A New Era En Route Post-Review Of Australian Payments System

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-The Review of the Australian Payments System calls for increased authority by Canberra in the digital payments sector
-It follows a number of high-profile skirmishes between Canberra and the Australian corporate world with Silicon Valley titans
-An aspiration for Australia to formulate a new strategy for its digital payments ecosystem must take into account the performance of the industry elsewhere in Asia

By Ed Kennedy

The federal government has released the final report in the Review of the Australian Payments System commissioned in September 2020. 

Authored by Sydney lawyer and financial systems expert Scott Farrell, it argues Canberra should significantly increase its influence in the industry. 

Accordingly, the federal government now has a new resource to utilise in looking to formulate a more decisive response to the perceived challenges posed by multinational digital payment systems. 

An examination of the growth of digital payment systems elsewhere in the world illustrates Australia certainly has the potential to capitalise in this era. 

This said, a world that’s increasingly economically borderless will require the federal government to have a truly global understanding to make a success of any stewardship of the local digital payment sector.

The Battle Lines Being Drawn in Digital Payments

A key undercurrent of this report is the tension between multinational digital giants such as Apple and Google, and large national businesses seeking expansion in the digital realm. 

From Canberra’s perspective, it’s the latest chapter in a widespread skirmish that notably saw Google threaten to pull its search engine out of Australia earlier this year in response to the federal government’s plans for its News Media Bargaining Code. 

Now, in looking past media to finance, the growth potential of tech like Apple Pay’s contactless digital payment system (AKA ‘tap-and-go’) is a key point of interest for Canberra, and source of anxiety for local businesses.

Matt Comyn, CEO of the Commonwealth Bank of Australia (CBA) criticised the Californian company during an appearance before a federal parliamentary inquiry in July. 

Comyn said Apple restricted access to the tech firm’s near-field communication (NFC) chips, and this diminished competition accordingly. 

Comyn also claimed Apple Pay possessed an 80% share of the digital wallet market in Australia before a subsequent clarification held Apple accounted for 80% of digital wallet payments at point of sale for CBA customers. 

For its part, a supplementary submission by Apple that followed said Apple Pay accounted for less than a 10% share of credit and debit card spending in Australia. 

This stoush between the world’s biggest tech company and Australia’s biggest bank illustrates the battle lines being drawn for the future of digital payments.

What The Report Says

With 15 recommendations, the call for greater government leadership of the sector and that it “Leverage the position of government as a large customer of the payments ecosystem to support broader objectives” makes clear the report sees value in the government – and Treasury in particular – playing a greater role in the sector going forward.

In addition, the recommendations to “Expand definition of payment system in the PSRA”,“Introduce a list of payment functions that require regulation”, and “Introduce a single, tiered payments licensing framework” seeks to modernise a sector where the sheer speed seen in the growth of digital payments globally has left many nations in urgent need to rapidly update existing regulations. 

The findings of the report have won kudos across the Australian financial industry. The Commonwealth Bank ((CBA)) and ANZ Bank ((ANZ)) have expressed support, so too have key stakeholders in the fintech sector, with statements put forward by Rebecca Schot-Guppy, CEO of FinTech Australia, and Andy White, CEO of AusPayNet, among others. 

By contrast, criticism of the report surrounded concerns its recommendations would add yet more red tape to a bureaucracy needing more than ever a capacity to operate with speed and efficiency. 

Yet, while the federal government is clearly gearing up for a new chapter in its contest with the tech giants of Silicon Valley, this report has also generated new discussion surrounding the digital payments sector in Australia more widely, and with reference to the fate and fortunes of digital payment services abroad. Recommendation 3 in the report calls for the development of “A strategic plan for the payments ecosystem”. 

Although everyday Australians are clearly enthusiastic for digital payment products, ultimately the ongoing evolution of digital wallets which sees them offer an ever-increasing array of services has been occurring far more rapidly overseas than in Oz. 

Such industry growth has been boosted in many instances via the presence of multinational tech companies – many of the same ones which segments of the local financial industry and Canberra have sparred with in recent times. 

Accordingly, this report and Australia's aspirations for the future of its digital payments sector must be viewed with this context in mind.

