A decade ago, the very idea seemed inconceivable, laughable even.
How could one company threaten the global banking system and revolutionise the way we, as consumers, deal with our cash and run our lives?
But when Apple launched its iPhone in 2007, just a few months before the global financial system cratered, it unwittingly unleashed a device that ultimately would pose a greater challenge to traditional banking than the three-year seizure of global finance that crippled the global economy.
And it’s a rapid evolution, from a music and communications platform to an integrated super-computer with pinpoint location accuracy, cameras and a range of applications that connect users with work, home and services, including government. It has transformed from an accessory into an item essential for everyday life.
Just like money, really. So, it was only a matter of time before the two collided when Apple and later Google launched tap and go payments systems. And once they did, there was no walking back.
Phones and digital wallets are replacing plastic as a means of payment at an alarming rate, eroding the power and reach of banks.
Five years ago, ANZ struck a deal with Apple to allow its customers to access its services through Apple Pay, a move that sent shivers through the industry. The three other majors joined forces and launched action through the Australian Consumer and Competition Commission, pleading for permission to work together to screw a better deal from the tech giant.
The competition regulator kyboshed the idea and the other three begrudgingly signed up to Apple’s payment system, all the while fretting that the tech giant would never allow their own apps to work as efficiently as Apple Pay.
The skirmishes since have given way to a series of battles that now threaten to erupt into war.
Afterpay or overpay?
Australian investors were agog at last week’s events. The country’s biggest-ever takeover – the $39 billion paper offer for Afterpay from US payments operator Square – has prompted a series of gushing editorials from our media.
That Afterpay has never made a profit or paid a dividend, faces potential regulatory hurdles and intense competition, for a moment at least, was forgotten.
There’s no denying the ingenuity and the intuition of Afterpay’s founders. They took an old idea – what for decades was known as lay-by – and tweaked it with modern technology to offer younger consumers access to credit, seemingly without the burden of interest charges. It has been a massive hit with consumers.
More importantly, what the deal underscored was the extent of the gathering storm around our payments systems and those who run them.
It also obscured a far less glamorous and largely overlooked development a fortnight earlier when it was leaked that Apple would be entering Afterpay’s arena. It launched its very own version of what now is known as buy now pay later using its Apple Pay system.
But it is more than that. It also would be offering loans, through a hook-up with Goldman Sachs that would source the cash. It is a sweet deal for Goldman Sachs, which has long explored the opportunity to expand out of the rarefied world of high finance and into a mass consumer market.
A bank in the hand is worth two at a branch
When was the last time you walked into a bank? You don’t even need them for large-scale transactions like organising a home loan these days. If you use a broker, the finance just comes through online, after all the checks are made.
Banks will always be there and will always be necessary. But technology has broken down the relationship between the bank and its customers.
The big tech companies know that and will continue to chip away at dismantling that relationship, so that banks ultimately are relegated to a backroom wholesale operation.
You can now tap your phone to pay for everyday items. But if that is extended to interest-free credit through your phone, without having to go through a third party like Afterpay or Zip or one of the banks, then why not?
And if retailers and merchants, who have been gouged mercilessly with horrendous fees by the buy now pay later crew, can get a better deal or no fees at all, they will happily side with a tech giant. That doesn’t bode well for the future of specialist buy now pay later firms.
The question is, just how far into the world of consumer finance will tech giants like Apple go? And the answer most likely is: As far as is possible and profitable.
Hostilities on the rise
Traditional banking has been under constant threat for decades. Interlopers and upstarts forever have been sniping from the sidelines and, over the years, they’ve forced banks to alter their behaviour.
But they’ve generally been small operators, playing at the margins and concentrating on niche areas like foreign exchange.
Twenty years ago, Australian banks faced a serious challenge to their stranglehold on mortgages, their bread and butter, when non-bank lenders such as Aussie and Wizard burst onto the scene, sourcing cash from wholesale global money markets and undercutting the big banks on home loans.
The banks were forced to respond, cutting their margins to compete. Ultimately, the newcomers were vanquished by the financial crisis. Without banking licences, the upstarts failed as they didn’t qualify for federal government handouts. Those that didn’t fail, were snapped up by the big four.
This time around, our banks are staring down a much bigger foe. Better resourced, more highly capitalised and truly global, Apple and its rival Google are significant opponents with serious muscle. Apple alone is capitalised at $US2.4 trillion.
One of the biggest confrontations right now revolves around Apple’s attempt to restrict Australian banks’ access to the payments chip on its iPhones, all while it wants access to our banks’ customer data through the Open Banking regime.
That’s prompted a blistering attack by Commonwealth Bank boss Matt Comyn, incensed that “manufacturers of mobile handsets” can set the terms under which bankers now offer their services to clients.
Big tech, banks and the legal system
Last week, Reserve Bank boss Phil Lowe articulated what now is on every banker in the world’s mind.
“The payments systems regulation needs a review,” he told a parliamentary economics committee.
“There is a need to update the legislation, including perhaps … a special licensing regime for payments providers.”
Right now, it’s a legal grey area as Apple Pay and Google Pay may not be classed as payment “systems”.
There have been similar concerns with buy now pay later operators. They’ve managed to avoid regulatory oversight by arguing they are not credit providers, given they don’t charge interest. But if you are late with your repayments, you’re hit with fees which many consider interest payments by another name.
Apple dominates the world of tap and go payments. As Mat Comyn likes to point out, it’s responsible for about 80 per cent of all transactions. So, it is fair to assume that it will attract some form of regulation at some stage.
Once it does, that may merely open the floodgates to further encroaching into the world of banking and finance.
CBA dominates Australian mortgages. The big four, combined, hold around 80 per cent of all loans over real estate.
While it may seem a bit rich for CBA to be crying foul over market power, it clearly sees the threat. And there is no way it or the other three majors will want to be relegated to a backroom role of providing vanilla packages to the tech giants.
Ultimately, central banks will not willingly allow an unregulated giant to take control of the banking system. It’s unlikely governments would willingly cede control of the payments system to an entity with only a fleeting relationship with tax.
But the battlelines have been drawn. And the war is on.