If it's tech, let it play out

After an earlier draft decision to decline, last week the ACCC definitively declined an authorisation application from three big banks (the Commonwealth Bank, National Australia Bank, and Westpac) and one decent sized one (Bendigo and Adelaide).The banks had wanted to engage in a collective negotiation with Apple over Apple Pay, its mobile phone payments app, and to engage in a collective boycott of Apple Pay in the meantime.

There were several incongruities about the application from the git go. One was the unusual spectacle of the big banks getting together to increase their bargaining power against one tech company: you don't normally have an image of the banks needing much regulatory help with their negotiations. Another was the absence of the ANZ, which has signed up with Apple Pay - you may have seen those quite good "an epic way to pay" ads on the TV - which again would have left you wondering why the other lot needed a helping hand. And yet another was the unlikelihood of Apple agreeing to what the Aussie banks wanted, even if the banks were allowed to bulk up as one bargaining entity. As the ACCC's Summary said (page v)

The ACCC notes that Apple has taken a global decision to offer an integrated mobile payment service on iPhones which does not allow open access to the NFC [I'll explain the NFC in a minute]. Apple submits that even if authorisation is granted it will not grant NFC access, and therefore the proposed conduct cannot lead to any of the public benefits claimed

However, any group is entitled to have a go at the ACCC's 'authorisation' process, if they can show that what would normally be an anti-competitive gang-up has, on the facts, benefits that outweigh the anti-competitive detriments. We have the same arrangements here.

There were all sorts of torpedoes running, for and against, but the banks' best argument was that if they got their way, there would be greater competition in the market for processing mobile phone payments. They hoped that their collective heft would be enough to push Apple into letting the banks access the 'NFC controller' in Apple phones - no, I didn't know before this decision what it was either, but it's the hardware and associated software that manages the close-distance wireless communication between devices like phones and check-out terminals.

That would mean that the banks could, via the the NFC controller, direct payments into their own payments systems, rather than into Apple's: everything is, typically, inhouse for Apple, and Apple Pay transactions get processed in Apple's own back office payments system. And the banks said that having the threat of diverting the payments away from Apple would constrain Apple's payments handling fees, which would benefit consumers.

And the ACCC agreed (page vi of the Summary):

NFC access is likely to result in a significant public benefit from increased competition in mobile payment services on iPhones. This increased competition, particularly in the short term, is likely to provide a competitive constraint on Apple in its pricing for Apple Pay

On the downside, however, there were problems that tipped the scale the other way.

One was that the ACCC thought there would be a loss of consumer choice between two clearly alternative models: the Apple/iOS way and the Google/Android way. If the banks got their way, the differences would be smudged over: my words, not theirs, but that was the gist. As the ACCC said (p ix)

this would affect Apple’s current integrated hardware-software strategy for mobile payments and operating systems more generally, thereby impacting how Apple competes with Google. In particular, NFC access may involve modifications to Apple’s software or hardware that lessen the degree of differentiation between the iOS platform and the Android platform

Another issue was Apple's 'accept all kinds of cards into the Apple digital wallet' approach ('multi issuer' in the jargon). For consumers, that's a good thing because you are less locked in to any one financial institution (p ix):

Multi-issuer digital wallets such as Apple Wallet and Android Pay are likely to increase competitive tension between payment card issuers by increasing the ease of consumer switching

The banks' versions of digital wallets, however, would be likely to maintain the current system of being, to some degree, tied to one institution (page ix):

The incentives of issuers to favour their own wallets over multi-issuer digital wallets are likely to have the effect of reinforcing the use of one payment card as a default card; whereas multi-issuer digital wallets would not have the same effect...To the extent NFC access would bias the development of issuer digital wallets over multi-issuer digital wallets, these potential benefits are likely to be lost

But perhaps the big take-away from the whole thing was the ACCC's reluctance to intervene in the early stages of a fast developing market - "the emerging markets for digital wallets and mobile payment services are subject to rapid innovation and change, which is already producing an increasing variety of mobile payment services, mobile payment devices, and digital wallet apps" (p vii) - where it is anyone's guess how things will play out or what the longer-term effect of early regulatory intervention might be. The best approach is surely not to try and second-guess when even the industry gurus aren't sure, and when large amounts of money are being placed on different runners.

And to the (limited) extent the ACCC could see impacts from allowing the banks' access, it didn't like the look of them in these freewheeling tech circumstances. For example (p ix)

Assuming that Apple opens access to its NFC controller as a result of the proposed conduct, this is likely to distort competition in mobile payment services by artificially directing the development of these emerging markets to the use of the NFC controller in smartphones. This is likely to hamper the innovations that are currently occurring around different devices and technologies for mobile payments

A lot of mergers and authorisations these days have this 'where will the tech go' element: here in New Zealand it's front and centre in both SkyTV/Vodafone and Stuff/NZME. Mark Berry, the chair of our Commerce Commission, said in February when knocking back the SkyTV/Vodafone one, that "uncertainty as to how this dynamic market will evolve is relevant to our assessment".

None of this is to say that any old anti-competitive rort should be ignored in dynamic markets, because it'll all get swept away by The Next Big Thing in the end. Tech companies may well get up to stuff that breaches section 27 of our Commerce Act, or section 36, and should be pinged (if s36 were in fact practicably enforceable in New Zealand). But if Mark's view can be unpacked a bit into something like "we can see the short-term impacts, but who the hell knows what's round the corner, and anything we authorise might make things worse", then he - and the ACCC - are on the right track.