In December 2019 RBA Governor Philip Lowe spelt out some of the rationale for consolidating Australia’s three domestic payments schemes – BPay, Eftpos and the New Payments Platform.
According to Lowe, there was “a public interest” case for a merger because common shareholders of the domestic schemes had indicated to the regulator they faced conflicting investment demands from each of the businesses.
Banking Day understands that a formal application to consolidate the schemes will be submitted to the ACCC this morning, with the respective boards of the merger candidates arguing their proposed union will also benefit Australian consumers and small businesses.
The application is one of the most unusual to hit the desk of ACCC boss Rod Sims in his decade-long reign at the competition regulator.
Normally the ACCC would be expected to tap the RBA’s expertise to assess the merits of any planned merger in the payments market, but that practice might have to be shelved in this case.
That’s because the RBA is a shareholder of the NPP and holds a vested interest in the proposed transaction getting approved.
Since Lowe first floated the case for a merger, the proposal has attracted sustained opposition from small business groups.
From the ACCC’s perspective this might mean the RBA is now wedged by a conflict of interest that ostensibly compromises its role as the nation’s payments regulator.
The merger proposal is also unusual because each of the schemes are essentially controlled by four common bank shareholders – Westpac, CBA, NAB and ANZ.
Together, the major banks have poured hundreds of millions into the development of the NPP and are now trying to rework its business case to justify the investment.
The strategic problem for the banks is that the NPP is generating losses and facing competitive threats from the other schemes in a raft of digital payments markets.
The Eftpos-owned Beem It app competes directly against the NPP’s peer to peer instant payments service.
Moreover, Eftpos last week added a new “digital deposit and withdrawal” capability to the Beem It app, which means it is marketing similar use cases to NPP’s soon-to-be-launched mandated payment service.
The Eftpos announcement shows that Beem It is being recalibrated to compete against NPP in third party payment initiation – a new capability the NPP says is the most heavily requested by users of its service.
The three merger candidates are also developing separately branded digital identity services that they each hope will become benchmark verification tools for ecommerce in Australia.
Another area of emerging competition between the schemes is in QR Code payments.
As a result of these observable competitive tensions, the boards and shareholders of the schemes face an uphill battle to win ACCC approval.
Combining the schemes is probably a rational response on the part of their common owners – the banks - who are understandably reluctant to sponsor what they see as the schemes’ “conflicting demands” for capital to fund service duplication.
While Governor Lowe has highlighted this dilemma as a public interest argument in favour of a merger, it is debatable whether it alone would be enough to sway the ACCC.
Merger applications are normally assessed on their immediate or likely impacts on competition in specific product markets.
The loss of competitive tension between the respective schemes in established and emerging digital payments markets seems a likely outcome of the deal getting a green light.
Such a prospect might be too much for the ACCC to stomach.
However, the ACCC might also need to test the major banks’ claims that each of the schemes are making conflicting demands for capital to support unsustainable business cases.
That claim could be tested by inspecting the most recent financial reports of each of the schemes.
After almost a decade of ceding market share to the Visa and Mastercard, Eftpos is again generating healthy profits and looks poised to increase earnings this year as more retailers demand least cost routing services from their acquiring banks.
As things now stand, Eftpos seems to be a self-sustaining business while NPP forages for commercial viability.
This might indicate that NPP is more desperate for a merger.
“If you look at the NPP’s strategic roadmap they are basically using their platform to replace EFT payments,” says McLean Roche payments expert, Grant Halverson.
“While they talk a good story they can’t escape the fact they are presently engaged in facilitating high value transactions that attract low revenue.”
Small business groups, such as COSBOA and the Master Grocers Association don’t want the merger to proceed and are stepping up their campaign for banks to support Eftpos’ entry into the contactless payments market.
COSBOA chair Mark McKenzie is sceptical that a union of the schemes would preserve Eftpos’ pricing strategy in debit processing.
“Eftpos and least cost routing have been a bit a saviour for small businesses,” McKenzie says.
“Our concern is that Eftpos’ presence in the contactless debit market could be watered down under a governance structure where the three schemes report to a common board.”