Apple now has a credit card, savings and loan – 04/24/2023 – Market

In 2019, after months of hard work, executives at Apple and Goldman Sachs bank were preparing to unveil the Apple Card, a historic step in the iPhone maker’s soaring ambitions for financial services.

As the launch date neared, the partners hit a snag: Apple, eager to be seen as providing unique value to customers and accustomed to grandiose marketing claims, wanted to market the product as “the safest credit ever”.

Apple had the upper hand. Goldman Sachs saw the Apple Card as a key product to show that it could serve individual customers. “For Goldman Sachs, what was being proposed was, ‘Hey, you don’t have a consumer product, and guess what? We can give you access to all of Apple’s customers,'” says a former Apple executive. “Apple was aware of this, so they squeezed everything they could out of that deal.”

But Goldman Sachs couldn’t buy the “most secure card ever” story. One person briefed on the discussions said that “stating something is ‘the safest’ would expose the bank to lawsuits”.

In the end, they settled on a quieter formula, that the Apple Card “provides a new level of privacy and security,” and that the absence of the 16-digit number and security code on the card made it “more secure than ever.” than any other physical credit card”.

The episode was one of the biggest debates between Apple and Goldman Sachs in the run-up to the launch, according to people familiar with the matter, and proved to be an early lesson for Apple in navigating the bureaucracy that exists in financial services.

Now, four years later, the iPhone maker is feeling increasingly comfortable in this arena, and is stepping up its efforts to expand further into the new market. For example, in the last three weeks, Apple has launched — with Goldman’s help — two great products.

Apple Pay Later, its “buy now, pay later” product, is the first example of Apple lending money directly to consumers. Savings, a high-yield savings account, offers US customers an interest rate of 4.15%, ten times the national average. The deposits will be managed by Goldman Sachs, which as a licensed bank has access to US government deposit guarantees.

The question for banks and other financial services providers is how much they should care about a tech company that boasts 1.2 billion iPhone users, a $2.6 trillion market cap and a track record of innovation. disorderly, and seems ready to invade its territory.

Apple’s scale makes even the world’s largest banks seem small. The company’s services division, which earns money from recurring subscriptions and payments made through the App Store, generated profits of $55 billion last year — more than JPMorgan and Citi combined. And yet it represents only one-fifth of Apple’s total revenue.

And the company has not been shy about its ambitions in this arena. Current Apple job ads speak of “transforming the industry in payments, transit and identity”. And Jennifer Bailey, vice president of Apple Pay, said in 2016 that Apple was “on for a good long ride at the end of which we’re going to replace the wallet.”

For Jamie Dimon, chief executive of JPMorgan Chase, the risk is clear enough to label Apple as a bank. “It may not have protected deposits, but it is a bank,” said the executive in June last year. “If it moves money, holds money, manages money, lends money — that’s a bank.”

Dimon again warned investors of the looming threat this month, saying “big tech companies” have “huge resources in terms of data and proprietary systems — all of which give them an extraordinary competitive advantage.”

Stephen Squeri, chief executive of American Express, admitted to analysts on Thursday that he is also “paranoid” about Apple and Amazon, which he called “phenomenal” companies with deep consumer connections.

“We’re not naive enough to think we can just keep going at a leisurely pace here,” he said. “We see that everyone is coming at us.”

This account of Apple’s financial services plans is based on interviews with eight people involved in the strategy, who asked that their names not be used because they were not authorized to speak publicly. Apple and Goldman Sachs declined to comment.

ice power

Apple tends to expand into new industries, typically not through flashy acquisitions but through incremental steps that give it a sustainable advantage over time.

In finance, the fruits of the slow-moving strategy are clearest in the case of Apple Pay, its wireless payment technology aimed at “transforming mobile payments”, first announced alongside the iPhone 6 in 2014.

Adoption was slow enough for Apple to be mocked in its early years of operation. In 2016, only 1 in 10 iPhone owners on the planet used Apple Pay. But the user base has risen to 50% by 2020, according to Deepwater Asset Management. In 2022, adoption reached 75% and the European Commission decided to open an antitrust investigation into the unit.

“They move with the speed and force of a glacier,” says Gene Munster, managing partner of Deepwater. Commenting on Apple’s next moves in banking, he adds that “it will take five to 10 years, but when the time comes we will think of Apple as we think of Citi, JPMorgan and Wells Fargo.”

The iPhone maker is playing for the future of finance and payments, say three former Apple employees, and its current moves are laying the technical groundwork to capture greater market share.

