Making Sense Of Apple’s Place In The Financial Services Ecosystem
Apple serves the wealthiest 1.3 Bn consumers on the planet with an ecosystem of intuitively designed hardware and services. But how much of a threat is it to established financial institutions, banks and fintechs?
Let’s get ready to Rundle
Under Tim Cook’s leadership, service revenues — including financial services — have increased more than four fold. This is thanks to Apple’s Recurring Revenue Bundles a.k.a the “Rundle”built around its market leading hardware. My Rundle now includes paid for iCloud storage, Apple Care +, Apple TV, and Apple Pay. (No Apple Music you will note, Spotify still rocks, nor Apple Fitness, it’s Whoop all the way. But I digress).
We are now a month on from Apple’s launch of a high-yield savings account (4.15% APY), its latest foray into consumer finance, and one that builds on existing wallet and payment platforms, a credit card, BNPL and “tap to pay” for merchants.
The two questions on everyone’s lips are:
1. How big a bite is Apple going to take out of other financial services businesses?
2. And what is Apple becoming? A $3 Trn market cap big tech, a fully fledged Fintech, or even The Bank of Cupertino?
The Orchard
Let’s start with the basics. Apple is a $2.7 Trn leviathan because it is better than any company on earth at growing and retaining valuable customers within its ecosystem — i.e. the orchard. Its success is predicated on continuously improving and controlling this ecosystem, without significant increases to operational costs; which is the main reason it they have partnered with Goldman Sachs to provide the plumbing for the Apple Card and Savings Account.
This partnership exemplifies Apple’s power as a consumer brand with unrivalled distribution. Who else would be capable of relegating one of the world’s largest and most feared banks to the role of a Infrastructure-as-a-Service provider, and junior partner?
If Apple is able to bully the so-called “Vampire Squid” of finance, then concerns that they are coming to eat the lunch of others in the financial sector are well founded.
Apple’s seven course tasting menu (with just deserts)
For starters, there are the major card networks, like Visa and Mastercard. Not only are they being disintermediated by a new generation of Account-to-Account (A2A) players like Brite*, but they could lose out on a whole lotta volume were Apple to pursue device-to-device P2P payments outside of traditional card rails. Apple Cash currently runs on virtual Visa debit cards, but why not avoid issuer, acquirer and card network fees by cutting out the middlemen? Building a global instant payments network won’t be straightforward, but growing A2A payment volumes might be too big an opportunity to resist.
Next up are Neobanks. Same same, but not as convenient as the combination of iPhone + Apple Pay + Credit Card + a high yield Savings account. True, European customers don’t have access to this full consumer finance proposition, yet, but it is surely only a matter of time. And it wouldn’t be a big leap to add forex and outcompete the likes of Revolut. The main challenge Apple is already facing, and will continue to face, is persuading customers to hold larger deposits in these accounts. Most use these slicker digital services for day to day spending but have their salaries paid into traditional bank accounts.
Third, P2P lenders and BNPLs. The strategic acquisition of Credit Kudos in 2022, in conjunction with the launch its own BNPL product (Apple Pay Later), means Apple is training its credit risk management muscles, so it is not difficult to imagine that a P2P credit product could follow and take a big chunk out of both alternative lending, higher interest “instant” consumer loans, and high street banking loan products. By extension, credit bureaus like Equifax, Experian, FICO and TransUnion should feel threatened by a player that won’t require their scores or credit checks.
Fourth, POS solutions operated by the likes of Ingenico, Verifone, Block, SumUp and co are already being threatened by the rise of “tap to pay”, which allows merchants to securely accept Apple Pay, contactless credit and debit cards, and other digital wallets without a payment terminal. Are these the first signs of terminal decline? (Sorry, couldn’t help myself). Undoubtedly, Apple’s PR department will claim they are dematerialising POS payments and saving the planet in the process, cue a blossoming, albeit transactional, relationship between two iPhones.
