{"id":195097,"date":"2023-10-20T21:18:58","date_gmt":"2023-10-20T21:18:58","guid":{"rendered":"https:\/\/tokenstalk.info\/?p=195097"},"modified":"2023-10-20T21:18:58","modified_gmt":"2023-10-20T21:18:58","slug":"iphone-and-apps-are-trumping-cards-for-payments-but-be-cautious","status":"publish","type":"post","link":"https:\/\/tokenstalk.info\/markets\/iphone-and-apps-are-trumping-cards-for-payments-but-be-cautious\/","title":{"rendered":"iPhone and apps are trumping cards for payments \u2013 but be cautious"},"content":{"rendered":"

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You don\u2019t have to look far to find evidence of technology giants muscling their way into the financial system: it\u2019s happening in shops all over the country.<\/p>\n

Payments on smartphones \u2013 especially iPhones \u2013 are well on the way to overtaking those on plastic cards, and accounted for more than a third of card transactions in the June quarter, the Reserve Bank says. Commonwealth Bank data shows nearly half of all in-store payments are made via apps on phones, and these numbers will only rise.<\/p>\n

<\/p>\n

Payments on smartphones are expected to overtake those on plastic cards.<\/span>Credit: <\/span>AFR <\/cite><\/p>\n

No prizes if you guessed that the big banks are not fans of this encroachment from the likes of Apple and Google. By inserting itself into the payment system, Apple has not only grabbed a small but growing revenue stream. More importantly, it\u2019s also gained a closer relationship with customers that could allow it to sell other products like savings accounts or credit cards, as it does in the US.<\/p>\n

So what, you ask? The threat of new competitors is a vital part of capitalism, and bank investors should face that risk just like those in any other company.<\/p>\n

However, recent commentary from regulators suggests that as well as being a long-term competitive threat for bank investors, the rise of big tech in finance also brings potential risks (and benefits) for customers \u2013 i.e. all of us.<\/p>\n

Bank complaints about competitive threats from others should be treated with a healthy dose of scepticism (especially when many think the banking oligopoly is a bit too cosy). But when regulators highlight the competitive risks from tech companies\u2019 move into a wider range of sectors, including finance, it\u2019s worth listening.<\/p>\n

\u2018Once big techs have established a captive consumer base, they can abuse their dominant position in the market.\u2019<\/p>\n

The Australian Competition and Consumer Commission (ACCC) has long been alive to these risks, and chair Gina Cass-Gottlieb reminded us of some of them in a speech this week. A paper from the Bank for International Settlements also showed how the rise of big tech in finance overseas raises new competition risks.<\/p>\n

To understand why regulators are looking at this, though, it\u2019s useful to go back to \u201cdigital wallets\u201d such as Apple Pay.<\/p>\n

Digital wallets took off during the COVID-19 pandemic, and are unregulated, growing fast, and dominated by Apple and Google. Consumers like the service, which is convenient and more secure than using a plastic card. But the Reserve Bank also says digital wallet payments on average attract \u201cmaterially\u201d higher fees that are ultimately passed on to merchants. Google doesn\u2019t charge fees for its wallet, but Apple does. How much? It won\u2019t say, so the government is stepping in.<\/p>\n

Treasurer Jim Chalmers recently unveiled changes that will allow the Reserve Bank to force Apple to reveal what it\u2019s charging, and potentially regulate how it behaves in the payments market. But the fight over Apple Pay is really just the tip of the iceberg when it comes to the competitive threat to banks from big tech.<\/p>\n

Experience overseas suggests that disrupting the payments market is how tech giants establish a relationship with customers, before expanding into other products such as lending, insurance, or savings accounts. So far, this hasn\u2019t happened much in Australia, and there\u2019s no guarantee it will.<\/p>\n

But a BIS working paper published this week explains how big tech has shaken up banking markets overseas.<\/p>\n

It says big tech players have been particularly good at breaking into finance in countries including China, Indonesia, Kenya and Korea. In China, it says big tech lending in 2020 and 2021 grew much more rapidly than traditional credit from banks.<\/p>\n

This rise of big techs in finance overseas has had its benefits: the authors say big tech firms\u2019 huge troves of customer data have allowed them to provide finance to people who were previously denied it. Big tech firms were also more likely to finance businesses without requiring them to put up collateral such as a property \u2013 a type of lending that\u2019s also been growing in Australia.<\/p>\n

<\/p>\n

ACCC chair Gina Cass-Gottlieb says competition concerns and consumer harms are \u201cbecoming increasingly apparent in digital platform markets\u201d.<\/span>Credit: <\/span>Natalie Boog<\/cite><\/p>\n

But the BIS also says big tech\u2019s move into finance brings new risks. It says digital platforms \u2013 businesses that allow buyers and sellers to transact with each other \u2013 are particularly prone to competition problems. The more buyers and sellers you have on the platform, the more useful it is to both sides. Size matters in so much that there\u2019s a far higher chance of ending up with a handful of dominant players with enormous power, whether that\u2019s China\u2019s Alibaba, or Google, Facebook or Apple.<\/p>\n

\u201cOnce big techs have established a captive consumer base, they can abuse their dominant position in the market to prevent the entry of competitors, increase switching costs, bundle products and promote their own products at the expense of third-party sellers,\u201d the BIS paper says.<\/p>\n

Cass-Gottlieb also said that around the world, competition concerns and consumer harms were \u201cbecoming increasingly apparent in digital platform markets\u201d.<\/p>\n

She pointed out that digital platforms have \u201cunique\u201d characteristics that make them prone to competition concerns. One such characteristic is the vast amount of customer data platforms they hold, which they can use to their advantage when moving into new sectors such as health, artificial intelligence, information storage, and finance. Another is that platforms often act as a \u201cgatekeeper\u201d between businesses and consumers \u2013 meaning you need to go through the tech giant to access some other business you\u2019re dealing with.<\/p>\n

Cass-Gottlieb wasn\u2019t speaking about banking specifically, but her concerns sound very similar to the bankers\u2019 worries about how tech giants have inserted themselves into the payments system. No wonder the banks aren\u2019t thrilled about Apple and Google\u2019s foray into finance.<\/p>\n

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. <\/i>Sign up to get it every weekday morning<\/i><\/b>.<\/i><\/b><\/p>\n

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