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Apple Pay

Mark Nathan – Managing Partner

Apple Pay is Apple’s mobile payment service, which lets owners of the iPhone 6 and newer models, make “tap and go” payments for goods and services. The service enables compatible devices to communicate with payment terminals using the Near Field Communication (NFC) chip built into their phones. In addition, users of all variants of iPhone 5 can also use Apple pay if paired up with an Apple watch.

What is NFC?

NFC is a set of communication protocols that enable two electronic devices to communicate with each other. It is the same technology that is found in contactless credit cards such as Visa Paywave or Mastercard PayPass. When two enabled devices are in close proximity, they are able to communicate wirelessly without the need to use the internet. The baseline technology allows the identification of transactions via the enabled cards and devices to link to bank accounts and other personal information. NFC technology has been around for quite some time but is gaining more publicity owing to its inclusion in smartphones and similar devices.

As your smart phone has the ability to emulate all your other NFC enabled cards, it could potentially enable your phone to take the place of all your contactless cards. In the UK, for example, you can already use your NFC enabled smart phone to travel on the London tube. You no longer need to carry your Oyster Card – the only issue being when your phone runs out of battery half way through your trip and you can’t “check out”!

NFC technology essentially powers all Tap and Go services such as Google Pay and Samsung Pay. However, for TAP and Go payments to be accepted, the payment terminals must also be compatible. In the US, Visa Inc. estimate that while more than half of all terminals are capable of Tap and Go, less than 15% have this facility enabled. Australia, on the other hand, is far more advanced as NFC enabled terminals are broadly available. This in turn has driven the take up and usage of NFC.


Apple Pay is just a specific use of a NFC chip in your Apple phone, which allows your phone to emulate your credit card. Unlike in android devices, Apple has restricted the use of the technology to the Apple Pay app only. That means that only Apple can write apps that use the NFC chip and not third parties such as your bank.

The Android system, on the other hand, allows anyone to write mobile apps that use the NFC card. This allows mobile apps programmers much more flexibility. As such, many Australian banks have written their own apps to access this NFC card and have enabled tap and go payments directly from their own banking apps. In addition to this, Google also bundles a service similar to Apple pay, unsurprisingly called Google Pay. This allows banking partners to offer tap and go payments without creating their own apps. ANZ, along with 28 smaller banks, used this option and partnered with Google Pay when it became available in the Australian market in mid-2016.

Banks resistance to Apple Pay

To use Apple Pay, your financial institution has to sign up to Apples service and make their cards available via Apple Pay. Australian banks have resisted doing this. This is because Apple is demanding what is apparently a significant fee for every transaction that is processed through an Apple phone. This fee is avoidable if Apple allows the banks to write apps that can access the NFC directly. In addition, the banks have concerns about the ownership of data processed through Apple pay. In the Australian market, American Express was the first to concede to Apples demands, probably due to its lower market penetration and higher fees. However, this service can only be used by customers with a card issued directly by American Express and not a bank branded American express card.

ANZ also gave into Apple’s fees and conditions in early 2016. However, CBA, NAB, Westpac and Bendigo continue to resist and have sought permission from the Australian Competition and Consumer Commission (ACCC) to bargain collectively. The two key issues they raised were:

1. Access to NFC controller in iPhones so they could roll out their own digital wallets in direct competition to Apple Pay.
2. The removal of restrictions imposed by Apple on preventing the banks from passing on service fees charged by Apple.

Only this week ACCC issued a draft decision to deny the banks request. The final verdict will be made sometime in March 2017. We view this as a disappointing outcome for the industry and prospects for innovation.

Paypal Wallet?

PayPal remains the dominant player in the online world, but also has aspirations to roll out in the “bricks and mortar” world. PayPal recently signed an agreement with both Visa and Mastercard that would enable Paypal branded cards or apps to be accepted at essentially all point-of-sale terminals. Australia will be one of the first countries where this feature will be enabled. While rolling out on Android phones will be easy, PayPal will face the same issues as the banks when trying to gain access to Apple’s NFC facility. That is, they will only be able to operate through Apple Pay rather than offering their own standalone service.

In the short term, Apple Pay delivers very little benefit over and above putting your tap and go credit card in your phone case. In fact, that’s just what some banks have been suggesting. CBA offers a separate NFC chip that you can stick on your Apple phone. Longer term, NFC technology has immense untapped potential. For example, all loyalty and travel cards could be stored on your phone in a single digital wallet. While we understand Apple’s approach to locking down access to the NFC from a commercial point of view, it will almost certainly hamper innovation on the IOS platform. The only digital wallet that will be available to you will be Apple’s own wallet – and every time you use that wallet, Apple will want to extract a fee. In contrast, we expect to see far greater innovation from Android based wallets. The Android open architecture will allow you to shop around for the wallet you want, and not be restricted to just a single offering.

Arnhem has positions in both Paypal and Alphabet (Google) in its Global Growth and Australia+ SMA portfolio.

This article has been prepared by Arnhem Investment Management Pty Limited ABN 17 129 606 775, AFSL 332484. It pays no regard to the specific investment objectives, financial position or particular needs of any specific recipient. You should seek your own professional advice in relation to any financial product referred to. You should also obtain the product disclosure statement relating to any financial product referred to and consider the statement before making any decision about whether to acquire the financial product. This article, including the information contained herein, may only be copied, reproduced, republished, or posted if done so in whole with original disclaimer included. © Arnhem Investment Management, 2016