Fifth, ignore Apple’s B2B hardware leasing business at your peril. It could become a platform for other B2B financial services very quickly and encroach upon existing B2B BNPL propositions. After all, Apple has a lot of free cash on its balance sheet it could be lending / factoring.
Sixth, Apple device IDs, bank account data, and easy to get IP address and location data are a fairly comprehensive set of identifiers to verify that someone is who they say they are. Which means Apple should be taking a juicy bite out of third party ID verification services right about now. Video ident processes add friction to the customer journey, negatively impact conversion and are expensive for merchants. In this regard, Apple offers a more convenient and affordable passport to the internet.
And for dessert, what about Health Insurance built around the Apple Watch + Apple Health data? Vitality 2.0, if you will, where Apple incentivises its customers to live healthier lives in return for better premiums. This would mean venturing into InsureTech, is this too much of a stretch? Let’s leave the underwriters to answer that one.
Incremental additionality
Each of these examples demonstrates Apple’s appetite for making money, by managing our money. But its hunger is being sated slowly. “Incremental additionality” is at the core of Apple’s growth strategy under Tim Cook. If you have never heard of this term before, that’s because I invented it this morning. It is shorthand for launching new products that deliver incremental benefits to Apple customers in return for greater than incremental Average Revenue Per Customer (ARPU). In essence, complementary services that increase the velocity of the Rundle flywheel. (Arguably Apple have become as good as, if not better at leveraging this effect than Amazon).
This is one of the reasons why service revenue, excluding the App Store, has swelled from a mere $3.7Bn in Q1 2013 to $20.8Bn by Q1 2023 (CAGR 19.5%).
The clues to where Apple will take its next bite, and how big this bite will be, lie within a relatively narrow range of incremental consumer benefit. For example, a further push into consumer lending looks like a good bet given that Apple has already built a BNPL product and acquired an alternative credit scoring company, offers a credit card and sits on a lot of consumer data that gives it an enviable level of insight into financial behaviour, and financial risk. The billion dollar question is how big and how bold will they choose to be in this space? Which is a neat segway into our second question:
What is Apple becoming?
We have established that it is already a formidable fintech, but is it planning to become a bank? Jamie Dimon, CEO of JP Morgan Chase, seems to think so.
He was recently reported as saying:
“If you move money, hold money, manage money, lend money — that’s a bank”.
With all due respect to this titan of high finance, I disagree. Banks also originate, underwrite and manage a book of loans including long term financial products like mortgages. Their core capabilities are maturity transformation, risk management and compliance. Is this really where Apple is aiming to go, and capabilities it is looking to develop?
Marble foyers and mahogany desks have a certain impregnability about them, and it would be very unlike Apple to try and rob a bank. The banking sector also engenders systemic and liquidity risk. Recent banking failures like SVB, Credit Suisse and First Republic are timely reminders of this fragility. Even moves to beef up leverage ratios, as set out under Basel III, don’t significantly ameliorate the risk of bank runs, according to some analysts, and the US banking sector will not align to EU standards until 2025 at the very earliest.
Assets over liabilities
Apple has a longstanding preference for holding assets on its balance sheet (e.g. large cash piles) and offloading liabilities (e.g. device and chip manufacturing, building and maintaining financial infrastructure). It is therefore more likely that they will continue to partner with banks where it makes sense, and use their scale and distribution to drive down costs, whilst making the numbers attractive enough that even the likes of Goldman Sachs find it hard to say no.
Other fintechs should be wise to think of Apple in the same way; if you can’t beat em, better to add value to their ecosystem and take a cut of the profits along the way. But, and this is an important but, even if Apple are a formidable competitor, their financial services business has yet to capture significant market share, something that Bloomberg pointed out last year when they got the scoop on Project Breakout — Apple’s plan to turn itself into a full-fledged payments and financial services company by building its own acquiring, payments processing, risk management, fraud and credit underwriting capabilities. As is often the case, change is more incremental than we expect. But in the case of Apple, I am of the view that fintechs of all stripes should remember Ernest Hemingway’s old adage about bankruptcy, namely that it happens in two ways, “Gradually, then suddenly”.
