The end of historically low interest rates was expected to be good news for banks,
as in a higher interest rate environment, banks tend to be more profitable. This is because the
difference between what they charge borrowers for loans and what they pay depositors for funding
widens. Unfortunately, the recent crises (in both the United States and Europe) show that real life
is often more complicated than simple theory. When interest rates and inflation rise, savers
feel the pinch of inflation and expect their money to work harder. That doesn’t always happen at
banks and this can lead customers to take their money elsewhere. Especially in this day and age
when it is so easy to move money electronically. When customers move their money away, other
funding sources are still available for banks, but these other sources also become more expensive as
these investors are also demanding higher yields. In the United States, total bank deposits have
been falling since the Fed began raising interest rates last year,
as savers realized they could earn higher returns in short term treasuries or money market funds.
Money market funds typically hold very low-risk assets that are easy to buy and sell,
including short-dated US government debt. The yields available on money market funds are
now the best they’ve been in years (as they rise when interest rates rise), and interest
rates have been lifted to 15-year highs by the Federal Reserve in its quest to curb inflation.
This trend of moving deposits out of bank savings accounts (which had already started),
really picked up pace when Silicon Valley Bank and Signature Bank failed. While the US government
agreed to backstop all of the deposits at the two failed banks, they did not guarantee those above
$250,000 at other institutions. This led savers to move their deposits from small banks to large
banks as savers wanted the security of having their money at “too big to fail” institutions.
When savers felt prodded to move their money, they obviously paid attention to the interest
rates they would be getting on that money. Goldman Sachs, JPMorgan Chase and Fidelity
were the biggest winners when investors began moving cash into money market funds.
On the other hand, Charles Schwab, State Street and M&T suffered almost $60 billion
dollars in combined bank deposit outflows in the first quarter of this year as customers moved
their money to higher yielding alternatives. In a new threat to traditional banks, Apple has
now teamed up with Goldman Sachs and launched a new savings account for US customers that will
pay a market-leading 4.15 percent interest. This easily beats the average US bank savings
account rate of just 0.37 per cent, it also beats competitors like American
Express which is offering 3.75 per cent and surprisingly - even Goldman’s standalone
savings account that operates under the Marcus brand, which offers 3.9 per cent.
Now, before I dig into the threat that Apple may pose to the banking industry let me tell
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link in the description to sign up today. Now, to be clear, Apple is not a bank – nor
is it becoming one. It is what fintech people would describe as a neobank. It’s partnering
with Goldman Sachs – a licensed bank and the deposits will all sit with Goldman, who has access
to US government-backed deposit insurance. Apple first entered the financial services
business four years ago when they launched the Apple credit card,
once again in partnership with Goldman Sachs. In classic Apple style, the tech giant has
developed a suite of financial products that includes Apple Card, Apple Pay, Buy Now Pay Later,
and now ‘Savings.’ This product suite combined with the closed-loop ecosystem of hundreds
of millions of iPhone users could provide a competitive moat, insulating Apple from the
competition making it an attractive financial services option for tech-savvy consumers.
In order to get an Apple savings account and the high interest rate associated with it,
you first have to have an Apple credit card, which means you need an Apple iPhone. The
savings account has no fees or minimum deposits or balance requirements. The good thing about it from
Apples perspective is that each of the products amplifies the next, in a classic example of the
network effect. What this means for customers is that once you are locked into the Apple product
ecosystem, it might be difficult to leave. Will customers switch to a different brand of
phone if they bank with Apple, for example? If you use all of Apples other financial products,
will it be your first stopping point when looking for a loan? In the long
run if this part of Apples business got quite big, the Federal Trade Commission might start
raising questions about anti-trust issues. But that is a long way off from that right now.
Apples greatest advantage over traditional banks is its brand. Customers love their products and
interact with them all day long. How many times per day do you interact with your
technology devices compared to with your bank? Apple has actively marketed its trustworthiness as
a technology company for years to differentiate itself from firms like Google or Meta,
who mostly rely on targeted advertising, or surveillance capitalism, for their profits.
Apple is frequently listed on corporate “most admired” lists unlike many of the big banks.
Apple also has the advantage of iPhone user data — which could possibly be used to assess credit risk
if Apple planned on doing more in the finance space. Last year, they signaled some interest
in doing just that when they purchased Credit Kudos, an “alternative” credit scoring start-up.
