This chapter outlines how digital wallets and mobile payments operate in Australia. It briefly describes the major platforms and services on offer in the Australian market and provides an overview of the level of uptake among Australian consumers of these products over recent years.
A digital wallet or ‘e-wallet’ is a software application (app) or service that allows users to store or transfer funds or to make transactions. Some digital wallets use hardware built into a mobile device to enable users to make
card-less or contactless payments to merchants at a point-of-sale (POS). Others facilitate online transfers and transactions between customers and merchants.
Some digital wallets also offer additional services related to digital currencies, identity cards, gift cards, tickets, and transportation passes, among other services.
Digital wallets can be either ‘open’ or ‘closed.’ Open wallets enable transactions between any customer and merchant with the appropriate technology to submit, receive, and process a transaction. Closed wallets allow customers to transact only with a single merchant or a specific group of merchants, and generally do not enable users to withdraw cash.
Digital wallets typically offer either passthrough or cash storage facilities. Passthrough digital wallets are payment systems that hold no cash and function as a platform or overlay for customers to draw on existing financial accounts when making a transfer or transaction. The main passthrough digital wallets in Australia include Apple Pay and Google Pay, among other products detailed below.
Passthrough services are generally linked to credit or debit cards issued by an authorised deposit-taking institution (ADI, a financial institution that is licensed to operate a banking business), and run on top of existing banking, credit card, and EFTPOS infrastructure—the payment rails (see Chapter 2). Industry analyst Mr Lance Blockley described the relationship between electronic payment products and the payment rails as follows: ‘these products do not have autonomy from the current payments system, even if customers perceive them to be separate or independent’.
Apple similarly noted in its submission:
Apple does not issue credit, debit or prepaid cards, and does not process, authorise or execute transactions. Apple is not a bank, a financial institution or payment service provider. Rather, Apple has partnered with banks and other financial institutions to enable them to securely store payment credentials on Apple devices which their customers use to make payments.
Other digital wallets allow users to load and store cash (usually in fiat currency—a government-issued currency—but sometimes as digital currency) that can be spent or transferred within the app to other users of the app, withdrawn through a linked bank account, or used for a transaction with a merchant. Most providers of these types of digital wallets—commonly known as a stored-value facility (SVF)—do not pay interest on the balance held on the service by a customer.
Technological developments associated with digital wallets have enabled financial service providers to offer new payment services, such as integrating POS financing or buy-now-pay-later (BNPL) services to allow for instant credit. Some also offer additional features like enhanced security, bill splitting, discounts, online coupons, loyalty card storage, or cross-border remittance payments.
Payment platforms and SVFs have become somewhat blurred in some jurisdictions, in which digital wallets may offer both passthrough and storage facilities. Similarly, some loyalty and digital gift cards facilitate peer-to-peer transfers, while other closed cards can span multiple sectors and provide consumers with a wide range of services which mirror many of the characteristics of more open systems.
In its submission, the Reserve Bank of Australia (RBA or Reserve Bank) noted that digital wallet providers may have significantly different business models. On the one hand, Apple limits direct access by third parties to parts of its devices, thereby requiring all payments to go through Apple’s own digital wallet by default, a proportion of which Apple charges to card issuers (see Chapter 5 for more on third party access to the chips required for mobile payments). On the other hand, Google allows third-party access to its devices, but is understood to use transaction data to market or promote its own services in some jurisdictions.
Many digital wallets use a set of standardised protocols for communicating between two electronic devices that enable ‘tap-and-go’ payments to be initiated by a customer using a near-field communication (NFC) chip or antenna in the user’s mobile device. In Australia, these transactions typically work through existing debit and credit card tap-and-go functionality at a POS. An NFC-enabled device has a ‘token’—a digitised (or virtual) and anonymised version of a credit or debit card, issued by an Authorised Financial Institution (AFI) that is stored securely on the customer’s device or in the cloud. When a transaction is initiated by a customer, the token is transmitted to the merchant’s terminal and then on to the acquirer and issuer for authorisation— as for transactions processed through the traditional payment rails detailed in the previous chapter and in Figure 3.1 below.
Figure 3.1: An NFC-initiated mobile payment
NFC-enabled digital wallets are either part of an ‘open’ ecosystem, in which third-parties can build products with direct access to the chip, or are ‘closed’, in which the operating system restricts direct access to only the manufacturer’s own digital wallet. NFC chips on Android devices are open, meaning any digital wallet on the device can be authorised by the customer to initiate transactions through the chip.
