NFC a bargaining chip for Apple, Australian banks

Several of Australia's leading banks have attempted to collectively bargain with Apple Inc. At issue is access to the near field communication (NFC) chip inside iPhones, currently the exclusive province of Apple Pay. Access to the chip would enable banks to provide their own payment and banking apps to iPhone carrying customers, as they do with Android users.

The banking collective initially consisted of Commonwealth Bank of Australia ABN, National Australia Bank, Westpac Banking Corp., and Australia and New Zealand Banking Group Ltd. (ANZ). Their efforts to open negotiations with Apple have met with a series of challenges, beginning with the internal defection of one of their members that shocked the banking community. The initiative remains on hold, pending further review by regulatory authorities and response from Apple, which has been silent throughout the proceedings.

Internal, external challenges

The Australian Competition and Consumer Commission (ACCC), an independent authority tasked with enforcing Australia's Competition and Consumer Act 2010, oversees a range of issues related to fair trade and consumer education. Following are ACCC's stated priorities:

• Maintain and promote competition and remedy market failure
• Protect the interests and safety of consumers and support fair trading in markets
• Promote the economically efficient operation of, use of and investment in monopoly infrastructure
• Increase engagement with the broad range of groups affected by commission actions

The four banks jointly appealed to the ACCC for permission to begin talks with Apple. The ACCC was reviewing the request when ANZ opted to pursue its own deal with the tech giant, debuting in April 2016 as the first Australian bank to offer Apple Pay.

The revamped collective, joined by Bendigo and Adelaide Bank and a growing number of card issuing banks, have requested ACCC authorization to bargain with Apple and boycott Apple Pay, which they claim unfairly restricts consumer choice and third-party wallet providers. The ACCC initially declined the application, stating that it needs more time to review its potential impact on the Australian payments ecosystem.

"[Given] the complexity of the issues and the limited time available, the ACCC has decided not to grant interim authorisation at this time," said ACCC Chairman Rod Sims in his Aug. 19, 2016 statement to the press. "The ACCC requires more time to consult and consider the views of industry, consumers, and other interested parties."

Sims noted the ACCC authorization process can take up to six months, as members consider a petition's impact on market competition, public benefits and possible harm to applicants and other parties. "We expect to release a draft decision in October 2016," he said, adding that the ACCC's decision not to grant immediate authorization is not indicative of any future outcome.

Impact on local, global communities

Payments analysts are questioning why Apple has locked down its NFC chip while making Bluetooth and Wi-Fi freely available to third party application providers. Some say the policy is also out of touch with a global trend toward interoperability and could broadly impact a number of payments industry stakeholders. What began as a simple challenge to Apple Pay has escalated into a series of debates about the role of banks, telco's and equipment manufacturers in the mobile wallet sphere.

"This all started when major Australian banks contested the walled garden of Apple Pay," said Joe Cincotta, Managing Director at Sydney-based Thinking Group and educator at Thinking School, an ecosystem for leading organizations and start-ups whose clients include American Express Co., Westpac Group and Facebook. "Will the ACCC step in? Probably. Will Apple yield to the pressure? Probably not."

Cincotta noted Apple's two-fold threat to banks and telcos:

• Apple leverages the secure element in its hardware, mobile wallet app and secure cloud services to control payment transaction flows, effectively eliminating the need for Trusted Service Managers (TSMs) and thereby cutting telco's out of mobile wallet transactions.

• Apple's control of transaction flows may also diminish the banks' share of transaction fee revenue, compared to other contactless payment methods such as plastic cards with embedded EMV (Europay, Mastercard and Visa) chips.

"Banks trying to launch their own wallets is not really the issue; it's banks being able to choose another conduit (Trusted Service Manager) for their wallets to use – thereby making the Apple hardware in their devices (Secure Element) able to be part of a completely different secure flow," Cincotta stated. "This would cut Apple out of the financial ecosystem associated with their technology."

Cincotta expects Apple to fight to maintain control of transaction flows, especially in Australia, where 65 percent of consumers have smart phones and over a million contactless transactions happen every day. These fees would be worth hundreds of millions over the next decade, he said.

"At a superficial level, it is a vote of 'no confidence' by Apple in third parties like banks developing mobile wallet solutions," he added. "If Apple is trying to get people comfortable with a big behavior change (using contactless payments from their phone) then fragmenting that experience with a zillion wallet apps would be a disaster."

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