For example, Apple spent years working on what was known internally as Project Muirfield — developing the iPhone’s ability not just to send but to receive payments. The feature was announced without much fanfare in February 2022: an Apple press release described that merchants using iPhones with “tap and go” NFC chips could now accept credit card payments without “requiring any hardware or additional payment”. The system works with payment service providers such as Stripe, Adyen and Square.

People familiar with the technology say the implications are much broader: If the shopper and merchant both use iPhones or iPads to process payments, it gives Apple the ability to create a closed loop that doesn’t require banking partners or networks. managed by Visa and Mastercard.

“At the moment they can’t bother the banks and they can’t separate the network partners – which are too important for distribution in the beginning,” says a former Apple employee. “But it’s easy to imagine the pendulum swinging: as more and more people switch to Apple Pay, it will move into Apple’s camp and allow Apple to make other moves that aren’t so reliant on banks.”

Munster adds that Apple has a long history of partnering with third parties until it’s advantageous for the company to go it alone, and he suspects that’s also the ultimate goal in finance. “The list of former Apple partners who have become obsolete is a long one,” he says.

Sam Shawki, chief executive of MagicCube, which offers similar technology for Android devices, said the ability for merchants to securely accept payments via smartphones and tablets could make the entire payment device market — a sector led by the United States — obsolete. by Verifone and Ingenico, which moves US$ 48 billion a year.

“This is a fax machine in an era of email,” he says of single-use devices. “Take a bite out of the market [empresa de pagamentos] Block is nothing, but taking a bite out of Ingenico and Verifone is something, and taking a bite out of Visa and PayPal is the long-term goal.”

Michel Léger, vice president of innovation at Ingenico, admits that software-based point-of-sale solutions have brought “a new era of payment acceptance”, but argues that Apple’s offering will complement physical terminals rather than replace them. . It would be “impractical to imagine a fleet of expensive smartphones at supermarket checkouts,” he says.

Others in the industry don’t see Apple as an existential threat. Eva Wang, a former American Express executive who now leads partnerships at Firework, a commercial video shopping solution, says Apple’s interest in payments and banking is more about extending the reach of the iPhone – to add convenience. but also to keep users “locked in” to Apple’s ecosystem.

“If I’m using all this Apple stuff, I’m less likely to decide to switch (to Android),” she says. “What interests them is something very different from banks.”

Big companies that have historically dominated industries certainly need to be “aware” of what Apple is doing, says Boe Hartman, the former head of Goldman Sachs’ technology division that built the infrastructure for the Apple Card. But he doesn’t see Apple creating Bank of Cupertino in the foreseeable future.

“Banks are rooted in constant regulation, and you have to prove that those regulations are being enforced every day,” he says. “Someone like Google or Apple just wants the experience of serving people, to keep people engaged in their ecosystem. That’s what they want. They don’t want to deal with regulatory things, which are difficult and complex.”

The Apple Perks

It’s in Apple’s firm interest to limit its ambitions to the customer experience and leave it to others to build infrastructure, or deal with credit risk and regulatory issues, says Amit Daryanani, an analyst at Evercore ISI.

This allows Apple to take a more selective, higher-margin, low-capital approach to its banking activities, fueled by the company’s ability to embed tools into the iPhone’s operating system — rather than a separate app that the user has to find and download.

A former Apple executive says that the cost of acquiring new customers for Apple Card was “laughably lower than any other credit card company” because it had so many distribution channels.

For example, Apple has sent users reminders for years to sign up for Apple Pay, even sending red notifications in the settings menu that implied something was wrong if the service wasn’t set up.

Kim Schwendeman, senior vice president of payments adoption at Stax, a payment platform for small businesses, says similar tactics could give the Apple Pay Later program an advantage.

“It’s easy for consumers who have Apple Pay to leverage these capabilities and get a loan,” she says. “For some of the more established competitors, the experience isn’t as seamless. That’s going to cause some anxiety.”

Apple also has another long-term advantage in iPhone user data — which could potentially be used to assess credit risk more comprehensively.

Last year, the company signaled its interest in the idea when it acquired Credit Kudos, a UK-based “alternative” credit scoring startup.

If that data were used to assess risk, it could be “very powerful in making smart credit decisions,” says Charlotte Principato, an analyst at Morning Consult, a business intelligence firm.

“The more information you have about a consumer, the better lending decisions that can be made,” she adds. And Apple “is sitting on a mountain of data.”