In contrast, Apple devices in most jurisdictions have closed NFC chips, meaning only cards or tokens stored within Apple’s own Wallet app have full access to the NFC chip. For card issuers to make use of native ‘tap-and-go’ functionality on an Apple device, they must enter into agreements with Apple to have their cards accessible through Apple’s own Wallet app. Transactions initiated by Apple Wallet are made through Apple’s own Apple Pay architecture, and thereby incur additional fees taken by Apple from the interchange fee.
Some third party apps are understood to have access to some features of the NFC chip on Apple devices to facilitate mobile payments. A bank’s own app, for example, may be able to initiate an NFC payment from within the banking app itself rather than from the operating system.
Regrettably, submissions did not address the capability for Apple devices to initiate mobile payments through third party applications without going through Apple’s own Wallet app. Evidence from Apple indicated third party apps can initiate contactless transactions within the app itself, but the committee has been provided with little evidence from which to form a view regarding the limitations or opportunities associated with this capability.
Some other digital wallets use a mobile device’s camera to read a
two-dimensional barcode (a quick read or QR code) that contains information that enables a consumer or merchant to initiate a transaction at a POS or to enable peer-to-peer transfers. Transactions based on QR codes (or ‘scan-to-pay’) have more commonly been linked to SVFs than passthrough wallets, often bypassing the traditional card-based payment ecosystem (although this need not be the case).
Given the rapid uptake of QR codes during the COVID-19 pandemic, EY (formerly Ernst & Young) pointed to growing opportunities for QR codes to provide a more secure and enhanced consumer experience for Australian consumers.
eftpos-owned Beem It is currently building a national QR code payment service that is scheduled to be rolled out from in 2021.
AusPayNet is currently developing industry-wide standards for the implementation of POS QR codes.
Submissions to this inquiry predicted that QR-based transactions would see rapid growth in Australia, driven largely by the relatively low-costs of entry for both merchants and consumers, the limited hardware requirements required for mass uptake, and accessibility for consumers.
Mobile payments can consist of purchases made on a website or in-app payments from a mobile device. Online transactions are generally processed through a credit card scheme (increasingly via a mobile payments platform like Apple Pay or Google Pay) or a digital wallet with an SVF (such as PayPal).
Bluetooth Low Energy
Like NFC, Bluetooth Low Energy (BLE) offers short-range wireless data transfers that can facilitate mobile payments. But BLE transfers data faster, more securely, and over a longer distance than NFC, offering the potential for transactions to take place away from a POS with even less involvement from customers than current tap-and-go transactions allow. BLE may also allow customers to leave their mobile device in their pocket and can eliminate checkout queues by enabling multiple customers to pay simultaneously.
Most recent smartphones and some POS terminals support BLE.
A mobile app developer described one potential use case for BLE-based transactions:
To enable contactless payment, customers must download the merchant or payment app and opt in to use Beacon for contactless payments. Once they opt-in and authorize future beacons payments at the store, any time they walk into the store, the technology will trigger a vibration or sound to confirm a successful check in. Your photo might appear on the cashier’s screen at the Point-of-Sale (POS) terminal. A customer doesn’t even have to open the app to enable any of these. The authorized application can detect when you’re about to checkout, will process your payment and email you the receipt. Customers, who are against the idea of automated payment at checkout, can also opt to authorize each transaction with a passcode or fingerprint sensor.
Industry analyst Mr Lance Blockley acknowledged that while BLE and other emerging payments technologies could bypass the need to regulate access to the NFC chip, existing infrastructure that currently supports NFC payments is already fully deployed. Supporting new technologies would require significant investment to roll out.
FinTech Australia CEO, Ms Rebecca Schot-Guppy, argued that access to the NFC chip was still critical for mobile payments, telling the committee, ‘it would probably be too costly in terms of terminal access and build-out’ to support alternative payments technologies (such as BLE) at this time. The committee understands that the relative costs and benefits of supporting BLE or other technologies are likely to vary by retailer size.
Ultra-wideband mobile payments
Another technology that could impact the mobile payments industry is
ultra-wideband (UWB). UWB—found in many recent Apple and Android mobile devices—is a low-power technology for sending encoded data over short distances that provides precise distance and location information. Early UWB trials have enabled consumers to make purchases over NFC without having to take their phones out of their pocket or bag, as well as supporting a range of non-payment services. UWB promises a more passive payment experience compared with the active consumer engagement required for NFC payments.