If their customer data was used to assess credit risk, it could allow them to compete
with credit rating agencies, but equally – doing this - might offend their customers.
Apple is well placed to solve some of the problems that have plagued traditional
banking for years. Take the Buy Now Pay Later program, for example. Apple funds these loans
largely from its own balance sheet, which had $165 billion dollars in cash and marketable
securities as of the first quarter of 2023, with total debt of $111 billion dollars. This is very
different to banks, who typically operate with 90 per cent or more borrowed money.
By using so much more equity funding, Apple is much less fragile than the average bank.
The question for financial services firms is how worried should they be about competition
from Apple? Apple is a huge firm that dwarves even the largest banks and they haven’t really
been hiding their ambitions in this space.” Since 2016 Apple has claimed to be on “a journey to
replace the wallet” and current job ads speak of “transforming the industry in payments.
Jamie Dimon - the CEO of JP Morgan has been paying attention too. In a speech last summer,
he described Apple as a bank, saying “It may not have insured deposits, but it’s a bank. If you
move money, hold money, manage money, lend money — that’s a bank.” He alluded to the threat again in
his letter to investors earlier this month saying, “large tech companies have enormous resources in
data and proprietary systems — all of which give them an extraordinary competitive advantage”.
In 2014, Apple Pay was announced – along with the iPhone 6. A lot of people made fun of the
idea early on as very few people initially used it, but by last year more than 75% of
iPhone users used Apple Pay and it had reached such scale that The European Commission had
opened an antitrust investigation into it. In February of last year Apple added a new
technology to the iPhone allowing it to accept payments from credit cards with “no additional
hardware or payment terminal needed”. The service works with payment service providers today,
but the implications of the technology are quite significant: if the customer and the merchant are
both using Apple products to process payments, Apple has the capability to create a closed-loop
that doesn’t require banking partners or networks like Visa and Mastercard to move money.
Apple is not trying to become a bank in any official sense, which is probably wise, given
how other tech companies have done when trying to enter the financial industry. (Facebook, for
example, tried to build a stablecoin, Diem, before eventually scrapping the project). But the fact
that Apple is beginning to look and act like a bank raises questions about eventual disruption in
the banking industry, and of Big Tech in general. Right now, Apple require a bank like Goldman Sachs
in the background, and Apple’s interest in financial services appears to mostly be about
extending the reach of the iPhone — adding convenience and keeping users “locked in” to
the Apple ecosystem, but Apple does have a long history of partnering with other firms
until it is to their advantage to go it alone. It is quite likely that a firm like Apple would
never want to find itself getting any deeper into the banking business. Banks are businesses that
are bogged down in regulation, adhering to that regulation can be complex, and any missteps can be
disastrous from a public relations perspective. Big tech firms like Apple, Google and Amazon
have amazing reach to trusting customers. When Apple launched their credit card four years ago,
they had a significantly lower cost of acquiring new customers in that space
than any other card issuer simply because they have such a good distribution network.
Their long-term goal might simply be to provide more and more services to their customers,
to lock them into the Apple ecosystem. It may be unattractive to get bogged down
in financial regulation and draw the attention of anti-trust regulators.
In many ways Apple may be more of a threat to Fintech neobanks like NuBank or Revolut than
it is to the traditional banks that it partners with. Revolut is a Fintech neobank that is highly
UK market focused. It evolved from a low-fee money transfer service to offering bank accounts across
Europe through its Lithuanian banking licence as well as being registered as an e-money institution
in the UK. In July 2021 Revolut raised $800 million dollars in Series E funding, valuing
the business at $33 billion dollars. The deal was co-led by Softbank and Tiger Global. Other
investors included Schroders and TriplePoint. Schroders has since written down their stake in
the deal by 46% and TriplePoint lowered the value of its stake by 15%. Revoluts current valuation
is still a massive 52 times its 2021 revenues and its revenues are less than fifty dollars
per customer – worse than a convenience store. The more Apple starts to look like a traditional
bank, the more attention they can expect from regulators. It would appear that they can probably
avoid doing that while partnering with Goldman, branding the products as Apple and charging a
healthy fee for their part of the deal. One way or another, it looks like we can expect more
banking to be done via iPhone going forward. If you enjoyed today’s video, you should watch
this one next. Don’t forget to check out our sponsor Surfshark using the link in
the description below. Have a great day and see you in the next video. Bye.