Australian bankers go for the throat in Apple fight

The group of Australian banks that want to collectively bargain with Apple over terms of its Apple Pay app have sharpened their focus to Apple's smartphone technology policy, an area the technology giant is likely to defend fiercely.

The four banks, Bendigo and Adelaide Bank, Commonwealth Bank of Australia, National Australia and Westpac, on Monday issued a statement saying the banks have narrowed their application to Australian regulators to focus solely on access to Near Field Communication (NFC) as terms of collective bargaining with Apple. Previously their arguments also addressed the fees Apple charges to Apple Pay issuers.

The NFC argument is vital because whoever controls the NFC hardware controls which other parties can access it.

Chris Ratcliffe/Bloomberg

This played out most openly years ago when three U.S. carriers refused Google access to the NFC secure element on any handset on their networks, effectively blocking the NFC Google Wallet app until the tech giant could come up with a software-based workaround. The carriers only backed down after their own mobile wallet venture failed, selling the assets of that venture to Google in 2015.

Apple's approach is little different from what the U.S. carriers implemented. To execute transactions, Apple places encrypted payment credentials on the iPhone, and does not provide access to other mobile contactless payment providers, creating a closed system. The Australian banks want Apple to be more open, enabling other apps to work alongside Apple Pay on smartphones.

"By locking out any independent access to the NFC function on iOS devices, apple is seeking for itself the exclusive use of Australia's existing NFC terminal infrastructure for the making of integrated mobile payments using iOS devices," said Lance Blockley, a spokesperson for the four banks in the Australian/Apple dispute. "Yet this infrastructure was built and paid for by the Australian banks and merchants for the benefit of all Australians."

Apple Pay launched in Australia in 2015, with American Express as its initial partner, though some credit unions and community banks now support the app. Since launch, the larger banks have tried to pool their leverage to combat some of the issues that have made banks and merchants in other parts of the world angry about Apple Pay, such as the closed NFC access.

Apple would seem to have the upper hand, since Australian regulators have already issued a preliminary ruling preventing the banks from collective bargaining with Apple, citing potential harm to competition. The ruling is not final, however, and both sides have continued to make their case. A final ruling is expected in March.

An authorization from the government would provide protection from court action for conduct that might otherwise raise concerns under the competition provisions of the Competition and Consumer Act 2010, said Duncan Harrod, a spokesperson for the Australian Competition and Consumer Commission, the regulator overseeing the Apple/Australian bank dispute.

"Broadly, the ACCC may grant an authorization when it is satisfied that the public benefit resulting from the conduct outweighs any public detriment," Harrod said.

The Australian banks didn't directly state that their narrow focus on NFC access was in response to the ACCC's earlier unfavorable draft ruling regarding fees. But it's clear their hope is by tying the dispute to technology "openness" rather than transaction income, they're more likely to win a favorable outcome next month.

"[The banks] would like the opportunity to have their wallets compete alongside Apple Wallet on iPhone, and for the consumers to decide which is best and most convenient," Blockley said. "This does not mean locking out or preventing Apple Wallet from operating here in Australia, just allowing competition side by side."

Apple did not return a request for comment. Apple and the Australian banks have been battling for months, with the banks accusing Apple of trying to limit competition and Apple contending its policy is based on security, at one point using the word "cartel" to describe the Australian banks' position, and accusing the banks of being the party trying to extract extra fees from transactions.

The Australian banks aren't the first organization to oppose Apple's policies. In November, George Throckmorton, managing director of the Payments Innovation Alliance, called on Apple to take a more option posture toward NFC access. And access to iPhones has caused squabbles and even merchant-led shutdowns since the early days of Apple Pay.

It's also not unusual for a new mobile payment app to have a staggered deployment, launching on one operating system months before the other because of the differences in policies between Apple and Android. Ever since Google began supporting Host Card Emulation as an alternative to accessing the NFC secure element, banks and retailers have used the same technology to bring their own wallet apps to market.

For example, Capital One and Wells Fargo have contactless wallet apps on Android, but support Apple Pay as a separate service for iPhone users. Banks around the world have also complained about Apple Pay's fees. Though generally not confirmed by Apple, these fees are known to be between 10 and 15 basis points per transaction, which eats into the interchange fees banks charge merchants.

All of the banks in the Australian case have mobile banking apps on both iOS and Android that offer balance queries, transfers, bill payments and most other common mobile banking features. Regarding NFC contactless payments, Westpac offers its own mobile payment app and Android Pay; NAB offers its own app; CBA offers its own app and Android Pay; and Bendigo and Adelaide offer Android Pay.

Given the global controversy over Apple's technology policy, any move that would dilute its ability to keep its technology closed in any market would be welcome news for merchants, technology companies and banks, even in markets like the U.S., where there isn't the same level of cooperation that would lend to group bargaining.

So expect Apple to dig in.

"In contrast to Android and its open approach, Apple has always been seeking to build a 'closed ecosystem' tightly controlled by Apple itself," said Zil Bareisis, a senior analyst at Celent, adding that as a result, banks have no choice but to partner with Apple Pay to deliver contactless payments on Apple devices.

"If the banks in Australia were to 'win,' it would be very hard for Apple to continue with its closed approach in other markets as well," Bareisis said. "Having said that, it’s a big 'if,' and I would expect Apple to strongly argue its case for continuing as is."

Apple should be amenable to an open NFC system in Australia because of the market opportunity, according to the banks. Australia is mature NFC market, unlike the U.S., Blockley said. "But 40% of handsets can currently only access this opportunity via Apple Pay and [the banks] believe this is wrong," Blockley said.