This analysis is by Bloomberg Intelligence Senior Industry Analyst Matt Ingram and Bloomberg Intelligence Associate Analyst Jack Baxter. It appeared first on the Bloomberg Terminal.
Customer trends toward digital payments could cost Australian banks A$600 million a year, while global competition hurts an annual revenue pool of A$2.5 billion. Consumer lenders also face headwinds from “buy now, pay later” (BNPL) growth. But domestic fintech pure plays face anything but smooth sailing as PayPal, Apple and crypto expand services.
Payment income, deposits could be impacted
Australian lenders’ profit could be hit by shifts to non-card digital payments and alternative consumer credit, which impose added costs and slash non-interest revenue. Shifts to digital-wallet services like Apple, Samsung and Google Pay could impose annual costs of up to A$600 million on the sector by 2025, by which time digital wallets are expected to process 39% of Australian retail payments vs. 12% in 2021. Also, real-time payments, facilitated by the New Payments Platform, could remove the need for large business cash-floats, cutting the size of demand-deposit accounts.
The rise of BNPL could pressure the big four banks’ A$29 billion of credit-card lending that was outstanding at the end of fiscal 2022. But a bridge in the regulatory divide between banks and BNPL could ease the banks’ loss of market share.
Banks’ A$2.5 billion payment revenue at risk
The big four banks’ 76% payment-terminal market share, generating what we estimate to be A$2.5 billion in annual revenue, is at risk from international competitors like Square. The digital-terminal provider offers a wider suite of services and point-of-sale integration, popular in the hospitality and retail sectors. Square terminals have a one-off cost starting at A$60 vs. the banks’ average A$300 annual charge. Overall charges are higher for Square terminals but can be surcharged to customers to offset the cost.
Australian banks have an opportunity to expand their payment-terminal offerings to maintain market share. Efforts of this kind would require large investment expenditure at a time when spending efforts are already focused on the shift to online banking.
Regulation, competition to slow BNPL growth
Growth of over 50% in BNPL volumes could slow to 30% per year until 2025 because of higher penetration and possible regulatory changes. Market entry by mainstream fintech brands like PayPal, Apple and Square could dilute market share held by pure plays like Zip and Afterpay. New regulations could force BNPL providers to hold an Australian Credit Licence (ACL) and conduct credit checks on customers, possibly impacting new-customer growth. Zip could be less affected by this change as its existing practices seem compliant. This, and incumbents’ existing penetration across Australia and New Zealand, might be competitive advantages against mammoth sector challengers.
Afterpay was Australia’s largest BNPL brand before its 2022 acquisition by Square for A$16.5 billion.
Banks to pay for customer digital payments
Australian digital payments could top A$370 billion, nearly 40% of the total, by 2025 vs. 25% in 1Q22, according to FIS Worldpay, which could cost banks up to A$600 million. Mobile-wallet providers include Apple, Google and Samsung Pay, which process payments via existing card networks like Mastercard and Visa, charge a fee to host banks’ cards. The hit to Australian banks isn’t disclosed, but in Europe the hit is as high as 0.15% of volumes — the basis for our calculations. Alphabet’s Google Pay has more to gain through collection of customer data to deepen customer insights for its advertising algorithm, we believe.
Network-service charges in Australia range from 0.3% to 0.5% for debit payments and from 0.9% to 1.7% for credit. Australian laws prohibit merchants from profiting off surcharge fees.
Digital currency to hurt existing payments
Layer 2 digital-currency payment applications like Strike, which allow for fiat payments without spending cryptocurrency, could render overseas-payment firms like OFX redundant and could hurt banks’ FX revenues. OFX holds foreign currency in accounts across the globe, collecting fees for fast overseas-payment facilitation while earning a spread on foreign exchange. Digital-currency transfers could offer the same service at a fraction of the cost, garnering interest from Mastercard and Visa.
Strike works by converting fiat payments to Bitcoin; transactions occur on the Lightning network, followed by reconversion into the destination currency. The Bitcoin balance remains unchanged except for a transaction fee we estimate is under 5 basis points. The Lightning network’s streamlining effect means faster and cheaper payments.
Bloomberg
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