Apple Pay's launch in Australia hits roadblocks as banks don't agree on fees

September 2015
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A number of Australian banks are fending off technology company Apple, as it tries to enter the Australian mobile payments market.

Fairfax Media understands fees are a big sticking point in the negotiations, with big banks not willing to give Apple a slice of the USD 2 billion a year they earn in interchange fees, which are paid by merchants for use of payments infrastructure.

In the US, Apple is believed to earn about 15 cents on every USD 100 of transactions. It is understood Apple has been asking for the same amount of interchange fee in Australia.

But Australia's big banks will not agree to this level given that interchange fees in Australia are about half the US level – equivalent to an average of 50 cents USD 100 of transaction compared with about USD 1 for USD 100 of transaction fees in the US.

Commonwealth Bank of Australia (CBA) chief executive Ian Narev would not comment on the progress of negotiations with Apple, but said Apple's attempts to provide Apple Pay in Australia won't be as easy as it was in the US given Australian banks' record of innovation.

Apple Pay launched in October 2014 in the US and in the UK in July 2015. It allows users of an iPhone 6 or Apple Watch to use a tap-and-go terminal to pay for items by holding their fingerprint on the phone or double-tapping the face of the smartwatch. But to be switched on in a market, Apple needs to strike a deal with banks to use the payments system.

CBA had already provided the same functionality as Apple Pay via its app – for users of Android phones – for two years, so it was difficult for Apple to argue it is providing much value. In the US, Apple Pay was innovative because tap-and-go was not a feature of that market.

Westpac also allows customers with Android phones to use them to pay via tap-and-go through the bank app. Take-up, however, has so far been low, with most customers preferring to pay with their cards.

National Australia Bank (NAB) was rumoured to be closest to securing a commercial arrangement with Apple over its payments product but Fairfax Media has been told it is more likely a small bank will be the first to strike a deal with Apple and use it as a tactic to target iPhone users for transaction-account market share.

In the UK, the banks were successful in negotiating Apple down to a much lower fee. Apple is receiving only a few pence a GBP 100 transaction, the Financial Times reported in July 2015.

The Reserve Bank of Australia is trying to push interchange fees down even further, to an average of 30 cent per USD 100 of transactions. This increases the stakes in the negotiations between the banks and Apple in how to share the interchange-fee pie.

The big banks are also reluctant to open their payments infrastructure to Apple for two other reasons. First, because they are being forced by the RBA to tip hundreds of millions of dollars into building the New Payments Platform, new infrastructure that will have real-time functionality, there are concerns about Apple seeking to free ride on this investment.

Second, the negotiations are also challenged because banks are concerned about the prospect of Apple getting in between them and their customer at the point-of-sale, as banks recognise that future revenue growth will come from being the "interface" when customers pay for goods and services, which will allow them to cross-sell products.

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