The limited range and precise location information differentiate UWB from BLE. The committee understands, however, that the use of both technologies to support mobile payments remains largely conceptual as neither has yet been implemented at scale.
Digital marketplaces (app stores)
Digital marketplaces or ‘app stores’ are virtual stores in which customers can search for and install digital wallets and other apps on their mobile devices. The Australian Competition and Consumer Commission (ACCC) considers these app stores to be ‘critical gateways’ for linking consumers to app developers and service providers.
App stores are typically run by device manufacturers, with the two main app stores in Australia being the Apple App Store and Google Play Store. Apple prohibits the installation of other app stores on its devices, meaning all apps must be downloaded through its own marketplace. Google devices (running the Android operating system) can install other app stores, but come with Google’s own Play Store preinstalled. The ACCC consequently noted that, ‘the ownership and control of their respective OS [operating system] give Apple and Google control over the distribution of mobile apps on their respective mobile ecosystems’.
Epic Games—a games developer and owner of a competing app marketplace, the Epic Games Store—described the distribution of apps on mobile devices:
Mobile apps are predominantly distributed on app marketplaces which are digital storefronts that provide a centralised distribution platform for developers to offer and distribute their apps, and for consumers to discover, download, and update apps. App marketplaces provide benefits to both consumers and app developers. They offer a secure and easily accessible way for consumers to navigate and browse the millions of available apps, and help them find and install the apps that best meet their needs.
Both Apple and Google collect fees for purchases made within apps distributed through their respective marketplaces. These transactions are called in-app purchases (IAP), which have typically attracted a standard commission of up to 30 per cent of the value paid by consumers. Subscriptions or recurring payments to app developers, as well as physical purchases made through an app, have generally incurred lower fees. Smaller developers may also be eligible for reduced fees for IAPs in some marketplaces, as detailed in Chapter 6.
Apple recently announced changes to the Apple App Store terms and conditions that would allow app developers to inform customers of alternative methods of paying for IAP outside Apple’s own payment processing platform, Apple Pay (see below). It is currently unclear to the committee whether these changes impact app developers in Australia or if they only apply in certain other jurisdictions.
Major platforms and technologies
Apple Pay is a passthrough mobile and online payment platform operated by Apple that is available only on Apple devices. Around 6.5 per cent of Australians are estimated to use Apple Pay. Apple collects a proportion of the interchange fee charged by the issuing and acquiring banks for every transaction. This fee is estimated to generally be between 0.04 per cent and 0.06 per cent of debit card transactions in Australia—a rate that is believed to be lower in Australia than many other international jurisdictions but higher than in Europe.
Apple restricts third party access to the NFC chip on its mobile devices, requiring payments on its devices that are made through the operating system to use its own Apple Pay digital wallet by default. Apple claims developers can enable their apps to initiate contactless payments directly from within the app, rather than use Apple Pay.
Apple Pay initially supported only payments routed through the international card schemes. It has since added support for payments to be routed over EFTPOS.
Apple is also reported to be developing a BNPL service known as Apple Pay Later.
Google launched Google Pay in Australia in 2016 (as ‘Android Pay’). Google Pay supports contactless payments at a POS using phones with NFC chips and is open to third parties to integrate into their own apps and services. Google claims it does not charge customers, card issuers, merchants, or acquiring banks to use the platform in Australia, but evidence suggests Google may collect information on transactions made through Google Pay for marketing and advertising purposes.
Google’s wallet supports some public transport systems, including Melbourne’s Myki.
Around 4.1 per cent of Australians are estimated to use Google’s digital wallet service.
Google Pay has added support for payments to be routed over EFTPOS.
Samsung’s Samsung Pay is a mobile payment and digital wallet service that supports both NFC and magnetic secure transmission (MST, a technology that sends a magnetic signal to emulate the swiping of a physical card at a POS) to initiate transactions at a POS. The smart wallet also allows customers to use loyalty cards and touch on to supported public transport systems, as with Sydney’s Opal network. Around 1 per cent of Australians are estimated to use Samsung Pay.
Many Australian banks offer their own digital wallets. These usually work only with their own cards and operate on either the EFTPOS or scheme networks.
The Commonwealth Bank of Australia (CBA) and the National Australia Bank are the only major banks in Australia believed to offer apps that directly support mobile payments on Android (as opposed to processing payments through Google Pay). Third party NFC access restrictions mean third-party digital wallet functionality is not supported on iOS devices.
