? If the big banks' argument is to be believed, a victory over Apple would benefit all of Australia's card issuers and weaken Apple's negotiating standpoint around the world.

The banks are currently awaiting a decision from the Australian Competition and Consumer Commission (ACCC) on a single issue: Permission to negotiate open access to the Near Field Communication (NFC) function on Apple's iPhones. Without such access, competition in Australia’s mobile wallet market will be constrained, the big banks say.

To underscore that point, the four banks this month withdrew part of their original ACCC petition, filed last year, which previously included permission to negotiate with Apple over fees banks are required to pay Apple, said to be about 10 to 15 basis points of the transaction in the U.S. and some other markets.

In essence, the big banks argue that Apple has an unfair advantage by hobbling efforts to develop their own NFC mobile wallets, which some banks have done on Google's Android platform.

But the small banks see this situation a different way: Apple has leveled the playing field.

“Smaller banks aren’t happy about (the fees), but being a smaller player means that their options are more limited, and Apple Pay does provide an effective solution,” said Christie Christelis, president of Technology Strategies International, a Toronto-based payments consulting and research firm.

Canada's largest banks also initially balked at adopting Apple Pay, when it launched there in late 2015 supported only by American Express Co. Canadian banks reportedly held off for a time because of Apple Pay's “onerous” fees, but within months most came around. By the middle of last year, all Canadian banks supported Apple Pay. The fees Canadian banks pay Apple weren’t disclosed.

Even within the big banks' ranks, a similar erosion of solidarity is evident. Australia and New Zealand Bank (ANZ), another large bank of similar size, doesn’t appear to share their concerns; ANZ decided to accept Apple Pay last year without protest, having cut a deal with Apple to pay a few cents per $100 of the transaction, according to the Australian Financial Review.

“ANZ not being in the fold with the other big banks petitioning the regulator weakens their case,” said Christelis. “Australia’s banking regulators are very savvy and they don’t want to interfere in issues where they believe the market should sort itself out.”

Despite the newly narrowed claims, fees could still be at the heart of the four Australian banks’ dispute with Apple, Christelis suggests. Credit card issuers in Australia and Canada feel particularly pinched by Apple Pay’s fees, because each country already has lower interchange rates than what U.S. banks earn on credit card transactions. Apple's fees could represent a larger slice of this pie outside the U.S.

“I think the real issue is about money, and the large banks don’t want to pay the fees to Apple to use Apple Pay, much like what happened in Canada before the banks caved in,” Christelis said.

Technology companies are obliged to protect their own assets, and yielding to the Australian banks’ request to open access to Apple’s NFC chip could have broad implications for other products, said David Ritter, a senior analyst covering payments for Bloomberg Intelligence.

“I don’t think the regulators can force Apple to open their ecosystem,” Ritter concluded.

And while the battle drags on, four of Australia’s largest banks continue to miss out on Apple Pay transactions in a market that has among the world’s highest penetration of NFC-enabled payment terminals. Apple’s own data suggests Australians conduct more Apple Pay transactions per month than customers in any of the 13 countries in which Apple Pay operates.

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Apple Pay NFC Interchange fees Australia