The evolution of payment acceptance – in Australia

Continuing our blog series on the 4 key trends shaping the Australian Payments Industry over the next five years, today we look at the evolution of payments acceptance.?

The past?

Our payments landscape is constantly evolving. Whilst Bankcard was launched back in 1974, it was only in 1984 when Australians were introduced to EFTPOS, a revolutionary payment technology that allowed consumers to make speedy, secure card payments at the point of sale. The innovation solved crime and logistical challenges associated with cash.??

The introduction of rewards points saw credit cards gain traction. However, growth in premium cards was constrained when the RBA moved to cap interchange rates at 0.8% in 2017. In recent years, debit cards have seen strong growth. The dominance of card payments over the last 40 years has been remarkable – especially when you consider the period spans the evolution of the internet. Its testament to the adaptability of a payments system that has seen the introduction of security and fraud prevention measures such as EMV Chips* and CVV**. We have also seen the introduction of convenience features such as contactless payments and mobile phone authentication, known as CDCVM***.??

Perhaps the biggest change which has occurred over the last couple of years is the introduction of digital wallets such as Google Pay and Apple Pay. Thanks to these, consumers are now interacting with their devices rather than a physical card at the terminal. This extra layer of separation between the consumer and the payment rails has opened a window of opportunity for mobile based payment solutions to gain ground – you can read more about this theme by delving into last month’s Super Apps blog.?

The present?

Payment acceptance solutions are adapting to support an increasing variety of app-based payment methods. Some payment apps have leveraged traditional rails to capitalise on existing acceptance infrastructure. Others, like PayPal have opted to forgo traditional rails in favour of a three-party model that seeks to forge a relationship with both the consumer and merchant. Achieving growth under the three-party model is much more challenging – making it difficult to reach mass adoption. On the other hand, the three party model also has its advantages – including that innovation is not constrained by interoperability requirements, plus there is greater control over costs. The new generation of payment acceptance solutions, which are entering the market today have been designed to cater for this increasing diversity.??

The future?

We can extrapolate current themes and overlay future milestones to gain insight into the continued evolution of payments acceptance in Australia:?

• Return of international travellers – As the pandemic subsides to an endemic, tourism operators will be relieved to see the return of international travellers, including those from countries where card payments are less common, such as China, India, Indonesia, the Philippines and Thailand. Merchants who serve these customers were already beginning to accept alternate payment methods before the pandemic. Back in 2018, Commbank and ePay introduced AliPay acceptance on CommBank’s Albert terminal to meet this demand. It’s fair to assume that the trend of accepting alternate payments methods will continue in sectors exposed to international travellers.?
• Competitive pressure – Dutch payment processor Adyen lists 80 supported payment types on its platform – among them 18 relevant to Australia. Checkout.com lists 40 payment methods. Modern payment acceptance solutions are moving to fulfill a greater number of merchant needs, including addressing some of the challenges associated with the increasing number of payment methods. There is also growing interest from marketplaces which are expanding beyond online sales into POS solutions. Increasingly, software is becoming the point of differentiation with tablets and mobile phones being repurposed as payment acceptance devices. – the topic of a recent blog by my colleague Septimu Mitu. This was evidenced earlier this year with Apple’s media release regarding Tap to Pay in the US, a widely anticipated move following Apple’s acquisition of Mobeewave in 2020. What’s more, Square have released their “Square Stand gen 2” in Australia, which facilitates card payments using an iPad.?
• Consumer Data Right (CDR) – Outgoing treasurer Josh Frydenberg accepted a recommendation to introduce payment initiation under CDR. We need look no further than the UK to see how this might shape the future of payments acceptance. Working with Endava, Natwest developed PayIt, a merchant solution that allows government and business customers to accept Faster Payment transactions via a merchants website using Open Banking Payment Initiation. This solution enables consumers to make payments without credit or debit cards. The initiative comes as Pay.UK, the Retail Payment Authority, looks at how it can promote competition and innovation in the account-to-account payments ecosystem. Adding Payment Initiation under CDR could see the establishment of similar payment acceptance offerings here in Australia.?
• Regulatory Review – The recent change in government adds an element of uncertainty to proposed regulatory changes to the payment system. Then shadow treasurer Jim Chalmers was quoted in the media as broadly supporting the outgoing governments position on regulatory reform. However, there was a touch of ambivalence in how Jim Chalmers addressed the Australian Bankers Association in March, stating he would have “preferred to inherit more developed thinking”. Whilst regulatory reform remains a near certainty, I believe we will see a less emboldened approach from a first term government towards the recommendation that the treasurer take on an enhanced strategic role. It will be particularly interesting to see how this plays out for crypto asset regulation in light of the recent Terra Luna collapse and a decision by CommBank to pause their crypto exchange pilot whilst they look more closely at regulatory matters.?
• NFC antenna access – The outcome of the ACCC’s investigation into ApplePay, which is looking closely at concerns relating to third party access to the iPhone’s NFC antenna. Australia isn’t the first country to challenge Apple’s position on this. Germany passed legislation in 2020 allowing access to the iPhone’s NFC antenna. More recently, EU regulators reached a preliminary conclusion that Apple has shielded its Apple Pay offering from competition. Apple has maintained the restrictions on NFC antenna access are required for security reasons. The outcome of these challenges has the potential to dramatically change the user experience of augmented payment solutions that currently use QR codes to match consumer and POS.??
• Interest Rates – Finally, tightening interest rate cycles will likely provide additional challenges for fintechs. Low-interest rates have provided ready access to funding allowing fintechs to invest in their products in recent years. However, rising interest rates will signal an expectation of increased return on investment. This will add further complexity for Buy Now Pay Later operators, with regulators already paying close attention to revenue attributed to late fees. Major banks benefit from multiple revenue streams making them more resilient in changeable times. I expect we will see more mergers and acquisitions as valuations shift in the changing market.?

Conclusion?

Payments Acceptance continues to evolve, while being shaped by regulation, competition and consumer behaviour. Innovation is occurring at the point of interaction, as newcomers attempt to win the customer relationship, whether that be the consumer, the merchant or both. This evolution presents both opportunities and challenges. For those industry participants who want to compete in this area, agility will be key to navigating the rapidly evolving environment. For banks, opting out is a risky strategy, as payment acceptance is closely linked to valuable working capital deposits.??

My view is that traditional card payments will remain the cornerstone of retail payments in Australia for some years. However, basic acceptance will increasingly become a commodity whilst feature-rich app-based payments chip away around the edges attracting greater number of consumers and merchants. For that reason, this is a trend not to be ignored. With consumers adopting electronic payments over cash, merchants have never before needed competition in efficient, dependable payments acceptance services as much as they do right now.?

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*EMV chip cards contain an integrated circuit that allows them to store data. The term EMV is derived from the creators of the standard – Euromoney, Mastercard and Visa.?

** CVV – Card Verification Value – helps combat online fraud as it indicates you hold the physical card.?

*** CDCVM – Consumer Device Cardholder Verification Method.?