Instalment payment products or ‘Buy now, pay later’ (BNPL) services enable customers to pay for only part of the cost of goods and services at the time of receipt and pay off the remainder of the cost in instalments. BNPL has primarily been offered in Australia for online payments only, but is increasingly available as a service at the POS.
Some BNPL services are stored in a digital wallet that enables contactless payments. Others operate through a barcode or QR code-based transaction, or via an app linked to a debit or credit card that supports tap-and-go payments.
The BNPL market in Australia has expanded rapidly in recent years with transactions reportedly growing by over 50 per cent in the second half of 2020 compared to the same period the previous year. Evidence before the committee nevertheless suggests the entire BNPL market makes up only around 1.7 per cent of the broader payments sector.
Australia’s largest BNPL providers are Afterpay with 3.2 million customers, Zip Co, and Humm which each claimed 2.1 million customers in mid-2020.
By late 2020, Afterpay and Zip Pay (one of Zip Co’s consumer products) were available in 53 600 and 30 100 merchants, respectively.
Some BNPL services charge users a monthly fee. Most users incur fees for late repayments. Merchants that enter into agreements to accept BNPL services also pay a fee to the BNPL provider for each transaction, which can be significantly higher than regular payment methods.
Afterpay reported an average global merchant fee of just under 4 per cent of the value of each transaction, with Zip Pay averaging around 3 per cent. The rate BNPL providers charge to small businesses can reportedly be higher, at up to six per cent or more.
Unlike card transactions, most merchants are contractually prohibited from surcharging customers to recoup BNPL fees.
The revenue model for BNPL providers can vary significantly between providers. Eighty per cent of Afterpay’s revenue for the 2018-2019 financial year was derived from merchant fees, with the remaining 20 per cent from missed payment fees. In contrast, Zip Co derived just 38 per cent of its revenue from merchant fees, and just 1 per cent from missed payments, with the remaining 61 per cent from other consumer fee revenue (including a flat monthly fee).
Some BNPL providers have also partnered with digital wallet providers to make their virtual credit cards available for contactless transactions, earning revenue through interchange fees and sales commissions.
A more recent development in the BNPL space is the increasing involvement of traditional banks. Several have introduced their own buy now pay later services or have bought into existing BNPL providers to offer instalment payment services to existing customers.
Although PayPal has traditionally been seen as an SVF, it functions as both a storage facility and a passthrough service for online payments. PayPal is currently the only digital wallet service to fall under APRA as a purchased payment facility (PPF, a facility under which a holder of a stored value may make a payment to another person on behalf of the user).
PayPal Australia reports over 9 million active accounts and announced plans in March 2021 to add their own BNPL product.
While traditionally available for online transactions only, PayPal announced in mid-2021 plans to offer a QR code-based app to allow in-person POS sales through its payment network.
PayPal launched in 2021 its BNPL product, known as ‘Pay in 4’ in July 2021.
Diem (formerly Libra) and Novi
Once launched, Facebook-backed Diem purports to offer a dollar-pegged cryptocurrency (Libra Coin) and digital wallet (Novi). Diem will facilitate secure transactions through its blockchain (a decentralised and distributed digital ledger or database) with what it claims to be ‘near zero’ transaction fees. The service will also enable money to be transferred via Facebook’s services—including Novi, WhatsApp, and Facebook—and may also be made available directly to merchants via a POS.
According to its white paper, Diem promises to augment Libra Coin by including single-currency stablecoins (that is, linked to an underlying asset in the form of a national currency) to complement fiat currencies, so as not to interfere with monetary sovereignty and monetary policy. Diem is expected to be rolled out in the US market in late 2021.
AliPay, China’s largest payment app with over a billion users, was launched in Australia by CBA in 2018 to cater primarily to Chinese tourists. An
SVF-based wallet, Alipay supports both online payments and QR code-based transactions. Alipay has said it has no plans to roll out its app to Australian customers.
WeChat Pay is a Chinese-owned digital wallet that enables customers to pay bills, purchase goods and services, transfer money to other users, and initiate in-person POS transactions. Uptake in Australia was initially driven by the need to provide payment solutions for Chinese tourists. WeChat Pay today boasts around 690 000 users in Australia. WeChat Pay was reportedly available in over 10 000 shops and restaurants in Australia in 2017.
