10 August 2021
Bargaining power imbalances between Australian banks and both Apple and Google in relation to digital wallet services raise the possibility that the Australian Government may implement a mandatory bargaining code to enhance competition.
Mobile payments and digital wallets (which enable consumers to make contactless payments from their credit and debit accounts using smart devices) are allowing consumers even more freedom in how they undertake banking transactions, pay bills and shop – both online and in store.
Although these and other banking technology innovations provide great benefits to consumers, such new innovations sometimes bring with them regulatory concerns. In the context of mobile payments and digital wallets, the Australian Government has recently identified competition and consumer protection as key issues. These are currently being examined by the Parliamentary Joint Committee on Corporations and Financial Services (Committee). The Terms of Reference for the Inquiry require the Committee to look at, amongst other issues, the nature of the commercial relationships and business models (including any imbalance in bargaining power) operating between providers of mobile payment digital wallet services, on the one hand, and financial services providers, retailers and other vendors as well as consumers, on the other. This is particularly important as, in order for Australian banks and other financial services providers to offer mobile payment and digital wallet services, they must enter into arrangements with the two major mobile operating system (OS) providers, Apple for iPhones and other Apple iOS devices and Google for Android OS devices. In short, Apple and Google are unavoidable partners for banks and financial institutions in providing these services.
Although no public statement has been released as to the rationale for the Inquiry, Australia is not the first jurisdiction to look closely at this sector. “Apple Pay” in particular has been scrutinised internationally. Apple Pay is the name given to Apple’s proprietary mobile payment solution used in iPhones and other Apple mobile devices. It enables payments via merchant apps and websites as well as in store. In June 2020 the European Commission commenced an investigation in relation to Apple and Apple Pay. Amongst other issues, this will look at the limitations imposed by Apple on the use of near field communications (NFC) functionality on iOS mobile devices. NFC functionality enables data to be exchanged over short distances and is required for the “tap and go” feature for digital wallets on smart devices. Only Apple Pay is able to use the NFC functionality on iPhones and other Apple devices, meaning other forms of digital wallets are not able to be developed and used. Not only does this inhibit innovation in the provision of mobile payment and digital wallet services, but the absence of alternatives also likely means that banks and financial services providers pay more to Apple to use Apple Pay. These outcomes harm consumers, who receive less choice and pay higher prices than may be the case in a competitive market.
In his recent testimony at a public hearing held by the Committee, the Commonwealth Bank CEO Matt Comyn, expressed similar concern with the monopoly position of mobile OS providers as follows:
"As one example, on Apple mobile devices, customers wanting to make a payment with a credit card in-store must use the Apple wallet app. The features of that app are set by Apple, and the ability to compete is restricted because Apple restricts access to the NFC chip. If another party, be that the Commonwealth Bank or a new entrant fintech, develops an additional wallet service and wants to offer it for in-store payments in competition with Apple's wallet, it cannot do so on an Apple device."
Apple, which did not appear at the recent public hearing, has stated that the restrictions it imposes on access to NFC are for security reasons. However Mr Comyn also noted in his testimony that this did not seem to be a compelling reason as the Commonwealth Bank has not seen a marked difference in fraud as between Apple iOS devices and Android OS devices, noting Google allows more flexibility.
The Reserve Bank’s submission to the Inquiry sheds light on other regulatory concerns of the Australian Government beyond the limits on innovation and higher pricing arising from this Apple restriction. That submission referred to the fact that although Apple states it does not collect and use consumer data from transactions made using Apple Pay, Google states that it may use data collected through digital wallet services on Android OS devices for targeted advertising. The Reserve Bank also highlighted a lack of transparency surrounding the fees payable for using digital wallets.
The success of Australia’s mandatory media bargaining code has raised the prospect that the same model could be used to address the competition and consumer protection concerns that have been raised in relation to digital wallet services and mobile OS providers.
The Australian Competition and Consumer Commission (ACCC) has recently been successful in advising the Australian Government regarding the implementation of a mandatory media bargaining code under the Competition and Consumer Act 2010 (Cth). That mandatory code was implemented to address the unequal bargaining power between digital platforms, specifically Google and Facebook, on the one hand, and news media businesses in Australia, on the other.
