Australia is way ahead of the U.S. in banking, but now risks falling behind

The U.S. is objectively behind countries like Australia in digital banking "by whatever metric you choose," according to Stripe cofounder John Collison, but that head start may not last forever. 

As president of a global payment company, in Sydney recently to launch the marketplace tool Stripe Connect, Collison was in a position to help me understand the digital divide between American and Australian banking.

Having lived in both countries, the difference feels striking. While I'd been paying landlords and sending friends dinner money online in Australia for years, suddenly in the U.S. in 2014, I found myself searching each month for a stamp and an envelope to mail off my housemates' rent cheques.

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It's not all cheques and cash: America finally began rolling out chip cards and terminals widely in late 2015 — an innovation so traumatic it inspired a BuzzFeed post titled: "Credit Card Chips Are The Absolute Fucking Worst." In Australia, the world's largest user of contactless (tap-and-go) payments, many may be wondering what the fuss is about.

Image: Stripe

Collison suggested two main culprits for the digital banking discrepancy: First up, the curse of the early adopter. 

"The U.S. started modernising and computerising its banking much before most other countries," he explained. "Those [mainframe] computers worked pretty well and they're good enough, and so the result is, we're still running on those mainframes, which is ridiculous."

Other countries have been able to learn from and surpass the U.S., and even make Australia look like it's caught in the payment past. Cash transfers are being digitised mobile-first in countries like Kenya, which has the M-PESA network allowing money to be transferred via SMS. 

"Because they don't have these legacy systems to deal with, they can obviously design something for the new world," Collison said.

The other possible cause, pointedly in contrast to Australia's situation, is the highly fragmented banking market in the U.S. 

"Everyone banks with banks like the 'First State Bank of Omaha' ... and here you have the big four," he said, referring to the National Australia Bank, Commonwealth Bank, ANZ and Westpac, which together are said to account for an incredible 80 percent of the Australian market.

According to the Federal Deposit Insurance Corporation, there are at least 6,016 banking institutions in the U.S. That's a lot of bodies to pull kicking and screaming into a digital network at once. 

This is not to downplay the mangled rollout of chip cards in the U.S., which has been widely acknowledged to be a mess. 

Unlike Australia, which uses contactless payments, or chip and pin typically for items over A$100, the U.S. opted for chip and signature despite it being less secure. As Ian Kar reported in Quartz, that may have been part of an attempt by the U.S. to save money, but lack of education has also plagued the transition.

"Payment experts have been openly complaining about the lack of education on how and when customers should use chip cards," Kar wrote. "The Aite Group notes in a report from June 2014 that banks and retailers in Australia ran full-page newspaper ads explaining the benefits of chip cards and how to use them when the country added EMV."

Falling behind on mobile payments

Despite its love of cheques and apparent hatred of chip cards, the U.S. may be set to leapfrog Australia and move straight to mobile payments. 

The growing demand for mobile payments is insatiable, suggested Ben Pfisterer, the Australian country manager of merchant payment provider Square. "They're actually in the process of leapfrogging contactless cards, or trying to ... straight from magstripe to chip cards and phones in the same leap."

And that's where Australia may be left behind. A report released by research firm RFi Consulting in mid-2016 found only 24 percent of Australians said they would try using mobile payments, compared to 77 percent in the U.S who said they were "extremely likely to use the technology," the ABC reported.

"It is probably because contactless credit and debit cards have been so successful and the incremental benefits are not enough — or been explained well enough — to make the jump," RFi managing director Alan Shields told the publication at the time. "You would be lucky if you get the right card from the right bank that connects with the right phone at the moment."

Image: Square

While Apple Pay, Samsung Pay and Android Pay have launched locally, the major banks are not wholesale on board with each provider.

To further complicate the picture, a number of Australia's largest banks applied to Australia's competition watchdog in July to negotiate collectively with providers of third-party mobile wallets — enemy number one: Apple. They want to get their own banking apps on Apple's hardware, which Apple has strongly resisted.

That's a dangerous impasse, Pfisterer suggested. In his view, there's a lesson in how Australia moved smoothly to contactless cards over the past decade. It was the liability shift in 2014 that he thinks became the tipping point. From August 2014, only PINs and not signatures were accepted.

"They put a liability shift in that if you didn't accept chip cards you'd be liable as a merchant," he explained. "The whole market was incentivised to move. It's a really easy next step to go 'we've got this technology, what should we do about it?' That's where contactless cards came in."

Now 59 percent of Australians have made a purchase with contactless cards, according to RFi Consulting, but only 10 percent said they had used a mobile wallet.

It was also a lucky confluence of events — Australia managed to find the right balance of cards and available terminals. "If you get too many cards and not enough terminals, people will stop using their cards," he said.

In contrast, too many mobile payment providers and not enough bank cards to use them with could prove enough of an inconvenience that consumers fail to see the appeal.

So could Australia leapfrog the U.S. again and move straight to wearable payment devices? Probably not, Pfisterer said.

"My general philosophy on payment innovation is you can't go two steps of change in one leap," he said. "I think wearables were identified years ago as the next generation a little too soon. That mass population device has not really come through."

Still, we're all just at the tip of the iceberg. "What's next is where it gets really exciting," he said.