Beem It is a digital wallet and instant payment platform backed by a consortium of Australian banks. Beem It currently links to a Visa or Mastercard debit card. The service facilitates instant payments and offers a range of additional features, including bill-splitting, loyalty card storage,
peer-to-peer transfers, and payment tracking. Beem It was bought last year by eftpos.
Shopify is an online e-commerce platform used primarily to create online shopping websites and process online payments. Shopify offers
subscription-based software that processes online sales payments. Earlier this year it announced plans to launch ‘a fully integrated point-of-sale solution that unifies their online and offline businesses’.
This inquiry, however, is not concerned directly with online payments. Online payments are within scope only in so far as these payments are initiated through mobile devices or use digital wallet services.
POLi Payments is a fully owned subsidiary of Australia Post that facilitates online payments to a select group of merchants. Payments are linked directly to a customer’s bank account. Customers are therefore not required to hold a credit card. Merchants pay a fee for accepting POLi (up to 1 per cent of the value of the transaction up to a maximum of $3.00) and are discouraged from surcharging. ASIC has exempted POLi Payments from the requirement to hold a financial services license.
Uptake among Australians
Amid public health concerns and steady growth driven by the speed, simplicity, and convenience of mobile payments, the CBA predicted that digital wallets were set by the end of 2021 to become the most popular method of contactless payment in Australia. Data from the bank showed that the number of monthly digital wallets transactions grew by 90 per cent from March 2020 to March 2021 ($36m to $68m), with the monthly value of digital wallets transactions more than doubling during that time ($1bn to $2.1bn, or 110 per cent).
Mobile payments offer opportunities that small businesses have been particularly keen to take up. NFC-enabled mobile card readers—like the Square Reader from US-based digital payments company, Square—are available with little or no upfront cost, and funds deposited into a merchants’ account within a day or two. Not only do these systems facilitate frictionless transactions and increase productivity, but they can also enable small businesses to collect and analyse customer data to better inform business strategies.
Also driving the uptake of digital wallets and mobile payments among Australians is the ubiquity of smartphones and the growth in wearable devices with integrated technology that facilitates mobile transactions. Uptake has also been driven by a rapid evolution of product offerings over recent years (especially non-traditional SVF providers), as well as the ability for customers to access capital—particularly through BNPL facilities.
Many of the submissions to this inquiry emphasised the role of the global pandemic in accelerating the pace of adoption of contactless payments, digital wallets, and mobile payments in Australia.
EY stated, ‘COVID-19 vastly accelerated the adoption of contactless payments’.
Adoption of mobile payments
Estimates of the rate at which digital wallets have been adopted by Australians vary widely, but broadly point to a rapid uptake in adoption among customers.
RBA figures from 2019 showed that digital wallet transactions accounted for 8 per cent of POS card transactions, up from 2 per cent in 2016. This figure is expected to have increased significantly during the pandemic according to consulting firm Deloitte. Indeed, the committee heard from Dr Lien Duong that over 10 per cent of Australians used contactless payment services in 2020.
In its submission to this inquiry, the Australian Banking Association described digital wallets as ‘an essential means of making payments.’
CBA reported in March 2021 that more than 40 per cent of contactless transactions among its customers were made via digital wallets. CBA submitted, ‘Australia has one of the highest penetration rates and fastest adoption rates of new payments technologies, including digital wallets and tap-and-go.’ CBA CEO, Mr Matt Comyn, predicted that the majority of POS transactions in Australia would be made with a digital wallet by the end of this year.
EY estimated that ‘one in two Australians have set up a digital wallet in the last 12 months’. According to EY, high demand for mobile payments among consumers, combined with a conducive business and regulatory landscape, has led Australia to be seen, ‘as one of the world leaders in Financial Services and technology’.
Figure 3.2: How Australians pay
Source: Reserve Bank of Australia, How Australians Pay: 2019 Consumer Payments Survey.
eftpos pointed to similar patterns of adoption among Australian consumers, leading to some retailers seeing between 10 to 30 per cent of their POS transactions made on mobile devices. eftpos CEO, Mr Stephen Benton, told the committee that tap-and-go card payments and sales through digital wallets represented nearly nine billion transactions a year—over two-thirds of all electronic retail transactions.
Despite the uptake of contactless digital wallets among consumers and businesses, CPA Australia noted, ‘while the percentage of Australian small businesses offering new payment options increased in 2020 from 2019, they continue to lag in comparison to their counterparts in Asia’.