Digital wallets are little used today, but future growth looks likely. Credit:Getty Images Apple will only allow banks to provide their customers with Apple Pay – which allows them to make tap-and-go payments using the iPhone – if they surrender some of their revenue, and agree to its terms. ANZ has obtained a first-move advantage by striking a deal with Apple, but the other banks say to do so would restrict the choice of millions of consumers. Refereeing this stoush is competition tsar Rod Sims. Later this month, the Australian Competition and Consumer Commission chairman is expected to issue a draft ruling on whether the banks can team up, and negotiate as one, as they have requested. This would involve them agreeing to boycott for up to three years, which under normal circumstances is illegal. Apple says the banks want to form a "cartel". So, what's all the fuss about?

Here are the strategic and commercial prizes being fought over, and the policy issues raised in this high-stakes battle. Fight over fees Through Apple Pay, the tech giant takes a cut of the fees paid by credit card companies to banks, known as interchange fees. It's estimated the local banks collectively make $2 billion a year in revenue from interchange fees, which are about 0.5 per cent of a purchase on a Visa or Mastercard. Apple Pay would pinch some of this revenue from the banks, but it won't say how much. Banks say Apple typically takes 0.07 to 0.25 per cent of a transaction on Apple Pay overseas, but Apple's submission to the ACCC does not say if this is true.

The banks want to form a negotiating bloc to apply pressure to change Apple's tight contract conditions, even though it hasn't done so for much larger banks in other countries. Payments expert Lance Blockley, who is representing the banks, says under the current arrangements Apple insists on preventing banks from passing on or disclosing any of the costs of paying for Apple Pay to customers or other businesses. "They are not allowed to disclose how much they are paying Apple Pay, and they are no allowed to pass on any of that cost to any other participant in the payment chain," he says. He says this goes against the Reserve Bank's push to make the cost of payments more transparent, so that consumers have a "price signal" to use the cheapest form of payment. Then again, it would hardly be the first time in finance that an opaque payment was made from one party to another, that was of questionable value to the consumer.

Control is prized While interchange fees are part of the story, they account for a relatively small share of bank profits. The bigger strategic issue for the lenders – and Apple – is control of the iPhone as a wallet. Despite the hype, "digital wallets" have so far failed to take off. However, banks reckon this may soon change, thanks to a boom in a tap-and-go payments (Australians are the world's keenest users of contactless payments), and Google, Samsung and Apple all offering their digital wallets here. Early next year, Sydney's public transport system will also allow tap-and-go payments. London made this change three years ago and now 35,000 trips a day, or 3.5 per cent of contactless journeys, are paid for with a phone. If phones do eventually replace wallets and cards, banks want to make sure they keep their position in every consumers' pocket, because selling retail financial products is the high-margin part of banking that makes them such highly profitable companies.

Consumers can already make tap-and-go payments on the iPhone today, but they must either attach a bank-supplied sticker to their phone or sign up with ANZ. The key complaint of banks – and some other businesses that want to provide digital wallets, such as retailers – is they cannot provide their own app that uses Apple's contactless payment system, known as a near-field communication (NFC) hardware. Apple says its NFC hardware is locked for security reasons, and that is what it does everywhere in the world. In contrast, Samsung and Google allow third parties to access the NFC hardware. Banks need help? If the ACCC says yes to the banks, it would strengthen their hand in the talks with Apple because there would be an agreement for none of the banks to blink first in the face of commercial pressure to do so. The lenders, who control two-thirds of the credit card market, are trying to convince the regulator that this boycott of Apple Pay would be in the public interest. Academic economist Joshua Gans says it would be "blatantly anti-competitive," because one of the things that forces banks to provide technology people want (like Apple Pay) is pressure from rivals.

Gans says there is simply no way Apple will bend its international policies to give our banks special access to the iPhone's NFC hardware, so the banks' real objective of a collective boycott is to demand a better price. "Why Australian banks should be able to collectively withdraw is beyond me. If the banks were more competitive, this might be an issue because customers could switch to ANZ or Amex. But they aren't, so this is consumer harm," he says. "Put simply, what the banks are doing smells awful. I hope the ACCC can get to its source in its deliberations." Despite their huge domestic power, the banks maintain Apple has the stronger bargaining position in this fight, because the only way banks can access the iPhone is through Apple's platform, iOS. Yet Gans also points out that Apple is not the biggest smart phone maker (the banks reckon it has about 40 per cent of the local market) and Google has its own operating Android system that also supports digital wallets. Apple does not have enough market power to cause a lessening in competition, he says. Whoever wins, there are drawbacks for competition

The competition regulator must decide whether the clear competitive damage of letting the banks team up is outweighed by any public benefits. What might those benefits be? Blockley says if the banks had their way it would allow consumers to ultimately upload multiple digital wallets onto their iPhone. They may want a Coles Flybuys wallet to use for some purchases, for instance, and a bank-run wallet for others. "But today, an iPhone owner can only have one wallet on their phone, and that is Apple Pay," he says. "What the banks are trying to do is give the consumers choice." Yet Apple says in its submission the banks have resisted "serious negotiations" with it for the last two years, and insists it won't change its mind to satisfy the banks even if they are allowed to team up.

The ACCC has already delayed its decision once, and its ultimate ruling will likely have some drawbacks from competition. It will either be reinforcing Apple's already substantial power over a part of the payments system that may soon take off, or it will be allowing three of Australia's largest companies to put their competitive differences aside on this issue.