The Digital Wallet is Here to Stay

Posted: 7th September 2016

By: Henry Chen

In a world where your phone acts as a watch, fitness tracker, game console and camera, it should be no surprise that the digital wallet is now officially ‘a thing’. In fact, a more appropriate question is why is the digital wallet only becoming ‘a thing’ now? The truth is, the digital wallet is a concept that has been around since the early days of the smartphone; but its adoption and use has only gained popularity in the last couple of years.

To understand why this is, it’s best to first look at what a digital wallet really means. A digital wallet is often used to refer to any digitalisation of payments that allows you to forego the need to use a card or god-forbid, cash. Paying for your newest pair of crocs on E-bay through PayPal can be referred to as an utilisation of the digital wallet. However, for this particular article our use of the term digital wallet refers specifically to the use of a phone as a payment mechanism for in-person purchases.

Apple CEO Tim Cook introduces Apple Pay.
Source: http://wccftech.com/survey-apple-pay-users-face-difficulty-apple-pay-checkouts/

So this brings us back to the question, why have we been so quick to hype up Apple Pay but given no attention to predecessors such as Google Wallet which have been around for much longer? The short answer is, Apple is ‘sexy’ and any product that they release will have millions of hippy-tech nerds frothing at the mouth. Though true, the popularity of Apple Pay is much more complex than that. The real answer lies in the intersection between Apple being at the right place at the right time and its strong focus on security.

Though for many of us, it may seem like the contactless ‘tap & go’ payment method is a no brainer for simplicity and efficiency, the truth is that Australians are currently leading the way with contactless payments globally, with 53% of the adult population having made a contactless payment (2015, Australian Payments Council) . In 2013, about 25-30% of all payments under $100 (the upper limit for ‘tap and go’ payments) were contactless – a number that jumped to around 50% by 2015. With the growing use of Near-field communication (NFC) technology by both users and vendors and the resulting network effect, the Australian market is ripe for picking by digital wallet providers Apple and rivals such as Android.

ANZ Executives with no regrets about ditching the rest of the banks and signing up to Apple Pay.
Source: https://www.youtube.com/watch?time_continue=34&v=kYeQWV48Uig

This also explains why the big banks in Australia are now taking Apple seriously. Unlike many other mobile phone and software companies such as Samsung and Google, Apple owns both the hardware of the phone and the operating system which runs it. This has given Apple the power to restrict access to the NFC chip in its phone, in turn forcing any potential banking partners to sign up to Apple Pay to give their customers a chance of using their iPhone as a digital wallet. Signing up to Apple Pay, means giving up 15% of the 1% interchange fee that banks would receive on any payments conducted through the service. However not signing up to Apple Pay could be much worse and the banks are well aware of this. It’s the exact reason why they have asked the Australian Competition and Consumer Commission (ACCC) for permission to collectively negotiate with Apple in regards to its NFC access. ANZ however, has taken the view that the adoption of Apple Pay is inevitable and has been the first major bank to sign up in an attempt to capitalise on the lingering negotiations of other banks.

Even if the ACCC grants permission for collective negotiation, there is no guarantee that Apple will sit down and engage in discussion. This seems even less likely given Apple’s recent submission to the ACCC in which it highlights unrestricted access to its NFC chip would compromise the security standards it aims to uphold and that this is the ‘latest tactic employed by these competing banks to blunt Apple’s entry into the Australian market’. This statement makes it especially clear that Apple is serious about the payments market and is here to stay. Apple knows that giving into Australian banks would open doors for banks overseas in much larger and more fruitful markets to make the same demands; a door Apple wants to keep firmly shut.

The opening of the UK’s transport system to open loop cards, saw the use of digital wallets skyrocket and with the Sydney Train’s Opal system planning to trial open loop early next year, the results are expected to be similar in Australia. Both the banks and Apple, understand that widespread adoption and use of the digital wallet is only a matter of time and neither wants to end up on the losing side