As the Big 4 banks roll out the New Payments Platform (NPP), it seems no rivals can seriously challenge the dominance of the big banks and card companies in the payments space.
Consider the miracle that is modern card payments. You pick out a bottle of milk at your corner store, walk up to the counter, wave a thin piece of plastic over a reader, and you’re done.
This simple transaction is the target for a large and cashed-up band of innovators who want to change the world’s consumer payments systems. They all want something like the contactless card, but more efficient and with less opportunity for banks and card companies to take a large slice on the way through.
So far, that’s not happening. The global payments system is awash with innovation, yet developed countries are seeing surprisingly little deep change.
Cash is not dead. As Australia’s Payments System Board notes, many older people still prefer it, and it’s still our favourite way to pay at cafés, restaurants and bars. Cash is simply being slowly abandoned. CapGemini’s most recent World Payments Report suggests the world will make more than 500 billion non-cash transactions this year.
But outside China, we’re still mostly using cards issued by our banks and the big payments processing networks such as Visa and Mastercard. The big consumer payments events of recent years have been the rise of online shopping, the explosion of debit cards and the introduction of NFC (near-field communications) chips into all that plastic.
Australia and New Zealand lead the world in rolling out NFC-enabled ‘tap-and-go’ contactless payments to retailers. We’re not only ahead of East Asia and Europe, but far ahead of the US. Mastercard says its March 2017 Digital Purchasing Survey found 82% of Australians are using tap-and-go cards every week, and payments specialist RFi Consulting reports New Zealanders are close behind. Merchants have lots of options.
I think plastic is around for a while yet
Alan Shields, Managing Director, RFi Consulting
These systems, though, remain dominated by the traditional payments system players. Two card giants, Visa and Mastercard, oversee the financial plumbing behind most credit card and online payments, with a little help from the likes of PayPal. Meanwhile, the Big 4 banks move the money around Australia and New Zealand and receive most of the fees.
These fees are spectacular. An October 2017 study by management consultants McKinsey reports that retail and wholesale payments made the global banking industry US$620 billion in 2016 revenue. Only lending brought in more. And payments processing, unlike lending, is the sort of business that needs no balance sheet provisions. That sort of business earns a 20% return on equity, says McKinsey – far better than lending.
To date, the banks have done well at defending these returns. Consumer inertia has helped. Many of us complain about the banks, and consumer surveys consistently show many people – particularly younger people – are interested in new types of payment providers. Yet the same surveys show we’re mostly happy with our own main bank, and we lack any passionate desire to have someone other than a bank take over our main payments tasks.
This is particularly true for Australia and New Zealand, along with the Nordic countries. A 2016 EY global survey shows banks in these two regions are least vulnerable to losing customers to new types of providers.
Banks have seen the survey data and know they must give consumers, in EY’s words, “simple-to-use, easy-to-understand banking products and services that integrate seamlessly into their lives”. Indeed, it is one reason some bank boards tie their CEOs’ pay to consumer satisfaction scores. So far, that’s working.
A new payments platform
In Australia, at least, one of the biggest forces for change has been the Reserve Bank of Australia. It dragged the Big 4 banks to payments innovation by forcing them to build the New Payments Platform (NPP), a common payments infrastructure for about 60 banks, credit unions and building societies that enables real-time, 24/7 payments.
The NPP launched in Australia in February and promises to reduce the time to complete a payment from the current standard (sometimes as long as two to three days) to usually under a minute. Instead of the current BSB and account number, payers will be able to use a simpler registered payID such as a mobile number. Instead of having 18 characters to describe a payment, the new system allows 280. And ‘overlay’ services will allow for payments innovation.
The first payment service to be built on the NPP is BPay’s Osko, but other services are expected to appear over time. How much difference will they make to Australian payments? As RFi’s Shields notes, “no-one knows how transformative it will be”.