That inequality of bargaining power had resulted in a situation where, although Australian consumers were drawn to use the services of the digital platforms because the platforms provided a source of reputable news content (which in turn enabled the platforms to generate advertising revenue), the platforms had consistently refused to pay Australian media businesses for the use of that content. This threatened the traditional business model of Australian media businesses, as advertising revenues were redirected from those businesses to the platforms. A failure to find a regulatory solution threatened the ongoing provision of reputable news content, which is a public good.
The mandatory media bargaining code was designed to require designated digital platforms to negotiate with media companies and, if agreement could not be reached on payment for the use of content, “final offer” arbitration would be required. Under that arbitration model, in almost all circumstances, the arbitration panel would select the payment offer put forward by one party or the other – the selected offer would then bind the parties. To avoid the uncertainty of the arbitration outcomes, both Google and Facebook chose to voluntarily enter into agreements with many Australian media companies to pay for news content. Although not all agreements have been concluded, the fact that many agreements are now in place demonstrates that the mandatory media bargaining code has been successful. This has in fact occurred without use of the legislative model, noting that neither Google nor Facebook has been designated under the code.
At the time he released the draft of the mandatory media bargaining code for consultation last year, ACCC Chair, Rod Sims stated the code was needed as:
"There is a fundamental bargaining power imbalance between news media businesses and the major digital platforms, partly because news businesses have no option but to deal with the platforms, and have had little ability to negotiate over payment for their content …"
It would seem, from the testimony of the Commonwealth Bank and others, that it is the same type of bargaining power imbalance between Australian banks and financial services companies and each of Apple and Google which has led to the competition and consumer protection problems in the mobile payment and digital wallet services sector. Australian banks and other financial services providers have no choice but to deal with both Apple and Google to access the relevant market. The terms imposed, particularly by Apple, are likely to have increased the price for the provision of these services, and also to have inhibited innovation in the development of services. These outcomes disadvantage Australian consumers.
At the Committee’s recent public hearing the ACCC was directly asked whether a code similar to the mandatory media bargaining code could improve outcomes in the mobile payment and digital wallet services sector. The ACCC’s response to the Committee indicated that a bargaining code could well be appropriate. The ACCC’s representative acknowledged that the issues that had been raised do have similarities to the issues that were addressed by the mandatory media bargaining code. The ACCC expressed some reluctance to be definitive, indicating in their testimony that the Reserve Bank and APRA are the regulators with the expertise in relation to Australia’s financial markets. Although that may be the case, the issues highlighted by stakeholders with the Committee raise competition and consumer protection issues that fall squarely within the responsibility of the ACCC, and the ACCC should accordingly have a role is advising the Australian Government on appropriate regulatory responses.
The ACCC is also well placed to provide advice to the Government regarding whether alternative international approaches adopted to address concerns in this area could be successfully applied in Australia. For example, in early 2020 Germany introduced an amendment to its Payment Services Supervisory Act, known as “Lex Apple Pay” (as it has most impact on Apple). Lex Apple Pay requires access to certain technical infrastructure, including the NFC antenna, to be provided by regulated “system enterprises” to payment service providers (or PSPs) on payment of an “appropriate” fee. To date, it appears no PSP has used this legislation though supporters argue that, in a similar way to the way in which Australia’s mandatory media bargaining code facilitated voluntary agreements, the threat of the law has in fact changed Apple’s negotiating position. Amendments to Lex Apple Pay due to take effect in March 2022 will provide (amongst other things) that, instead of charging an appropriate fee, regulated system enterprises such as Apple will only be able to charge a fee equal to its actual (and potentially reasonable development) costs for providing access. These changes may facilitate more extensive use of the regime.
The ACCC indicated in its testimony to the Committee that it plans to make further announcements about the types of regulatory options for digital platforms next year. We will have to wait until these announcements are made, and the Committee finalises its Inquiry, to see whether the Australian Government adopts the successful mandatory media bargaining code as a model for regulation in this part of the banking sector. Given that CBA has forecast that the majority of in-store payments in Australia will be made via a digital wallet by the end of 2021, this should be seen as an important area for regulatory reform by the Australian Government.
Authors: Angela Flannery & Clare Giugni
 See the Terms of Reference
 See the European Commission’s media release
 See the testimony from the public hearing
 See the Reserve Bank’s submission (and all other submissions)
 See the ACCC's media release
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.