The battle for supremacy in Australia’s payments industry was never going to be a blitzkrieg. It was always going to be a lengthier campaign where those with stamina, size, and funding would win.
In a struggle which has occupied most of this decade, we are finally getting a clearer picture of which players are in the ascendant. The results are due to new future directions in payments, driven by technology and consumer choices.
Infrastructure and regulation are also playing a role, as the market gets used to the New Payments Platform (NPP) – designed to make payments real-time – and to Open Banking which will share data, boost competition and encourage new entrants.
At the core, however, is the consumer. As they become more comfortable making payments with their smartphones, their loyalty to older providers has been undermined.
Shifting Battle Lines
According to the Reserve Bank of Australia (RBA), the Australian consumer today makes an average of 500 electronic payments each year. This is up from 100 at the turn of the century. Over the same period, the number of annual visits to Automatic Teller Machines has almost halved to less than 20 per year.
Payments are important because, in the words of James Faucette, head of the U.S. telco equipment, payments and processing research for investment bank Morgan Stanley, ”payments is a trojan horse.”
Speaking at the inaugural Morgan Stanley Australia Summit last week, Faucette said that once a consumer started using a company for payments, it was the beginning of a relationship built on trust.
“It’s a bit of a dance right now to figure out who is going to own what part of the customer relationship,” he said.
In the roll call of combatants in Australia, the new global non-banking superpowers Amazon, PayPal and Apple are strategically poised.
To that end, they have used their financial firepower to buy up promising fintech startups, thereby neutralizing them as a threat but also harnessing their innovative DNA to re-invigorate their own.
But at the same time, they are holding up progress. The RBA recently warned the banks that it was getting fed up with the way they were stalling the transition to the New Payments Platform, and willfully slowing down payments.
One startup which has thrived on its own so far is installment payments provider Afterpay. It leverages debit card payments networks and enables customers to obtain goods upfront for a quarter of the price. They then need to pay the balance in three installments or incur fees.
Afterpay’s latest half-yearly results showed it had doubled revenues to AUD 2.2 billion, as it also expanded into the U.S.
The laggards, it would appear, are the mid-sized banking players like the Bank of Queensland and Suncorp. They have had neither the scale of the financial resources to either challenge the incumbents, or harness innovation to any significant degree. These players are facing such an existential threat that some analysts believe they will be forced to merge or be taken over.
Local payments network eftpos Australia, which has been electronically transferring funds from purchases made with credit and debit cards at points of sale for three decades, is another legacy player fighting a rearguard action.
With its market share under pressure, it has reached out to another market entrant – payments challenger Square – to protect its business as it called on regulators to control the explosion in digital wallets, where it is often excluded.
The Last Stand
Earlier this month, Morgan Stanley’s Australian banking analyst Andre Stadnik released research claiming that the major domestic banks had three to five years to fend off Apple and Google or risk losing AUD 22 billion of industry revenue.
The best-case scenario, said Stadnik, was that the banks would have to “sacrifice some revenues” to protect their patch. They would also need to invest significantly in new technology to keep customers.
Amazon launched its Australian business in 2018, and so far the specter of a “Bank of Amazon” has yet to be realized.
With some time in hand, Australia's largest bank CBA this month announced it would invest AUD 5 billion in technology, much of it customer facing in a makeover for its market-leading mobile app.
Much of the revamp will be based around personalization, with the app using 157 billion data points in a combination of machine learning and analytics to send more than 3 billion personalized messages to customers each year.
It is salutary, perhaps, to understand that in a rush to digitization, not all consumers want to embrace new technology.
As he announced the AUD 5 billion technology investment, CBA chief executive Matt Comyn said the bank would be keeping printed passbooks because many customers still value them.
"One of the verbatims which always sticks in my mind, from one of our customers, was: ‘I hope I die before the Commonwealth Bank takes away my passbook,' "Comyn said.
“When you’ve got customers preferencing death over the cessation of a product or service, it feels like a pretty difficult area to go after.”
Which shows the difficulty for incumbents in a rapidly changing market. They need to push into the future while acknowledging and servicing the past.