How phones fail
The tech giants are all eyeing the payments system as well, if only because they see the money being made there. Apple and Google, for instance, are working to replace your wallet or purse as the place where you keep your ‘cards’. Adopt their system and your cards no longer exist as plastic; they’re in a ‘mobile wallet’ on your phone.
This seems like a shrewd plan. Many Australian and New Zealand adults now have a phone with the NFC chip required to make payments. But replacing physical cards is happening more slowly than expected.
Long-time smartphone leader Apple, for instance, has made only glacial progress in luring consumers onto its relatively easy-to-use iPhone-based Apple Pay system. The most recent survey by payments industry site pymnts.com shows most iPhone users haven’t even tried Apple Pay.
Karen Webster, CEO of payments innovation firm Market Platform Dynamics, reported in February 2018 that the percentage of smartphone users who used Apple Pay for their last transaction changed from 1.9% at launch to 2.6% in March 2015 to 3.0% in December 2017. Google, which recently replaced two older systems with a wallet and payments service called Google Pay, is faring no better.
Indeed, attention is now turning from devices such as phones to commerce systems such as the one owned by Amazon. The retail e-commerce giant has an increasing presence in homes through its Alexa voice-activated assistant, which runs on a range of devices. And Amazon has spent years mastering the art of getting people to transact.
But so far, there’s no real evidence that Amazon will produce a breakthrough. The most successful phone payments app in the US may be Walmart Pay, which gives its users something extra: it applies discounts on their purchases.
Why is there broad resistance to this new payments technology? Some commentators cite consumer concerns about security or the correct use of the app. But RFi Consulting managing director Alan Shields says the fundamental issue is simple: consumers don’t feel the need for a new technology solution. Cards already work.
To just replicate the card experience with a phone, Shields points out, you need to match the right type of phone with the right type of bank account and the right sort of store terminal, and then you need to know how to use them all. And of course, the store cashier needs to know the technology, too – and you need to be confident that they know. “There’s just so many hurdles,” he says with a sigh.
Beyond Apple and Google
Maybe tech giants should just jump into the banking business? A 2017 Accenture study of bank consumers in 18 countries report 31% of consumers would consider buying banking services from an online provider such as Google or Amazon. And for people born from the mid-1990s on, that figure rises to 41%.
But the same Accenture study shows most people prefer banks to handle their financial data – and other surveys agree. Many technology innovators don’t want the big tech players battling the banks; they would prefer to see a new open global payments system on which transactions can ride, much as documents now ride over the worldwide web. But such a system needs standards that players cannot yet agree on, and security that no system can yet provide. As CapGemini notes, these problems are “slowing the pace of the new ecosystem’s emergence”.
Or maybe the place to look for disruption is not Silicon Valley but China, home to warring electronic payments giants Alipay, the Alibaba subsidiary that years ago overtook PayPal as the world’s largest mobile payment platform, and WeChat, its Tencent-owned nemesis. The Chinese electronics payments giants evolved at the same time as Chinese consumerism itself, and now, as the historian Niall Ferguson recently observed, “everyone pays for everything with smartphones”. The Chinese Ministry of Industry and Information Technology estimates the volume of China’s mobile payments at US$12.7 trillion just for the first 10 months of 2017.
Yet the Chinese giants have made little impact outside their home markets, finding a home in the Chinese diaspora, but hardly anywhere else. Non-Chinese users struggle to use their apps and often wonder about backdoor surveillance by the Chinese government – so they’re spottily accepted outside tourist destinations.
Plastic is durable
As Shields says, there’s a lot we don’t know about the future of payments generally, despite the torrent of investment pouring into the sector worldwide. He thinks it’s possible that Australia, New Zealand and other western economies may mostly skip phone-based payments and go straight to wearables – payment authorisation devices embedded within phones and Fitbits and even finger rings. But he adds: “I think plastic is around for a while yet.”
This article was originally published in the April 2018 issue of acuity.