Walking through the bustling streets of Hong Kong, one of the things I cannot help but notice is just how many locals seem to be beeping away at their Octopus Cards, whether at train stations, convenience stores, fast food shops or vending machines.
In essence, digital wallets allow them to accomplish nearly all of their daily transactions across the city with a single card. It naturally leads me to wonder why digital wallets haven’t caught on in the same way in Australian cities.
The unfortunate reason behind our laggard adoption, and thicker traditional wallets, has less to do with technology and more to do with the politics of oligopoly. In 2017, when digital wallets were already catching on overseas, three of the big four Australian banks were caught up in a dispute with the technology titan Apple that held back the introduction of digital wallets.
In a dispute to capture a larger share of the cut from digital transactions, these banks sought to collectively negotiate with Apple for access to the iPhone’s near-field communication (NFC) antenna technology. However, the Australian Competition and Consumer Commission (ACCC) made a final determination that denied the banks this maneuver, citing the detriment it would cause to consumers.
Apple demands 0.15% on every credit card transaction processed through Apple Pay, creating a substantial threat to bank revenues. Compounding this threat, the Reserve Bank of Australia (RBA) has imposed caps on interchange fees that enhance transparency in the banking system and pushed for standardisation to level the playing field between major banks and other payment providers.
Although the dispute posed by the major banks caused Australian consumers significant delay, the ACCC’s final determination ensured that banks wouldn’t stifle technological introductions such as tap-and-go, smartwatches, fitness wearable devices and other technologies in their infancy. It has also prevented consumers from being locked into a particular bank based on payment processing methods alone.
Still, the odd thing in Australia has been that the presence of necessary digital wallet technologies has not automatically translated into consumer adoption, at least not to the same degree as in the far east or Europe. Again, this is in part because of the oligopolist culture of the big banks, who have not adopted external payment systems quickly enough, and preferred instead to have transactions delivered from their own apps.
A clash of cultures
What we see in Australia is, in fact, a clash of financial cultures. On one hand, Australia is regarded as one of the top five financial technology (fintech) destinations in the world, with over 600 fintechs now operating in the country, up twofold from 2015. On the other hand, the overall financial architecture of the country is concentrated in four large banking behemoths who are slow to innovate but quick to throw around their political muscle, as they did against Apple.
These two financial cultures cannot continue to co-exist for much longer. Smaller fintechs will ultimately have to confront the big banks over some issue, and then either work out disadvantageous deals or find their operations and growth stifled. Apple was different from these fintechs both in size and scope, and smaller entities will not be able to muster the same bargaining power when put in such situations.
While Australia does have powerful oversight authorities such as the RBA and the ACCC, in the long-run, it is difficult to foresee the degree to which the big banks can be brought to heel given their strong inroads into the democratic process — a problem that is also stifling the dynamism of capitalism in other economies such as the US and the UK.
The recent royal commission into the banking sector is illustrative of the ways in which entrenched traditional financial infrastructure is hurting innovation, accountability and consumer welfare in our country. In looking at how innovations such as digital wallets, which are now commonplace in neighbouring economies such as Hong Kong, can be disseminated in Australia successfully, the same oligopolistic market structure will continue to brush up to the detriment of the Australian consumer.
Breaking the impasse
However, there is room for optimism as fintech adoption may finally start to gain traction in Australia. By now, the major banks and card companies have chosen technology providers, and consumers are getting more and more comfortable with technologies such as tap-and-go. A total 88% of Australians now own a smartphone, and 60% of owners use their smartphones to make payments. Strong growth is also being observed among senior age cohorts, where 80% of seniors now own a smartphone, up from 69% in 2016.
But Australia still has a long way to go. The goal must be to move beyond simple mobile payments and build more comprehensive architecture that takes in loyalty programs, mass transit ticketing, access methods, user identity and many other innovations.
There is only so far that pure innovation can take us when rigid market structures slow the introduction of fintech into our lives. However, the status quo cannot be maintained for much longer. The long-term choice for stubborn incumbents is clear: embrace a fintech driven future or face a slow descent to obsolescence.