Australians’ Enthusiasm for Digital Payments

To many Australians today the notion we could have an additional surge in digital payments may be hard to envision. This is perhaps little surprise given Aussies have long been enthusiastic supporters of digital payments. At a foundational level, this is evidenced by the nationwide affection for tap and go.

According to the Mastercard Digital Purchasing Survey released in 2017, 82% of Australians were using tap and go payments weekly. 

New data from Mastercard this year held that half of Australians would now actively avoid merchants who cannot offer a form of electric payment to them. In turn, provided they feel safe in doing so, 72% of Australians are receptive to trying new payment methods.

Yet even though many cutting-edge payment services have found a happy home Down Under, ultimately the same usage of ‘super apps’ abroad – offerings where a wide range of financial products are available, and tasks can be undertaken in a single platform – has not so far found a similar embrace locally. 

Yes, the greater utilisation of mobile payment and digital wallet services like Apple Pay, Google Pay, and Samsung Pay in Australia (and elsewhere) certainly represents a drive into a new era of digital payments – especially when they are used in new ways such as with smartwatches in lieu of smartphones – but the integration and utilisation of such processes is just scratching the surface of what super apps could provide in Australia.

There are numerous factors that account for the timid progress of super apps locally – and there have already been some (modest) steps into this arena, such as Westpac’s ((WBC)) partnership with Afterpay ((APT)) and the CBA’s acquisition of a 23% stake in online retailer Little Birdie in order to provide CBA customers access to special online shopping offers – but at present it’s in India, China, and elsewhere in Asia that super apps are seeing their greatest uptake. 

The Indian and Chinese Experience with Super Apps

India’s Unified Payments Interface (UPI) has been called “the best financial innovation post-Independence in India”. The country has become a leading example of how a real-time payment system can work, and provide tremendous benefits by doing so. 

It’s true it’s not within the UPI area alone that India has won acclaim for its digital pioneering,  with the nation's Aadhaar system (where every Indian citizen is given a 12 digit ID) also winning praise. 

Yet India’s UPI has not only garnered substantial interest domestically hitting over 1bn transactions in 2019 just three years after its initial launch, but also with foreign business. Google, Amazon, and Facebook have all looked to pursue the creation of payment apps that give them a slice of India’s rapidly growing online payments sector.

China’s experience with the super app has been startling, but is now also perceived to have an uncertain future. Although apps like WeChat and AliPay have become household names in the nation of 1.4bn, recent times has seen Beijing begin a crackdown on big tech firms.

Beijing contends it’s seeking to push back against monopolistic behaviour in the sector, and prevent (further) market dominance in the future. Yet for tech giants Tencent and Alibaba which own WeChat and AliPay respectively, the tightening of controls by Beijing threatens to throw a spanner in the works of their expansion goals for their hugely successful apps. 

Although the success of a super app in a particular justriction must be considered as a standalone case given the variables that can exist, beyond the challenges that come with allaying regulatory concerns and enticing consumer uptake, a key reason for the success of the Chinese super apps has been their ease of use and capacity to integrate services that meet the needs of Chinese users across a variety of daily tasks. 

It’d be a mistake to think accordingly the success of a super app simply requires throwing a bundle of services together into one package, as instead the ease and enjoyability of using these apps has been critical to their rise.

The Processing Time for the Next Era of Digital Payments

The federal government desires to reform its approach to digital payments regulation, and develop a strategy for fostering the industry’s growth in future, with strong support among the local industry to pursue it.

There are lessons in the experiences of India and China to be found. Especially because the years ahead will see Australia face fierce new economic competition from rising economic powers like Indonesia and South Korea, in addition to the ongoing growth of the region’s three largest economies, in India, China, and Japan.

Yet ultimately, success in turning the page and starting a new chapter for the Australian digital payments industry will be reliant upon decisions made at home. 

Not only in Canberra’s quest to strike a new accord with Silicon Valley firms on digital payments, but also in its ability to spur the growth of many digital offerings such as super apps which come with immense profit potential and technological promise, but also many challenges regarding concerns surrounding data sharing and privacy, among others. 

The capacity of stakeholders to clear these hurdles together for mutual benefit is far from clear at present, but the lines in the sand are being drawn decisively by interested parties in a way that’s clear for all to see. 

***

Review of the Australian Payments System – Final report

https://treasury.gov.au/publication/p2021-198587 

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