Coming to a bank near you…

Coming to a bank near you…

ANZ has announced that it has signed an agreement with Google for ANZ customers to be able to upload their credit and debit accounts to Android Pay. This will allow customers to use ANZ accounts to make contactless payments for goods and services. ANZ expects to begin offering access to Android Pay by mid 2016, and will also be able to provide contactless payments through its own app on Android phones (allowing it to retain 100 per cent of the interchange fee if it can convince customers to use its app rather than Android Pay). 

Note that CBA already provides an Android app that allows its customers to perform contactless transactions with an Android phone. WBC customers can do the same on its app with some Android phones. NAB and ANZ don’t offer anything at present.

The major banks have resisted the pressure from Apple and Google to allow customers to utilise Apple Pay and Android Pay in Australia on the basis that the fee the service providers wanted as a percentage of the transaction value was too high given Australian interchange fees are lower than in the US. In the US, Apply Pay charges a 15bpt interchange fee. This effectively comes out of the bank’s 100bpts overall fee charged to merchants.

In Australia, the interchange fee is around 50bpts. Despite this, Apple is still pushing for a 15bpt fee on Apple Pay transactions. 

This is a fight that has been going on for over a year. Apple Pay made its first incursion into the Australian payments system last month with the announcement that Australian Amex customers can now utilise Apple Pay, but only on Amex issued cards (ie not on Amex cards issued by banks).

Transaction fee income is high return and scalable for the banks. According to APRA, the major banks generated around A$3.6 billion in total transaction and deposit account keeping fees in the year to June 2015. The majority of this is transaction fees. This revenue line has been under pressure over the last few years due to various legal disputes and PR issues around excess penalty fees, but interchange fees have been a source of fee growth. Additionally, the RBA has been actively pushing for reductions in the interchange fee. So adding Apple Pay and Android Pay to the system will further reduce bank fee revenue growth on top of any downward pressure on interchange fee rates.Note that the 15 bpt Apple Pay fee would amount to around A$422 million of the A$2.4 billion of total merchant fee revenue generated by the banks in FY14 if applied to all transactions. In reality it would only be a proportion of the total transactions given around 60 per cent of transactions in Australia are contactless at present (but increasing).

Ultimately it will be the customer that determines whether the banks will need to give in to Apple and Google, resulting in additional players taking a cut from transaction fees. The move by ANZ indicates that there is mounting pressure. The development of apps by each of the banks will be seen as a means of reducing the threat, but ultimately consumers will opt for the simplest solution. This is likely to be an Apple Pay or Android Pay in which accounts across banks can be stored and utilised in a single app.

The big change will occur if (when) the banks eventually give in to Apple given the penetration of the iPhone in Australia. But this is yet another area of threat to bank returns and profit growth, with pressure on fee income shifting the mix of residual earnings toward more capital intensive and less scalable returns from lending.

Stuart Jackson is a Senior Analyst with Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.